In the final instalment of Thrust Carbon's series on carbon pricing, the spotlight shifts to the social cost of carbon (SCC). This crucial metric accounts for inflation, population growth, and multifaceted impacts, evaluating the economic toll of emitting one tonne of CO2. While extensive research exists, a definitive SCC price remains elusive and varies regionally. This blog will compare SCC calculations from a variety of entities, shedding light on their diverse approaches and potential implications. This information can be used to make informed decisions relating to a company wishing to choose their SCC.

What is the social cost of carbon?

So far, in Thrust Carbon’s three-part series on carbon pricing, we have explored carbon taxes and internal carbon pricing. In this third and final instalment, we will take a deep dive into what the social cost of carbon is, and why it is an important factor to consider when making sustainable decisions. We will also discuss the existing research on the social cost of carbon, the limitations of this research, and what we believe are the best-practice pricing options.

As a concept, the social cost of carbon reflects the economic impacts associated with the release of carbon dioxide and other greenhouse gases. These costs can include damage to public health, impacts on agriculture and forestry, and the financial costs of mitigating and adapting to the effects of climate change. These examples will also take the rate of inflation and population into account.

In recent years, the social cost of carbon has become an increasingly important tool for policymakers and businesses as they try to understand and address the impacts of climate change. By putting a monetary value on the social cost of carbon, decision-makers can more accurately weigh the costs and benefits of different business choices.

In this article, we will explore the different ways that the social cost of carbon can be calculated. We will also compare different pricing options and make recommendations on which we believe are the most effective.

Breakdown of the social cost of carbon

The social cost of carbon (SCC) is a way of measuring the economic impact of greenhouse gas emissions on society. It takes into account the environmental, health, and economic costs associated with emitting one tonne of carbon dioxide into the atmosphere. Some factors that can be included in the calculation of the social cost of carbon are:

1. The cost of damages caused by climate change, such as floods, droughts, and other natural disasters.

2. The cost of reducing emissions, such as investing in renewable energy, carbon capture technologies, and other measures to reduce greenhouse gas emissions.

3. The impact of climate change on human health, such as increased rates of respiratory illnesses, heat-related illnesses, and other health problems.

4. The impact of climate change on the global economy, including the cost of lost productivity, disrupted supply chains, and other economic impacts.

Discount rates

Discounting (when calculating the social cost of carbon) is the practice of adjusting future costs and benefits of greenhouse gas emissions to reflect their present value. This is important because the social cost of carbon is often calculated over roughly 100 years. Discounting assumes that future generations will be wealthier and better able to adapt to climate change.

The discount rate used can significantly impact the final value of the social cost of carbon. A higher discount rate will result in a lower social cost of carbon because future costs and benefits are given less weight. On the other hand, a lower discount rate will result in a higher social cost of carbon because future costs and benefits are given more weight.

Some argue that discounting undervalues the impact of climate change on future generations, while others argue that a higher discount rate reflects the reality of economic growth and technological progress over time.

Did you know?

Social Cost of Carbon programmes (SCCs) in developing regions are are 20 times higher than developed regions on average - University College London

Scope of research available

There has been a significant amount of research conducted over the years regarding the calculation of the social cost of carbon. However, much of this has not been able to suggest an actual price for the social cost of carbon, as it lacks the necessary data and detail required to do so. The following articles are examples of great research and interesting debate into certain aspects of SCC, without a final figure:

- The social cost of carbon and inequality, Centre for Economic Policy Research

- Social Cost of Carbon 101, Resources For Future

- Social Cost of Carbon, Columbia Climate School

- The Social Cost of Carbon: Advances in Long-Term Probabilistic Projections of Population, GDP, Emissions, and Discount Rates, Brookings Institution

One of the key debates within this research has been focused on the rate of inflation and population growth. These factors have a significant impact on the social cost of carbon, as they can not only affect the severity and frequency of climate-related events, but inflation can drastically change the price within a short space of time.

Despite the lack of agreement on how best to calculate the social cost of carbon, some countries have developed their own methodologies. For example, the US government established an Interagency Working Group on the Social Cost of Carbon in 2009, which has since updated its methodology several times. Other countries with their own methodology include the UK, Canada, and Germany - all of which will be discussed below.

In addition to government-led research, there are also independent bodies, such as Nature Journal and Forest Research, that conduct their own research into the social cost of carbon. Interestingly, this independent research often suggests a much higher social cost of carbon than those calculated by governments. This may be due to differences in the calculation of economic impacts (inflation, population), or it may be due to a more comprehensive covering of impacts.

In the next section, we will compare some key examples of the social cost of carbon calculated by different countries and independent bodies. By doing so, we hope to provide a clearer picture of the different approaches being taken to calculate the social cost of carbon, as well as the potential implications of these different methodologies.

Comparison

Below is a table containing some of the different calculations of the social cost of carbon. This table provides a useful overview of the different approaches taken by governments and independent bodies to calculate the social cost of carbon, and allows for easy comparison between them.

While there is further research available online around other methods of calculating the social cost of carbon, these often lack a final number due to the complexity of the calculation process. Additionally, many other calculations available are outdated and do not reflect modern factors. Therefore, the methodologies presented in the table are considered to be the best-available options, even though they may vary in value.

As you can clearly see, there are many different approaches being taken to calculate the social cost of carbon, all with as well as their respective strengths and limitations.

Conclusion

Our preferred options

While there is no standardised approach for calculating the social cost of carbon, the methodologies presented in the table above provide a useful overview of the different approaches taken by governments and independent bodies. There is still some uncertainty in the estimates due to the complexity of the calculation process and the uncertainty of future developments, but in my opinion, the most reliable choices would be:

- Nature Journal

-- Conducted by independent researchers.

-- Comprehensive research with a public methodology.

-- Considers modern issues (such as temperature-related mortality) that older models do not consider.

- US & Canada Gov Research

-- Worth including as a large portion of organisations will request them.

-- Generally comprehensive, but recognises room for improvement.

- German Environment Agencies

-- Gives a similar value to the Nature Journal, giving more confidence in the SCC being in this ballpark.

-- Comprehensive, public methodology.

-- Relatively new figure (2020).

Recommended next steps!

Travel managers and sustainability leads should use the social cost of carbon (SCC) to understand the true financial impact of their carbon emissions, guiding smarter sustainability decisions. At Thrust Carbon, we offer the Thrust Calculator, a tool tailored to provide real-time emission calculations and allows for custom carbon pricing and budgets.

If you would like to learn more about how we can streamline the use of SCCs in your reporting, please get in touch with a member of our team!