We don’t know what climate change will cost — that doesn’t mean we can ignore it

We don’t know what climate change will cost — that doesn’t mean we can ignore it

The “social cost of carbon” (SCC) is the dollar value of the future climate damages from emitting an additional ton of carbon dioxide. During the Georgia W. Bush and Barack ObamaBarack Hussein ObamaChina’s educational offensive in African markets Democrats have major policy dilemma with new Congress Booker's potential 2020 bid is generating buzz among Democratic activists, says political reporter MORE administrations, the SCC was used in regulatory cost-benefit analysis. The SCC is also the starting point for thinking about the appropriate magnitude of a carbon tax to reduce carbon dioxide (CO2) emissions.

Over the past year, the SCC has come under attack both from the administration and from Congress. Last fall, the administration substantially reduced the value of the SCC by using — incorrectly — a high discount rate and a narrow construction of domestic benefits. Most recently, uncertainty about the size of the SCC has been used as an argument for a House resolution opposing a carbon tax. 

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The two of us bring quite different perspectives to the SCC. While one of us (Stock) was working in the Obama Council of Economic Advisers to refine and apply the SCC, the other (Pindyck) was criticizing the computer models used by the U.S. Government to estimate the SCC, arguing that the models had major flaws and uncertainties.

 

But both of us agree about the importance of the SCC — and of having a carbon fee as an important step in harnessing market forces to reduce CO2 emissions and incentivize the development of clean energy sources.

Critics of a carbon tax argue that because of uncertainty over the correct value of the SCC, it should not be used at all for policy purposes — in effect, its value should be set to zero legislatively. In fact, some of Pindyck’s writing about this uncertainty were used (out of context and selectively) to make that case. But setting the value of the SCC to zero implies that mitigating climate change has no value and is therefore unnecessary. The idea that uncertainty means we should do nothing is completely illogical.

We do not know where the next hurricane will strike and how much damage it will do, but that doesn’t mean we should pretend the cost is zero and FEMA should be defunded. On the contrary, FEMA needs to be ready for hard-to-predict disasters. 

Likewise, we do not know how much damage our homes might sustain from a fire, or even whether a fire will occur, but that doesn’t mean we shouldn’t buy fire insurance. On the contrary, a prudent homeowner buys enough insurance to cover the potential cost of a bad fire. 

Similarly, we do not know what the costs of climate change will be, but that doesn’t mean we should pretend those costs are zero and take no action. Instead, we should take action now as insurance against what could be relatively low, or potentially very high, costs in the future. As the courts have recognized, there is no rational basis for arguing that because it is uncertain, the SCC is zero. 

What then is the right value of the SCC? That is a tough question that both of us have thought about a lot. The models used by the government to estimate the SCC have some important weaknesses, which researchers are actively working to resolve.

One of us (Stock) is optimistic that this research will substantially improve the estimate of the SCC. The other (Pindyck) is not, so has explored other methods of estimating the SCC, including surveying experts, a method used in other scientific fields facing complicated unknowns. (The results suggest that the SCC is much larger than the Obama administration’s estimates.) 

Another approach is to focus on the insurance aspect, where we worry only about worst-case outcomes. That would understate the total cost of climate change because it ignores important, but less costly damages, but it also suggests that the SCC could be quite large. 

The two of us have been on different sides of the academic debate over the SCC. But we agree that while we can’t pinpoint the value of the SCC, it isn’t zero. We agree that a carbon tax is a smart conservative step we should take now. And we agree that the right people to figure out the value of the SCC are scientists and economists, not members of Congress.

Robert Pindyck is the Bank of Tokyo-Mitsubishi professor of Economics and Finance at the MIT Sloan School of Management. 

James Stock is Burbank professor of Political Economy, Department of Economics and Harvard Kennedy School, Harvard University.