In the closing days of February, the Biden administration set its interim social cost of carbon, a metric that aims to capture the aggregate economic harm caused by an additional increment of carbon-dioxide emissions, at $51 per ton. The Biden administration’s $51 estimate will serve as a placeholder until, in its own words, the White House evaluates and incorporates the latest climate science and economic research. But while the White House has stressed that this exercise will restore policymaking norms, developments behind the scenes suggest that the administration will put its policy cart before the horse of climate economics.
The social cost of carbon (SCC) is the bridge spanning the fields of climate science and economics. William Nordhaus, the first modeler to be recognized by the Nobel committee for work at this nexus, describes the SCC as the single most important economic concept we have for evaluating the effects of climate change on human life.
It is the SCC that girds the arguments for carbon-mitigation policies that tend to attract right-of-center economists and policy analysts. The concept ostensibly facilitates our evaluation of climate damages and enables us to assess policies in a cost-benefit framework. Putting on hold analytical disagreements over utility comparisons and normative disagreements over discounting, the work of Nordhaus and others such as Richard Tol on the SCC has even convinced some libertarians of the importance of internalizing the costs our actions might impose on others.
In the right-of-center case for carbon-mitigation policies, the SCC is the tool that lets us see into the future, approximate the damage emissions will cause, and factor the cost of that damage into our decision-making today. The most attractive approach to those right of center is typically to invoke the work of A.C. Pigou and apply a “Pigovian” carbon tax that bakes climate costs into our everyday economic choices.
But those to whom the Pigovian approach appeals should view the upcoming Biden revisions to the SCC with caution. Unlike the exercise performed by the Obama administration, on which the interim $51 figure is based, the new administration’s undertaking is likely to abandon the Nordhausian approach altogether and work backward from Biden’s preconceived and conveniently round goal of net-zero emissions by 2050.
Noah Kaufman, recently hired as senior economist for the Council of Economic Advisors (CEA), leads a new school of thinking on carbon pricing. Kaufman and a team of co-authors presented the case last year in the journal Nature that the Nordhausian social cost of carbon framework has outlived its usefulness. “SCC estimates will continue to improve,” they argue, “but methodological advancements are unlikely to narrow the range of SCC estimates much. After all, large uncertainties come from parameters that are inherently uncertain, such as the appropriate discount rates, risk aversion levels, issues around inequality and attempts to assign monetary values to non-economic climate damages.”
Rather than estimating harm from climate change and using the dollar-translated figure as a basis for cost-benefit analysis or a carbon tax, Kaufman suggests that we assume a goal of net-zero emissions and regulate from there with what he calls a near-term-to-net-zero carbon price. This approach, right or wrong, breaks distinctly with the methodology that garnered Nordhaus Nobel recognition and won the support of so many right-of-center thinkers.
The flaw here is obvious: If we don’t have trustworthy estimates of climate damages, as Kaufman alleges in Nature, how do we know zeroing out carbon emissions is a cost-efficient endeavor? The Nordhaus approach, inconveniently for Biden and his new CEA hire, finds that the policies required to achieve a goal like Biden’s for 2050 would cause more harm than they would alleviate through emissions reductions.
Nordhaus’s optimal scenario — the one in which people have the best chance for prosperous lives — includes continued emissions beyond midcentury because of the enormous and concomitant economic benefits. This view holds that human beings are better off being wealthier in a higher GHG world than in a poorer one with GHG concentrations held steady. To be clear, Nordhaus’s work supports carbon mitigation. But what it does not support is a preconceived goal. The SCC on the Nordhausian model is an indicator of how stringent carbon policies should be whereas Kaufman’s recommended near-term-to-net-zero carbon price is a set of directions for reaching a capricious target.
Kaufman’s framework yields a near-term-to-net-zero carbon price of $52 in 2025 — not meaningfully different from the interim number Biden is borrowing from Obama’s team. But the dollars and cents that result are downstream of a crucial methodological difference. Are we working from the best estimate of future damage to ascertain externalized costs or are we reverse-engineering a pre-ordained, rhetorically convenient goal?
For right-of-center analysts and policymakers, the Pigovian aim of internalizing the costs of human activity is attractive. While the new school of climate thinking deploys some of the language of the Pigovian tradition, it ditches its foundation. Biden’s climate advisors, far from restoring norms, are crossing a methodological Rubicon. Unable to substantiate its preferred outcome, the Biden administration will scatter the deck and revise the rules to push our economy in a direction climate economics does not justify.