Climate change & energy

The social cost of carbon

Definition

The social cost of carbon (SCC) measures the full cost today of an incremental unit of carbon (or equivalent amount of other greenhouse gases) emitted now, summing the full cost of the damage it imposes over the whole of its time in the atmosphere. It measures the scale of the externality which needs to be incorporated into decisions on policy and investment options in government. 

The SCC matters because it signals what society should, in theory, be willing to pay now to avoid the future damage caused by incremental carbon emissions.

Because the amount of damage done by each incremental unit of carbon in the atmosphere depends on the concentration of atmospheric carbon today and in the future to which it is adding, the SCC varies depending on which emissions and concentration trajectory the world is on. 

The SCC is conceptually different from:

  • the market price of carbon, which reflects the value of traded carbon emissions (e.g. through EU ETS); and
  • the marginal abatement cost, which reflects the cost of reducing emissions (rather than the damage if those emissions continue).

Background

In January 2002, a Government Economic Service working paper 'Estimating the Social Cost of Carbon Emissions' was published as a joint Defra-Treasury publication. The GES paper suggested £19/tCO2 within a range of £10 to £38/tCO2. This was formerly expressed in carbon equivalent (so £70/tC (within a range of £35 to £140/tC) as an illustrative estimate for the global damage cost of carbon emissions, rising by £0.27/tCO2 (£1/tC) per year in real terms to reflect the increasing marginal cost of emissions over time. The GES paper also recommended periodic reviews of the illustrative figures as new evidence became available.

A government-wide review of the social cost of carbon has resulted in new guidance being issued – see here for details.  The new guidance adopts the concept of the shadow price of carbon, replacing the social cost of carbon.  It establishes a new basis for determining how carbon should be valued in government policy and project appraisals, and raises the value and its growth, so that the value of carbon is 4 per cent higher than previously in 2007; 18 per cent higher in 2020; and nearly 50 per cent higher in 2050

This upward revision reflects analysis done for the Stern Review, and work commissioned by the Defra-chaired Inter-departmental Group on the social cost of carbon (IGSCC). In October 2003 the IGSCC commissioned further research:

  • Social Cost of Carbon: a closer look at uncertainty, by the Stockholm Environment Institute, Oxford has examined the major uncertainties inherent in estimating the marginal damage costs of climate change, that is to say, the social cost of carbon. It suggests that a lower benchmark in line with the lower end of the range recommended by the GES paper (£ 35 tC) is reasonable under certain assumptions on discount rates and equity weighting and a moderate degree of risk aversion. It also concludes that an upper benchmark of the SCC for global policy contexts is more difficult to deduce from the present state-of-the-art models. However, the report further notes that the risk of higher values for the social cost of carbon is significant.
  • Methodological Approaches for Using Social Cost of Carbon Estimates in Policy Assessment by AEA Technology. The aim of this policy-oriented project was to inform Government on how best to incorporate SCC values in relevant decision making contexts, given the uncertainty which will continue to surround the monetisation of global climate change. The study involved some additional modelling as well as a detailed consultation with stakeholders, including both experts and practitioners in climate change policy assessment. The report concluded that the benefits of climate change policy should be considered when setting long-term targets and goals, and that some benefits can be directly estimated as monetary values, but a wider framework is needed to take all relevant effects into account. Extensive uncertainty analysis is also recommended, with consideration of discount rates and distributional weighting. The report also confirmed the conclusion of the SEI report that no single value of the SCC can be estimated with confidence.

Page published: 24 August 2007

Department for Environment, Food and Rural Affairs