How to use the Shadow Price of Carbon in policy appraisal
Note that this replaces ALL guidance on using the Social Cost of Carbon
Introduction
The shadow price of carbon (SPC) is used to value the expected increase or decrease in emissions of greenhouse gas emissions resulting from a proposed policy. Put simply, the SPC reflects the damage costs of climate change caused by each additional tonne of greenhouse gas emitted – converted into carbon dioxide equivalent (CO2e) for ease of comparison.
The SPC is different from the previously used social cost of carbon (SCC) in that it takes more account of uncertainty and is based on a stabilisation trajectory.
Including the benefits of lower CO2e emissions from a policy designed to reduce them (or a policy with a different objective that also reduced CO2e as a co-benefit) in the policy’s appraisal would make the policy relatively more attractive - either in comparison to alternatives with worse CO2e impacts, or by increasing the scale of the benefits relative to costs. Accounting for such environmental benefits aids ‘green’ policy-making.
Similarly, valuing the additional CO2e emitted by a policy would add to its overall costs and make it a relatively less attractive option than one with lower additional CO2e emissions (or indeed CO2e savings). It is possible that including the monetised value of a policy that increases CO2e emissions may even switch the balance of costs and benefits so that the costs outweighed the benefits.
It is mandatory to carry out an Impact Assessment (IA) for any proposed Central Government policy that would affect the private, public or voluntary sector. New guidance requires that all IA must contain a ‘Summary: Analysis and Evidence’ page setting out the rationale, costs and benefits (including the value of changes in greenhouse gas emissions), which must be signed off by the department’s chief economist. The value of changes in greenhouse gas emissions must be calculated according to the Shadow Price of Carbon guidance which follows, and inserted in the relevant place on the IA summary page.
For consistency, all changes in greenhouse gas emissions should be expressed as carbon dioxide equivalent, rather than carbon equivalent. However, referring to carbon is an acceptable shorthand for carbon dioxide equivalent, so long as this is made clear, and all figures are in CO2e.
Step 1: Quantify the impact on greenhouse gas emissions, giving the figures in tonnes of carbon dioxide equivalent
- Set out the exact quantity of carbon dioxide – or CO2 equivalent – the policy is expected to save/emit each year in a spreadsheet. This should be a net change from an assumed baseline rate of emissions. The assumed baseline are emissions in the absence of the policy.
- For policies affecting CO2 this is straightforward, but for policies affecting other greenhouse gases, for example nitrous oxide (N2O), methane (CH4) or fluorinated gases (HFCs, HCFCs, SF6), it is necessary to convert these to CO2 equivalent.
- Use the global warming potentials in Table 1 to convert other greenhouse gases. For example, 1 tonne methane = 21 tonnes CO2e, and 1 tonne nitrous oxide = 310 tonnes CO2e. For gases not shown below, contact Defra.
Table 1: Greenhouse Gas global warming potentials to convert greenhouse gases to carbon dioxide equivalent1.
| Greenhouse Gas | Global Warming Potential |
|---|---|
Carbon Dioxide (CO2) |
1 |
Methane (CH4) |
21 |
Nitrous oxide (N2O) |
310 |
HFC-134a |
1,300 |
HFC-143a |
3,800 |
Sulphur hexafluoride (SF6) |
23,900 |
3.67 |
Notes
Global Warming Potential
The global warming potential (GWP) figures listed in the table are the 1995 100 year GWP values in terms of CO2. Whilst the GWP have since been updated, the Kyoto Protocol states that "global warming potentials used by Parties [to the Protocol] should be those provided by the IPCC in its Second Assessment Report (1995)…". Contact Defra for GWPs of other greenhouse gases.
Carbon Dioxide as Carbon
Carbon / carbon dioxide conversion included for converting figures in tC into tCO2 – government documents should now refer to CO2 (equivalent) rather than carbon (equivalent)
Page published: 19 December 2007