What does carbon cost?

The Harper government allows for a price on carbon

Environment Minister Peter Kent announced the government’s regulations for “heavy-duty vehicles and engines” this morning. For the purposes of determining the benefit of regulations, the government uses something called the “social cost of carbon.” Here is the EPA’s explanation of that calculation. And here is how the Harper government explains the figure in today’s regulations.

The SCC is used in the modelling of the cost-benefit analysis of environmental regulations in a RIAS to quantify the benefits of reducing GHG emissions. It represents an estimate of the economic value of avoided climate change damages at the global level for current and future generations as a result of reducing GHG emissions. The calculations of SCC are independent of the method used to reduce emissions. The SCC is also used by the United States in their costbenefit analysis of regulations. The values used by Environment Canada are based on the extensive work of the U.S. Interagency Working Group on the Social Cost of Carbon.

The estimated value of avoided damages from GHG reductions is based on the climate change damages avoided at the global level. These damages are usually referred to as the social cost of carbon (SCC). Estimates of the SCC between and within countries vary widely due to challenges in predicting future emissions, climate change, damages and determining the appropriate weight to place on future costs relative to near-term costs (discount rate).

SCC values used in this assessment draw on ongoing work being undertaken by Environment Canada in collaboration with a federal interdepartmental working group, and in consultation with a number of external academic experts. This work involves reviewing existing literature and other countries’ approaches to valuing GHG emissions. Preliminary recommendations, based on current literature and, in line with the approach adopted by the U.S. Interagency Working Group on the Social Cost of Carbon, are that it is reasonable to estimate SCC values at $28.44/tonne of CO2 in 2012, increasing at a given percentage each year associated with the expected growth in damages. Environment Canada’s review also concludes that a value of $112.37/tonne in 2012 should be considered, reflecting arguments raised by Weitzman (2011)14 and Pindyck (2011) regarding the treatment of right-skewed probability distributions of the SCC in costbenefit analyses.16 Their argument calls for full consideration of low probability, high-cost climate damage scenarios in cost-benefit analyses to more accurately reflect risk. A value of $112.37 per tonne does not, however, reflect the extreme end of SCC estimates, as some studies have produced values exceeding $1 thousand per tonne of carbon emitted.

As shown in Figure 3 below, the social cost of carbon values increase over time to reflect the increasing marginal damages of climate change as projected GHG concentrations increase. The time-varying schedule of SCC estimates for Canada has been derived from the work of the U.S. Interagency Working Group. The federal interdepartmental working group on SCC also concluded that it is necessary to continually review the above estimates in order to incorporate advances in physical sciences, economic literature, and modelling to ensure the SCC estimates remain current. Environment Canada will continue to collaborate with the federal interdepartmental working group and outside experts to review and incorporate as appropriate new research on SCC into the future.

For the purposes of the cost-benefit analysis, the government appears to use the $28.44/tonne projection to project $500 million in savings.

For those worrying about the price of Thanksgiving turkey, the new regulations carry about $800 million in technology costs (that will be passed on to consumers) and another $4.8 billion in projected fuel savings.

What I suspect is necessary for a real debate on greenhouse gas emissions policy is a cost-benefit analysis that compares the Harper government’s regulations and the NDP’s cap-and-trade proposal.

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