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Background
Climate change has become a pervasive concern in our daily lives, and while its impact is widely acknowledged, there exists a lesser-known yet crucial aspect related to it – the Social Cost of Carbon (SCC).
This article aims to shed light on this magic number, exploring its background, applications, and the values associated with it. Through this blog we embark on a journey to unravel the intricacies of climate solutions, shedding light on the importance of the SCC—a critical metric that quantifies the economic impact of carbon emissions.
Understanding the Social Cost of Carbon (SCC)
So, what do you mean by Social Cost of Carbon (SCC)?
The social cost of carbon dioxide (SC-CO2) measures the monetised value of the damages to society caused by an incremental metric tonne of CO2 emissions and is a key metric informing climate policy.
Estimates of the social cost of carbon are the yardstick for climate policy targets.
The SCC is a pivotal tool employed by the US Federal Government to estimate the societal damage inflicted by greenhouse gas pollution.
This damage or destruction can happen in various forms:
- Deadly heat-waves- something increasingly common nowadays
- Water shortages- again, very common in different parts of the world
- Disappearing flora (plants) and fauna (animals)- again, sadly prevalent
Hence, the SCC is the monetary benefit of reducing carbon emissions by avoiding the above-mentioned different forms of environmental destruction.
In essence, the SCC acts as a crucial metric in quantifying the true cost of environmental degradation caused by carbon-emitting activities.
“The social cost of carbon is the single most important number for thinking about climate change,” – Marshall Burke (Stanford University economist).
The SCC or Social Cost of Carbon was created in order to show Policy-makers the gap between the market price of coal and other fossil fuels and the cost of the environmental damage that they actually cause.
Furthermore, recent developments have expanded the scope of SCC calculations to include not only carbon dioxide but also other pollutants like nitrous oxide and methane.
The Biden administration has been preparing to finalise a new social cost that’s expected to be more than seven times as high as Trump’s. That might encourage regulators to push for emissions cuts in everything from agriculture to transportation to manufacturing.
Applications of the SCC
The calculated benefits derived from the SCC play a vital role in justifying government regulations aimed at penalising companies engaged in carbon-emitting activities. By assigning a monetary value to the environmental damage caused, policymakers can make such activities economically unattractive for companies.
According to a study report by Nature, each additional ton of carbon dioxide emitted into the atmosphere costs society $185 per ton—3.6 times the current US federal estimate of $51 per ton.
A higher social cost of carbon signals to companies that the government sees big benefits to cutting greenhouse gas emissions.
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Considerations and Drawbacks:
While the SCC provides a valuable framework, it is crucial to consider potential drawbacks in its calculations.
Well, all calculations are based on assumptions and this model assumes cash-flow discounting rates that are higher than what markets have actually seen in recent times.
If lower rates had been used, then as we know from discounted cash-flow (DCF) calculations this would mean a higher SCC.
Looking Ahead- Climate Change Solutions
As we navigate the evolving landscape of climate change solutions, the evolution of SCC calculations remains an intriguing aspect. It raises questions about the effectiveness of these calculations as deterrents for companies to reduce their carbon footprint. Only time will reveal the true impact and effectiveness of the SCC as a tool in the broader effort to combat climate change.
In conclusion, the Social Cost of Carbon stands as a significant measure, providing a monetary perspective on the environmental toll of carbon emissions. Its increasing relevance underscores the urgency of addressing climate change and adopting effective strategies to curtail its damaging effects.
