The Financial Times (2021) report defines the social cost of carbon as the monetary cost of the effects resulting from emitting an extra tonne of carbon dioxide, including a non-market impact on the health of humans and the environment. Watkiss (2006) suggests that the social cost of carbon is determined as the net present value of the impact of one extra tonne of carbon that is released into the environment today over the next 100 years and presents a monetary evaluation of the present and future risks caused by a tonne of CO2 emissions. Research by Wright and Doelle (2019) contends that SCC evaluates the costs and benefits of policies that reduce carbon emissions, such as carbon taxes and cap-and-trade policies, and focuses on social presumptions since it depends on how the effects of climate change are assessed and reported. These effects should be distinct from the global impact of changes in the climate or the average results.
Previously Wright and Doelle (2019) have contended that the social cost of carbon is anchored on the premise that carbon emissions contribute to climate change, which can have significant economic impacts which include the severity of extreme climate conditions, rise in the sea level, and the loss of ecosystems and biodiversity. Therefore, the SCC attempts to estimate the future cost damage these changes could cause to the environment. Van den Bijgaart, Gerlagh, and Liski (2016) suggest that a ton of CO2 emissions’ economic costs are estimated to determine the SCC and expressed as a monetary value in US dollars, euros, or British pounds per ton of carbon (tC) where a price on a tonne of CO2 emissions is meant to help legislators determine whether a policy intended to slow climate change is reasonable (Watkiss, 2006).
Wang et al. (2019) argue that calculating the social cost of carbon is targeted toward addressing the change in climate, which may be considered a type of economic failure in which all the prices of property damages, the effects on productivity and human health, and the costs related to ecosystem and biodiversity loss can all be considered. As a result, the social cost of carbon addresses the long-term impacts of global warming, such as fluctuations in agricultural output and the accessibility of natural resources. Research by Downing and Watkiss (2003) affirms that the social cost of carbon value is important in various decisions, such as project evaluation and regulatory effects analysis, and pertinent to broader energy and transportation policy, project evaluation, regulatory impact analysis, and mitigation of greenhouse gases policy. A study by Cramton et al. (2020) has contended that legislators use the social cost of carbon to determine if the prices and rewards of a proposed approach to slow global climate change are reasonable; a greater SCC reveals that the rewards of a specific environmental policy to reduce carbon dioxide surpass its costs whereas a lower SCC causes a strategy to appear to cost far higher than the rewards it yields.
Why it is Difficult to Calculate the SCC and Why the Value of SCC Differs Widely Based on the Modelling Approach Used.
According to Atkinson et al. (2018), the social cost of carbon depends on ethical presumptions since it relies on how climate change impacts are identified and analyzed. Therefore, SCC calculations are an important component of climate policy cost-benefit analysis. Nevertheless, calculating the SCC is a complex operation, and the value of the SCC can differ significantly depending on the modelling strategies utilized.
Research by Rogoff (2019) suggests that the intricacy of the climate system, which contains a few of the many interrelated components such as the environment, oceans, landmasses, and living organisms, is the main impediment to accurately calculating the social cost of carbon because it is difficult to forecast how the climate will change in response to changes in greenhouse gas emissions because of the complex interactions between these components. Moreover, several economic sectors, particularly agriculture, health, and infrastructure, are affected by the change in the climate. A study by Downing and Watkiss (2003) suggests that geographically, the effects of environmental change can differ (Figure 1), with some regions being more susceptible than others which means that any calculation of the social costs of carbon has to take a broad view of impacts and be considerate of regional differences such as regional collapse.
Research by Wang et al. (2017) have contended that environmental scientists and economists develop mathematical models to predict what will happen to several indicators when extra greenhouse gas is emitted into the surrounding to calculate the social cost of carbon. These indicators include health outcomes, agricultural output, and property values. A report by Financial Times (2021) reported that a tonne more carbon dioxide emissions reduces longevity, damages plants, raises sea levels, and decreases property values. For example, an SCC of $51 indicates that economists and climate scientists estimate that the total costs related to a rise in carbon emissions will be $51 per ton.
According to Kemfert (2002), the integrated assessment model (IAMs) is the most popular machine model which simulates how the economy, climate system, and other important variables interact. They are utilized to calculate the costs and rewards of various climate policies, including carbon taxes, cap-and-trade schemes, and the effects of climate change. A similar study by Wang et al. (2017) argues that IAMs must rely on several assumptions and use probability distributions to express uncertainty. However, they might not accurately reflect the complete range of potential outcomes to replicate the intricate relationships between the economy and the climate system. Nevertheless, despite these drawbacks, they are well-validated methods for calculating the social cost of carbon and use oversimplifying assumptions.
Previously Rogoff (2019) contended that the uncertainty surrounding future emissions with several variables, such as population expansion, technology advancements, and economic decisions influencing future emissions and climatic impacts, is a significant challenge in calculating the social cost of carbon. Downing and Watkiss (2003) suggest that the impacts of climate change are uncertain and unpredictable ( Figure 1) because they are contingent upon the number of future emissions and the vulnerability of the climate system, which made scientists develop various models for calculating the social cost of carbon to address these problems. According to Wang et al. (2017), the assumptions, data inputs, and analytical methods used in these modelling methodologies vary, which can significantly impact how the projected value of the SCC is calculated. The following table shows the SCC risk matrix for a relationship between uncertainty in valuation and uncertainty in estimating climate change.
Figure 1, the SCC Risk Matrix for a correlation between the uncertainty of estimating climate change and SCC Calculation.
Source: (Downing and Watkiss, 2003)
Similar research by Cramton et al. (2020) suggests that the calculations contain numerous assumptions, contributing to the variation in estimations. Firstly, the degree to which models predict that carbon emissions will impact the selected indicators varies. However, the alternative results for a given indicator, such as a rise in temperature, can vary even when using the same model. According to Wang et al. (2017), two models can assign different values to the same outcome. However, a few social elements with fixed values are significantly affected by carbon dioxide emissions, such as human health. Nevertheless, although economists refute the precise figures, these elements’ values significantly impact an estimated social cost of carbon.
Previously Kemfert (2002) suggested that some models only consider a particular outcome’s impacts on a specific country; as a result, they estimate the social cost of carbon level substantially lower than models that take the effects of increasing carbon emissions on the entire world. Downing and Watkiss (2003) suggest that the estimates can vary when economists utilize various discount rates, which measure how much the estimator value the present compared to the future. Recent research by the Economist (2020) reported that a 2% discount factor is used for the $190 Defra estimate, where the SCC decreases to $120 when they apply a greater discount rate of 2.5%, devaluing the future in the process. According to the Economist (2020), the SCC increases to $340 if they utilize a 1.5% discount rate and set a greater value in the future.
Required Changes to Ensure SCC is paid by any Institution whose action has a Detrimental Impact on the climate through the Emission of Green House Gases (GHG)
According to the NPR (2023), pollution is a harmful and possibly hazardous substance that contaminates the land, water, or air. Previously Heine, Faure, and Dominioni (2020) have contended that the polluter pays principle prompts the participants in pollution to be accountable for the costs involved with mitigating it in the interests of public health and the environment. For example, a factory is typically held responsible for properly disposing of potentially toxic waste produced by its operations. Vinuales (2015) suggests that the 1992 Rio Declaration, formally known as incorporates the polluter pays principle, which is a set of guiding principles for sustainable development globally. The principle is the foundation for most land, water, and air damage laws, making greenhouse gas emissions (GHG) a form of pollution.
Research by World Health Organization (2019) reported that ambient air pollution is related to the deaths of 4.2 million people annually, and emissions of greenhouse gases contribute to it. However, institutions have yet to acknowledge their activities have raised the extent of emitting carbon that can lead to a change in climate, and emitters are held accountable for reducing such pollution. The Economist’s (2020) report considers it a market failure when the cost of pollution caused by the release of greenhouse gases is not passed down to the emitters. A study by Grantham Research Institute (2022) claims that the SCC is instead externalized to the community when the pollution caused by GHG is not charged to emitters.
The following changes can be made to internalize the SCC to the emitters of carbon:
- Policy Changes
Research by Harford (2022) suggests that administrations can address the social cost of carbon by enacting a carbon tax policy to hold greenhouse gas emitters accountable for their emissions to internalize the SCC. According to Kenneth Rogoff (2019), a uniform global carbon emissions tax is the best way to address the change in climate problem from an environmental perspective where emitters are forced to assume the cost of pollution and impose a fee on the carbon gas emission compared to the associated price set by the future change in the climate. Financial Times (2021) suggests that individuals and businesses should be prompted by implementing policies to decrease their carbon emissions and meet their promises on carbon emissions by internalizing the SCC, which can help lessen the effects of climate change.
A study by Arent (2017) suggests that governments should implement policies mandating SCC payments from greenhouse gas emitters and emphasizing using renewable energy sources. This would require carbon emitters to shift from fossil fuels to renewable energy sources like wind, biomass, solar, hydropower, and geothermal energy. Dinçer and Yuksel (2022) argue that the climate would benefit from decreased carbon emissions by lowering their carbon footprint, which is positive effects. Similar research by Bodansky, Brunnée, and Lavanya Rajamani (2017) suggests implementing a uniform cap-and-trade system policy across the world in which organizations can be capped with a limitation on the number of greenhouse gases they are allowed to emit and permitted to trade emissions permits with other organizations. Consequently, the price of a polluting permit is set by emissions trading between low- and high-cost polluters through enough licenses to cover their entire emissions for a particular year the polluters have paid. This cap–and–trade policy would encourage businesses to lower their carbon emissions by allowing flexibility in fulfilling their emissions targets.
Research by the NPR (2023) demonstrates that policies that remove pollutants would result in a 7% reduction in global emissions, and energy subsidies would be a $40 per ton negative carbon tax by 2025. Therefore, withdrawing coal and fossil subsidies would discourage institutions from utilizing coal or fossil in production. Similar research by Gouse, Gray, and Tomlinson (2018) suggests that coal incentives and subsidies are estimated to cost between $37 and $51 billion.
- Legal Changes
Legal changes would involve establishing international liability laws that hold institutions accountable for the damages caused by their carbon emissions. Previous research by Bodansky, Brunnée, and Lavanya Rajamani (2017) suggests that there is a need to pass a law to support the policy about a uniform global emission tax. However, international law is still developing and exploring strategies to integrate these climate change issues into legally binding processes. Kuper (2021) contends that real carbon laws explicitly require legislators to guarantee that the organization pays for decontaminating and combating pollution in situations where the climate has already been damaged, or there is a chance for damage in the future.
Research by Harford (2022) suggests that legislators could propose law reforms that compel carbon capture and storage (CCS) technology investments from greenhouse gas emitters (GHG). The CCS mechanism captures CO2 from sources such as power plants, industrial operations, and other sources, storing it in underground geological formations to keep it from entering the atmosphere. A report by Financial Times (2021) suggests that carbon capture technology can cut emissions from already-existing sources of GHG emissions and global GHG emissions by up to 17% and would help reduce the quantity of carbon footprint released into the atmosphere.
According to Al Shidi, Sulaiman, and Amoatey (2016), legislators can implement financial initiatives and regulations such as tax credits and subsidies to encourage the usage of renewable energy sources. Previously Kuper (2021) contends that states can establish renewable portfolio standards, which call for a specific proportion of energy from renewable which could assist in the war against change in climate by enacting laws and regulations that force carbon polluters to transition to renewable energy sources.
- Societal Changes
According to World Health Organization (2019), the foundation for influencing individuals and institutions to take action and invest in clean energy and renewable energy technology is raising public awareness of climate change. Awareness should be initiated by educational programs, campaigns, conferences, and seminars focusing on the causes, effects, and viable mitigation strategies for climate change. Moreover, it’s necessary to offer people the information and guidance they need to understand how their decisions can impact the environment and what actions they can take to lower their greenhouse gases and other pollutants.
Previously Edenhofer et al. (2011) have contended that establishing a community SCC fund that could be used to finance green energy initiatives, such as the adoption of new clean energy sources and the usage of renewable energy technologies will promote initiatives that reduce the climate-changing impacts of greenhouse gas and other pollutants. In addition, the SCC funding might finance industries such as reforestation, land reclamation, and energy-efficient construction that lower carbon emission and other pollutants. Communities may handle the SCC fund directly or through a third party, such as a government agency.
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