By Eric Roston

It’s a number with a name its inventors concede is baffling. But it may also be, as many in the field have called it, the most important number you’ve never heard of. The “social cost of carbon,” or SCC, was created to show policy makers the gap between the market price of fossil fuels and the cost of the environmental damage they cause. The Trump administration all but ignored climate accounting in its regulations, but President Joe Biden has ordered his staff to move promptly to calculate new social cost estimates for CO₂, plus nitrous oxide and methane.

1. What is the social cost of carbon?

It’s a tool used in federal benefit-cost analysis to account for the damage greenhouse gas pollution inflicts on society, whether it comes in the form of deadly heat waves, water shortages or disappearing crops or animals. One of its champions, Michael Greenstone, says it can also be regarded as “the benefit, in money terms, of reducing carbon emissions.” Those benefits can justify regulations that make polluting activities more expensive. To distinguish among the effects of the greenhouse gases, the SCC in recent years has fractured into separate “social costs” of CO₂, methane and nitrous oxide.

2. Where does the number come from?

A federal court slapped the Department of Transportation in 2008 for failing to account for the benefits of cutting carbon-dioxide emissions. In the early years of the Obama administration, Greenstone, now the Milton Friedman Distinguished Service Professor in Economics at the University of Chicago, and Cass Sunstein, a law professor at Harvard University then working at the White House, led a team that developed a formula that agencies could use to factor in the benefit of avoiding emissions when pricing out a new policy. Social-cost estimates can also help inform legislation dealing with carbon pricing, such as taxes or cap-and-trade programs, although legislators tend to take into account other economic and political factors as well.

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Areas of Focus: Social Cost of Carbon
Definition
Social Cost of Carbon
The social cost of carbon is an essential tool for incorporating the cost of climate change into policy-making, corporate planning and investment decisionmaking in the United States and around the...
Energy Markets
Definition
Energy Markets
Well-functioning markets are essential for providing access to reliable, affordable energy. EPIC research is uncovering the policies, prices and information needed to help energy markets work efficiently.
Fossil Fuels
Definition
Fossil Fuels
Under current policies, fossil fuels will play an important role in the energy system for the foreseeable future. EPIC research is exploring the costs and benefits of these fuels as...