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367. Climate Change Policies Should Focus on the Social Cost of Carbon

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In preparation for the 26th Conference of the Parties (COP26) to the United Nations Framework Convention on Climate Change (UNFCCC), scheduled for November 2021, countries are working to formulate policies to address climate change. In the process, guidelines on the economic valuation of greenhouse gas emissions will be important in determining the scale of implementation of climate change measures.

In the August 20 issue of Science, Joseph E. Aldy of Harvard University and colleagues wrote an article on climate policy focusing on the social cost of carbon (SCC). The following is a summary of the article.

The cost of reducing climate-changing carbon dioxide (CO2) emissions is incurred at the time the action is taken, whereas the benefits that accrue after the economic damage has been avoided will continue to accrue for hundreds and sometimes thousands of years. This future economic benefit is converted into a monetary value, the social cost of carbon (SCC), which measures the avoided economic damages associated with a metric ton of CO2 emissions. Avoided damages include impacts on agricultural production, reduced labor productivity, property damage (especially in coastal areas), impacts on mortality and morbidity, and induced migration.

On his first day in office, U.S. President Biden ordered the re-establishment of the SCC Interagency Working Group and directed it to produce a final SCC by January 2022. The tentative SCC released by the administration puts the social cost per ton at $51 (Pick Up 243. Social Cost of Greenhouse Gases). In addition, President Biden has instructed agencies to consider applying the SCC to monetize the climate change benefits of their budgets, procurement, and other government actions. Incidentally, in addition to the U.S., the governments of Canada, France, Germany, Mexico, Norway and other countries, as well as the International Monetary Fund, are using the U.S. as a reference or creating their own SCCs.

In addition to cost-benefit analysis using the SCC, there are other methods for evaluating climate change policies. For example, a cost-benefit analysis has been proposed in which the maximum rate of increase in the global average temperature or the target of reducing CO2 emissions to zero is set and compared with the cost of alternative approaches selected to achieve the target. In the U.S., cost-benefit analysis using SCC is the mainstream method for climate policy evaluation, but recently there seems to be a movement to promote cost-effectiveness analysis due to the complexity of SCC estimation.

While recognizing the value of research in promoting cost-effective ways to achieve climate goals, the authors recommend using SCC-based cost-benefit analysis as a means of evaluating and justifying climate policies. Cost-benefit analysis is a cost estimate that focuses on adopting the lowest cost policy to achieve a goal and takes no account of benefits. Furthermore, this method ignores the benefit of avoiding damage caused by climate change, which may lead to policy retreat when trying to take climate change action. Therefore, the evaluation by cost-benefit analysis using SCC should be adopted and applied to climate policy assessment by updating the current provisional value of SCC to a reliable value.

Aldy, J. E. et al., (2020) Keep climate policy focused on the social cost of carbon. Science

Contributor: KANAMORI Norihito (Information and Public Relations Office)