Tuesday, August, 05, 2014
By Joseph Sarkis
The title of this blog represents the social cost of carbon emissions as determined by the U.S. Government's Office of Management and Budgets in 2015, using a discount rate of 3%. $37 per ton of carbon is the central rate that the government estimated to be the social cost this report report from November, 2013.
The government estimated the U.S. social cost of carbon increased $24 to $37 using three integrated assessment models (IAMs): DICE-2010, FUND 3.8, and PAGE09.
The average market rate for carbon emissions in public trading markets is around $10 per ton. Thus, the government estimate is greater than the market rate. Is this an indictment of the free market system or poor estimation all around?
According to a report jointly supported by the Environmental Defense Fund, the Natural Resources Council, and the Institute for Policy Intergrity and authored by Peter Howard, the government's social cost estimate is too low. The report identified a broad variety of impacts ommitted from the evaluation. An excerpt from the report summarizes the breadth of impacts left out:
"These omissions include climate impacts on the following market sectors: agriculture, forestry, and fisheries (including pests, pathogens, and weeds, erosion, fires, and ocean acidification); ecosystem services (including biodiversity and habitat loss); health impacts (including Lyme disease and respiratory illness from increased ozone pollution, pollen, and wildfire smoke); inter-regional damages (including migration of human and economic capital); inter-sector damages (including the combined surge effects of stronger storms and rising sea levels), exacerbation of existing non-climate stresses (including the combined effect of the over pumping of groundwater and climate-driven reductions in regional water supplies); socially contingent damages (including increases in violence and other social conflict); decreasing growth rates (including decreases in labor productivity and increases in capital depreciation); weather variability (including increased drought and in-land flooding); and catastrophic impacts (including unknown unknowns on the scale of the rapid melting of Arctic permafrost or ice sheets)."
A single final cost estimate is not given in the joint 'rejoinder' report to the U.S. Government report. Part of the complexity involves whether potentional benefits such as lessened fuel usage or shifts in energy requirements. Yet, the U.S. Government report did show a 95th-percentile (simulated extreme) cost per ton was estimated to be $109 per ton. The probability tail is long. The question is whether the 95th percentile is the more legitimate value.
What does this mean? It means that the free market emissions trading systems are underestimating the true cost of carbon emissions.
Many companies realize this underestimation and internally adjust the cost of carbon value for internal planning, risk assessment, and investment purposes. The CDP (Carbon Disclosure Project) identified what many companies use as their internal price.
In an article published by the they reported from the CDP to show that internal carbon emissions prices ranged from $6-7 (Microsoft) to $60 per ton of CO2 emissions (Exxon-Mobil). These values are also used in internal emissions trading systems where companies set up internal markets for managers to trade.
Although internal markets are still relatively rare (about 20% of companies reporting to the CDP), they do still exist. The most famous and early internal market was set up by BP (British Petroleum) which is now defunct.
Thus, the pricing and costing is critical for accurate internalization of carbon emissions externalities, but it is not an easy estimate to make. Tools continue to be developed to help in this estimation.
Accounting colleagues and I have been considering how to simulate and estimate the values helping to identify appropriate 'implicit' costs that can be used by managers. The field of environmental management accounting, with respect to carbon pricing, is still in its infancy.
As academics, this is one inter-disciplinary effort integrating policy, economics, management accounting, and quantitative modeling that can provide some interesting investigation both to help managers and policy makers. Given the breadth and complexities of the issues involved in this estimation, research may not arrive at a final answer, but investigation to help set some boundaries is still needed.
Here's one last thought: Given a conservative estimate of the social cost at $37 per ton of CO2 emissions, and given that global CO2 emissions were estimated to be about 36 billion tons in 2013, the overall social costs from CO2 emissions in 2013 was about $1.3 trillion.