Sustainability

The most important number no one has heard of

We often speak about the environmental implications of carbon dioxide: the warming potential of the gas, the degradation of nature and the ocean acidification as a consequences of higher concentration levels, however the social implications are less discussed.

Date
Author
Siobhan Archer, Sustainable Investing Specialist
Reading time
6 minutes

Carbon dioxide

How do we begin to calculate the impact of a vehicle manufacturing company in the United States on a family that has lost their house to flooding? The social cost of carbon is “the single most important number that nobody has ever heard of” according to Gernot Wagner, a climate economist at New York University, emphasising its role as an important question in public policy which will define life on our planet.

What is the social cost of carbon?

The social cost of carbon is an estimate, in monetary terms (usually USD $) of the economic damages contributed by emitting one additional tonne of carbon dioxide into the air. By using a dollar value, this allows policymakers and economists to accurately value the cost of climate change when making decisions.

This attempt to quantify all the social and economic harm caused by additional carbon released into the atmosphere is a complex calculation. Property damage as part of extreme weather events, crop losses due to arid or wet conditions, and migrations due to climate conditions all have a cost to society, whether it’s loss of production value or governments needing to issue support packages to mitigate circumstances. To accurately estimate the cost of carbon, economists must put a value on the cost of humans’ health and even death, which is both an economically and philosophically difficult feat.

One of the drivers behind quantifying the social implications of carbon is that if we expect negative consequences in the future from higher emissions today, we should be willing to pay something for those costs today.

How have policymakers approached the cost of carbon?

This notion of responsibility today for tomorrow’s consequences is what makes this one of the most powerful tools for policymakers. Policymakers and government departments use a process whereby they estimate both future greenhouse gas emissions and future estimates of economic growth, from there, they must estimate the physical climate change projections and how this will translate into a human cost.

Once this value exists, it’s easy for politicians to weigh up decisions and conduct cost benefit analysis on new and existing projects. For example, if the initial move to making cars more energy efficient is costly due to machinery upgrades and new inputs. This can be revalued by considering the emissions saved and the social carbon savings, like the thousands of reduced cases of lung disease from toxic emissions. In the UK, the social cost of carbon is an important element in decision making used by the Department for Business, Energy & Industrial Strategy (BEIS) and others in assessing where to prioritise spending in line with the UK’s net zero by 2050 commitment.

What is the value for the social cost of carbon?

Different countries and different government departments in those countries will have varying social costs of carbon. In the US, the first public cost of carbon was heralded by President Obama in 2009 as $51/tonne of CO2 calculated and negotiated by an interagency working group of experts. Under Trump this number fell to between $1 and $7/tonne of CO2, justifying the rolling back of major climate regulations like the Paris Agreement and the Obama-era Clean Power Act. President Joe Biden re-established this group in his Day One Executive Order on climate action, readopting Obama’s higher price and looking to go beyond the work on social cost of carbon alone but broadening this to a social cost of nitrous oxide and methane as well.  

In the UK, the social cost of carbon was commonly established by Professor Nicholas Stern, a banker, academic and former chief economist at the European Bank for Reconstruction and Development as well as the World Bank. Stern was responsible for the eponymous and ground-breaking Stern Review in 2006 which set out the benefits of strong, early action on climate change to outweigh the potential impacts of inaction. In his work, Stern advocates for a higher price of $266/tonnes of CO2, to adequately capture the real value of rising emissions.

Future implications

Tackling climate change will involve costs, the Institutional Investors Group on Climate Change (IIGCC) estimate total investment in to climate solutions such as renewable energy and low carbon transport will need to reach around $126 trillion. However, importantly, the cost of inaction is much higher. Embedding a human cost to climate change is key to ensuring a Just Transition which will keep people at the heart of the shift to a low carbon economy. In doing so, we can create an environment which prioritises good green jobs, safeguards people’s homes and livelihoods and tackles inequalities globally.

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