Smoke stacks at a coal burning power plant

The Social Cost of Carbon is Still the Best Way to Evaluate Climate Policy

Professor of Economics Matthew Kotchen argues that the social cost of carbon, which accounts for the future damage that atmospheric carbon causes, is preferable to an alternative approach put forward by two prominent economists

Written by Geoffrey Giller MESc ‘14

For the past decade, the United States government has primarily relied on a measure, known as the social cost of carbon, to help evaluate the costs and benefits of various climate change policies. However, some economists have called for the use of a different metric, called target-consistent carbon pricing. In a new commentary published in Science, Yale School of the Environment Professor of Economics Matthew Kotchen and colleagues at Harvard argue that the social cost of carbon is still the best way to assess climate policy.
Portrait of Matthew Kotchen in Kroon Hall

Matthew Kotchen, Professor of Economics

The social cost of carbon, Kotchen explains, is the “cost to society of increasing a ton of carbon dioxide emissions, or any other greenhouse gas, over all space and over all time.” It tries to account for the cost of all the multitudinous damages that atmospheric carbon can cause: from recovery efforts after worsened storms, to human health impacts due to wildfires, to increased conflicts worldwide from the migration of climate refugees.

This number can be helpful when evaluating the economic benefits of a new climate change policy. Every ton of carbon that a new policy prevents from being emitted would have a concrete value. At the moment, the social cost of carbon has been set by the Biden administration at around $51 per ton of carbon emitted, which is the same value projected during the Obama administration. But an Interagency Working Group on the Social Cost of Greenhouse Gases within the Biden administration is working on updating that number. The revised amount is expected to increase, Kotchen says, which would justify more aggressive climate policies.

The proposed alternative to using the social cost of carbon for cost-benefit analysis is using target-consistent carbon pricing to evaluate the effectiveness of particular policies. But this approach doesn’t deal directly with the future impacts of emitted carbon, Kotchen notes. The target-consistent pricing approach, which economists like Nicholas Stern and Joseph Stiglitz have advocated for rather than the social cost of carbon, takes a given goal — say, a reduction of carbon dioxide emissions by 50% by 2030 — and estimates how much it would cost to reduce each ton of carbon emissions every year to achieve it. This yearly, per-ton cost is the target-consistent price of carbon.
The big concern with the target-consistent approach is that it puts politics first by establishing a potentially arbitrary goal and then retroactively builds in the analysis necessary to achieve it, rather than using rigorous economic analysis to help inform what should be our overall climate target
— Matthew Kotchen, Professor of Economics
The problem, says Kotchen, is that the climate goal in question can be “determined by an arbitrary political decision.” So, while target-consistent pricing may indeed be helpful in finding the most cost-effective route to a certain endpoint (50% reduction by 2030), that target itself may not be one that is in the best interests of a country or the world. In contrast, using the social cost of carbon in cost-benefit analysis “is an objective and scientific way of evaluating whether a policy is a good idea,” he says.

The big concern with the target-consistent approach, Kotchen says, is that it puts politics first by establishing a potentially arbitrary goal and then retroactively builds in the analysis necessary to achieve it, rather than using rigorous economic analysis to help inform what should be our overall climate target.Target-consistent pricing, he adds, is subject to drastic changes depending on who is in charge politically, rather than providing a non-partisan path with objective consistency.

Kotchen says he hopes that the paper may help to persuade Biden’s Interagency Working Group to stay the course and keep its focus on updating the social cost of carbon, rather than “changing the conceptual approach and moving to a target-consistent price approach instead.”
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