The social cost of carbon: Valuation estimates and their use in UK policy.

Abstract

There is an increasing interest in the economics of climate change, and the marginal damage costs of emissions, known as the Social Cost of Carbon (SCC). In 2002, the UK Government recommended an SCC for policy appraisal. A recent review of this SCC was commissioned and summarised in this paper. The authors conclude that SCC estimates span at least three orders of magnitude, reflecting uncertainties in climate change and choices of key parameters/variables (discount rate, equity weighting and risk aversion). Estimates also vary due to their coverage, and a risk matrix was developed to compare climate change effects (predictable to major events) against impacts (market, non-market and socially contingent). From several lines of evidence, the current lower SCC value is considered a reasonable lower benchmark for a global decision committed to reducing the threat of dangerous climate change. An upper benchmark was more difficult to deduce, though the risk of high values was considered significant. It is currently impossible to provide a central value with confidence. The study also reviewed the use of the SCC in policy, from project appraisal to long-term climate policy, and used stakeholder interviews to elicit views. A wide diversity of responses was found: whilst most considered some values are needed for policy appraisal, nearly all had reservations for long-term policy. From this, the authors propose a two tier approach. The economic benefits of climate change should be considered when setting long-term policy, but a wider framework is needed (i.e. than cost-benefit analysis). This should include a disaggregated analysis of economic winners and losers by region and sector, and key impact indicators such as health and ecosystems. It should also consider the full risk matrix (i.e. non-marginal/irreversible effects). Once long-term policy is set, shadow prices for appraisal across Government are useful, provided they are consistent with the long-term goal, and are applied consistently.