The social cost of carbon turns climate change into dollars

The mounting impacts of climate change cost the U.S. billions of dollars each year. Droughts, heat waves, floods, wildfires, hurricanes, and cold snaps all leave their mark. In 2021 alone, there were 20 distinct billion-dollar weather and climate disasters, like Hurricane Ida and the February cold wave that stretched down to Texas, with a total price tag of $145 billion.  

Releasing planet-warming gases into the atmosphere comes at a cost to the environment and society. Scientists and economists refer to this as the “social cost of carbon,” a  policy-informing metric used to determine the cost of one ton of carbon dioxide into the atmosphere. Quite literally, turning climate change into dollars.  

It’s “our tool for monetizing how much worse those disaster-type events will be,” said Tamma Carleton, an environmental economist at the University of California, Santa Barbara.

On his first day in office in 2021, President Biden ordered a review and update to the social cost of carbon to match the current state of science, economics, and inflation. Its value currently sits at $51 per ton of carbon emitted. But the number is a decade-old, and experts say it's grossly underestimated.

“What people don’t appreciate about the [social cost of carbon] is it is the linchpin of climate policy in the United States because we don’t have other vehicles for pricing climate change into our system,” said Carleton. 

 The review has been met with some opposition by states like Missouri and Louisiana. At the end of May, the Supreme Court rejected Louisiana’s request to block the use of the climate metric.

 Carleton said that without a hard dollar amount, policymakers only have a vague sense of what they think will be good for people, but money talks. 

 Suppose a car manufacturer wants to retool their factory to make electric vehicles. In that case, the social cost of carbon turns something qualitative into values they can rationally weigh.

Experts say that calculating the cost is complicated because greenhouse gases, like carbon dioxide, stick around in the atmosphere and warm the planet for years to come, and it includes a range of possible values—or uncertainty. 

 Most people have probably never heard of the social cost of carbon.  But they are sure to hear more about it in the coming months and years as the U.S. has less than a decade to cut its carbon emissions by roughly half by reducing fossil fuel use, switching to renewable energy, and investing in carbon removal from the atmosphere, according to the latest mitigation report from the Intergovernmental Panel on Climate Change.

Turning benefits into dollars

Cost-benefit analysis has been a required part of federal decision-making since an executive order by the Reagan administration in 1981. It wasn’t until after 2008 when the Supreme Court ruled that the government needed to weigh the environmental costs and benefits of new policies and regulations.

But at that point, all the federal agencies were doing their own thing, said Peter Howard. Former President Barack Obama wanted a uniform number to put on that line, and to do this formed an Interagency Working Group that calculated the first dollar amount, equaling $51 today, the same number that the Biden administration still uses. 

The social cost of carbon “was used really heavily over the Obama administration years,” said Carleton. “It had real influence over climate policy.” 

Today, several states, like New York, California, and Minnesota, also use the social cost of carbon in decision-making. 

In 2015, the Obama administration asked the National Academy of Sciences to review the process, which they did in a report in 2017. The report collated the best available science and provided a roadmap to update the number in the future, said Howard.

The Trump administration disbanded the Interagency Working Group and pulled two critical levers in the social cost of carbon calculation. First, they changed the “discount rate,” an essential part of the social cost of carbon that considers how future costs and benefits are less valuable now than present ones. The Trump administration raised the discount rate, and a higher discount rate means society values present damages more than future damages.

The second change was that they only counted damage that happened in the U.S.  

These changes lowballed the number down to as low as $1. And because of the change in administration, Howard said that the recommendations from the National Academy of Sciences have yet to be implemented. 

Getting the number right

The impacts of climate change are often described as small changes in temperature or massive emissions, which doesn’t always make sense to people, said Howard.  

“Putting it in dollar terms helps the public really understand what the magnitude of the climate costs are.” 

The new dollar value is slated to come out within the next year, said Howard, who anticipates that critics, like states that have already pursued legal action, probably won’t be happy if the number goes up.

There are lots of things that policymakers and society need to prioritize. A precise dollar amount will ensure “we don’t underdo it or overdo it with policies that don’t pass the test,” said Carleton. 

She says there also needs to be a better way to update it with the pace of science. 

One of the biggest advances since the number was first used is the understanding that climate change does not affect everyone equally, Carleton said. Now, policymakers can look at the average social cost of carbon but also see how different populations experience climate change and make decisions with that in mind.

“We're entering an era where policymakers will have an estimate of that aggregate social cost of carbon number but also next to it a map of how different populations are going to be exposed,” she said.

 “It enables more rational climate policy, but also climate policy that puts equity at the core. That really wasn’t feasible ten years ago.”