ECONOMICS:

Administration grossly underestimated carbon cost, says study

The social cost of carbon, the economic value of avoiding the negative consequences of climate change, could be close to $900 per ton of CO2 in a worst-case scenario -- nearly 45 times the $21 per ton established two years ago, according to a study by the group Economics for Equity and the Environment (E3).

The E3 study was launched the same day as a policy brief from the World Resources Institute stating that the social cost of carbon could be causing more confusion than clarification in understanding the effects of low-carbon policies.

The studies are the most recent fodder in the search to estimate the unknown and to put a price on possibility.

In 2009, an interagency working group made up of several federal agencies was created to quantify the cost of putting greenhouse gases into the atmosphere. This cost would be applied in the cost-benefit analyses performed by the Office of Management and Budget (OMB) to assess the impacts of policy measures.

A slightly odd phrase

To evaluate the social cost of carbon, economists undertake a comprehensive review of future scenarios, current science and value judgments. They emerge with a dollar amount, ranging from about $5 to $3,000, depending on who does the math.

In the case of the Obama administration, that amount was a range between $5 and $65 per ton, with a central value of $21 per ton.

"You feed a bunch of assumptions into a machine, and out goes a number," said Michael Greenstone, an economist at the Massachusetts Institute of Technology who helped establish that value for the interagency working group. "Some go up, and some go down."

That number is the assigned value of the benefits gained from avoiding unwanted environmental degradation.

"The 'social cost of carbon' is a slightly odd phrase," said Frank Ackerman, director of the Climate Economics Group at the Stockholm Environment Institute, who co-authored the E3 report with Elizabeth Stanton. "It manages impacts on agriculture, loss of seafront property, health effects, changes in forests, changes in tropical storms. It's meant to represent economic damages."

The E3 report used four scenarios accounting for different future temperatures, the probability of a experiencing hotter-than-expected weather, and variable discount rates -- a percentage representing how serious conditions will be in the distant future. Low discount rates put more weight on the future, and high discount rates less.

Based on the four scenarios, the social cost of carbon values for 2010 ranged from $28 per ton to $893 per ton. In the 2050 model, values ranged from $64 to $1,550.

'Unrealistically optimistic estimates'

The interagency group adopted a social carbon cost that painted a relatively benign picture of climate change, said Ackerman.

"The very low numbers are based on outdated and unrealistically optimistic estimates on what's going to happen," he said. The justification for the $21-per-ton carbon cost was based on studies up to 15 years old, when a strong economy and a rudimentary understanding of climate change offered a relatively confident outlook, said Ackerman.

"The balance has shifted very heavily in a different direction," he added.

Greenstone defended the working group's social carbon cost, saying that the value was established with an eye to well-established scientific findings.

"My own view is that the $21 per ton was [applied] given the current state of science," he said. "One area that we don't understand very well is the frequency and nature of potential catastrophes."

"The science certainly raises these potential outcomes, but we don't understand how likely they are and don't understand what their outcome will be," he added.

OMB declined to comment on its use of the interagency working group's findings for its cost-benefit analyses.

An imperfect process

While calculating the social cost of carbon can be a valuable tool, the uncertainty around climate change could slow down the policymaking process rather than help it, said Ruth Greenspan Bell, a senior fellow at the World Resources Institute. Bell co-authored the policy brief "More than Meets the Eye: The Social Cost of Carbon in U.S. Climate Policy, in Plain English" with Dianne Callan of the Environmental Law Institute.

"The point is it's a very, very imperfect process," she said. Decisionmakers "should understand that they should not take it as gospel ... the assumptions are much more important than the final numbers."

"Look at the climate science," she advised policymakers. "Don't put an artificial ceiling or lid based on the social cost of carbon."

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