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1085. Equity Weighting for the Social Cost of Carbon
1085. Equity Weighting for the Social Cost of Carbon
The Social Cost of Carbon Dioxide (SCC) refers to the additional damage to society due to the emission of additional carbon dioxide. The level of the SCC is a strong guide for advancing the response to climate change, as it refers to the cost to be paid to avoid additional carbon emissions. The higher the SCC, the more justified it is to implement measures below that cost.
One of the well-known factors when determining an SCC is the choice of the discount rate, which reflects how people will evaluate the future against current economic benefits and costs. High discount rates incentivize prioritizing the profits of the current generation over future generations and lead to a reluctance to take action on climate change by underestimating the present value of the damage, the SCC. Conversely, the lower the discount rate, the higher the present value of future damage and the higher the SCC, which justifies more stringent emissions reductions. For example, a recent study estimated the median SCC in 2020 to be $37.3, which would be $140.0 at a discount rate of 2.5% and $22.6 at a 5% discount rate.
In addition to this, another factor that determines SCC is "income weighting" (also known as "distribution" or "equity" weighting). Income weighting is a way to highlight the impact of regulation on distribution equity and place greater weight on the benefits and costs affecting low-income groups compared to high-income groups. The motivation for distribution weighting reflects the idea that a dollar for high-income earners is less valuable than the same dollar for low-income earners.
An op-ed published in the journal Science argues that the U.S. government's new income-weighted guidelines for SCC could have a significant impact on the benefit-cost analysis of United States climate policies.
In December 2023, the United States Environmental Protection Agency (EPA) finalized a new SCC estimate of $190 per ton of CO2 for use in the impact analysis of federal regulations. This increase is more than three times higher than the previous official United States SCC and is largely due to the reduction of the discount rate from 3% to 2%. In November 2023, the Office of Management and Budget (OMB) also adopted the same 2% discount rate in its new Regulatory Impact Analysis Guidelines (Circular A-4) for all federal agencies. In addition, the new OMB guidelines also allow the use of income weighting, and the proposed distribution-weighted approach shows an approximately eight-fold increase in SCC.
This major change in the SCC is due to the fact that the majority of the effects of climate change occur outside the borders of the United States, in addition to the more than threefold increase resulting from the reduction in the discount rate. The median per capita income in the United States is roughly above the 90th percentile of the global income distribution, suggesting that applying distribution weighting globally gives greater weight to impacts affecting more than 90% of the world's population compared to the weight given to the typical United States resident (both being one).
While pointing out that discussions on SCC tend to focus on the discount rate, the editorial emphasized the need for careful and sensible dialogue between the scientific and policy communities regarding the income weighting of SCC in the future in light of the global impact of United States climate policy.
Reference
Brian C. Prest et al., Equity weighting increases the social cost of carbon. Science 385,715-717(2024).DOI:10.1126/science.adn1488 https://www.science.org/doi/10.1126/science.adn1488
Contributor: IIYAMA Miyuki, Information Program