The Social Cost of Carbon and Carbon Taxes Bruce M. Everett, PhD July 15, 2019
What is the “Social Cost of Carbon” Future economic cost of one additional tonne of CO 2 emissions, discounted to today’s value.
What is the “Social Cost of Carbon” • Used to evaluate cost-benefit of CO 2 regulations • Obama Administration calculated SCC ~$42/tonne for 2020 • Trump Administration estimates $1-6
Why care about the SCC?
Growing support for CO 2 taxes with the tax set at the Social Cost of Carbon.
Founded June 20, 2017 Members include: • James A. Baker • George Schultz • Ben Bernanke • Stephen Hawking • Larry Summers • Janet Yellen
Corporate Founders (among others)
A sensible carbon fee should begin at $40 a ton and increase steadily over time...
A sensible carbon fee should begin at $40 a ton and increase steadily over time...
“Economic theory suggests a carbon tax should be set equal to the social cost of carbon…”
“Economic theory suggests a carbon tax should be set equal to the social cost of carbon …”
Two key questions about the SCC • Where does $40/tonne come from? • Does it mean anything?
Developed by an Interagency Working Group
Integrated Assessment Models (IAMs) Climate Economic Model Model Scenarios • GDP ° T ° T ➔ GDP • Population CO 2 ➔ • CO 2 Emissions • Discount each year’s loss to present value • Add up the years • Recalculate with +1 tonne of CO 2 • Difference = Social Cost of Carbon
The government task force uses 3 models • DICE Dynamic Integrated Climate-Economy model (William Nordhaus) • FUND Framework for Uncertainty, Negotiation Distribution and (Richard Tol) • PAGE Policy Analysis of the Greenhouse Effect (Chris Hope)
The government task force uses 3 models • These models are complex and opaque. • We built a simplified model. Operates in EXCEL - Available at CO 2 Coalition website - • Simple, but replicates the structure of IAMs • Uses Government’s basic assumptions • Everyone welcome to use our model.
The government models – damage functions Damages for year 2100 Global damage as % of GDP At 7 ° C, 3-20% At 4 ° C, 1-4% Temperature change, ° C • Wide range of estimates for same temperature
Our model – damage functions Global damage as % of GDP Temperature change, ° C
Note: We do not claim that our model better represents either climate dynamics or economic damage. Its purpose is to demonstrate how IAMs work.
Our model – results With the government’s scenarios and assumptions: SCC ($/tonne) ranges from ($13.1) to $57.5 Average = $22.9
The government’s model – assumptions 1. Climate sensitivity = 3.5 (very high!) 2. Damages calculated out to 2300
The government’s model – assumptions 1. Climate sensitivity = 3.5 (very high!) 2. Damages calculated out to 2300
The World in 1938 Global population 2.3 billion (30% of today’s) 1. Global GDP was $6 trillion (10% of today’s) 2. Per capita GDP was $2,600 (25% of today’s) 3. • Most wealthy people lived in N Amer and Europe 4. The world was stuck in a deep depression How well could people have • US GDP had fallen 10% in a decade predicted today’s world? • US unemployment was 20% 5. Totalitarian ideologies were on the rise 6. The world was on the verge of a devastating war 7. Many critical technologies were unknown: • Computers, television, antibiotics, contraception, advanced vaccines, GPS, robotics, cell phones
The World in 1938 Global population 2.3 billion (30% of today’s) 1. Global GDP was $6 trillion (10% of today’s) 2. Per capita GDP was $2,600 (25% of today’s) 3. • Most wealthy people lived in N Amer and Europe 4. The world was stuck in a deep depression How about a group of experts • US GDP had fallen 10% in a decade convened in 1838? • US unemployment was 20% 1738? 5. Totalitarian ideologies were on the rise 6. The world was on the verge of a devastating war 7. Many critical technologies were unknown: • Computers, television, antibiotics, contraception, advanced vaccines, GPS, robotics, cell phones
Scenarios 250+ years into the future are science fiction.
Why pretend we can tell the future?
Why pretend we can tell the future? Share of projected damages by period 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% IMAGE MERGE MESSAGE MiniCAM
Why pretend we can tell the future? Share of projected damages by period 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Now-2100 0% IMAGE MERGE MESSAGE MiniCAM
Why pretend we can tell the future? Share of projected damages by period 100% 90% 80% 70% 60% 50% 40% 30% 20% 2100-2200 10% Now-2100 0% IMAGE MERGE MESSAGE MiniCAM
Why pretend we can tell the future? Share of projected damages by period 100% 90% 80% 70% 60% 2200-2300 50% 40% 30% 20% 2100-2200 10% Now-2100 0% IMAGE MERGE MESSAGE MiniCAM
Our model – results With the government’s scenarios and assumptions: SCC ($/tonne) ranges from ($13.1) to $57.5 Average = $22.9 If we limit the analysis to the year 2100: SCC ($/tonne) ranges from ($16.9) to $32.3 Average = $10.4
The government’s model – assumptions 1. Climate sensitivity =3.5 (very high!) 2. Damages calculated out to 2300 3. Discount rate = 3% The discount rate reflects the time value of money At 3%, $1 next year is worth $1/1.03 today $1 in 2 years is worth $1/(1.03) 2 today and so on
1%? 3%? 5%? 7%? There is no agreed discount rate for long time frames (30+ years). OMB recommends testing up to 7%. 3% is the low end of the range.
The impact of assumptions (Climate sensitivity = 3.5) ------ Ave SCC ------ DR = 2300 2100 1% $277.7 $32.2 3% $22.9 $10.4 5% $4.9 $3.7 7% $1.5 $1.3 Pick a number, any number! Same climate dynamics and damages
Whom are we helping? GDP (Trillion $2018) IMAGE Scenario $3,000 $2,500 >30X 2019 GDP Trillion $2018 $2,000 $1,500 $1,000 $500 $0 2019 2100 2200 2300
Whom are we helping? Population (Billion) IMAGE Scenario 10.0 8.0 6.0 Billion 4.0 2.0 0.0 2019 2100 2200 2300
Whom are we helping? Family income ($) IMAGE Scenario $1,500,000 Average $2018 per family of 4 $1,250,000 $1,000,000 $750,000 $500,000 $250,000 $0 2019 2100 2200 2300
Whom are we helping? Family income ($) IMAGE Scenario $1,500,000 Average $2018 per family of 4 $1,250,000 5X 2019 17% Per capita GDP $1,000,000 $750,000 $500,000 $250,000 $0 2019 2100 2200 2300
Ferrari Lamborghini ($252,000) ($525,000) Should climate policy transfer wealth from today’s poor to tomorrow’s rich?
Conclusion The SCC calculation is too sensitive to be useful as a policy tool. But What would happen if we did set a $40/tonne carbon tax?
Three things you need to know 1. A $1/tonne on CO 2 = 1¢/gal on gasoline. 2. US CO 2 emissions ~ 5 Gt per year. 3. US emissions ~ 15% of the world total.
US renewable energy pricing is a tangle of subsidies, mandates and portfolio requirements. Prices well below costs.
Transportation • A $40/tonne carbon tax = 40¢/gallon. • A tax of $1,000/tonne ($10/gal) would be required to make electric cars competitive without subsidies.
Wind energy • A tax of $200/tonne would be required to make wind power competitive with natural gas for power generation.
Solar energy • A tax of $500/tonne would be required to make solar power competitive with natural gas for power generation.
Global CO 2 emissions in 2017 (Gt) 35 30 Billion tonnes of CO 2 25 20 IPCC says we 15 must be around here by 2050. 10 5 -
Global CO 2 emissions in 2017 (Gt) 35 Latin America Former Soviet Union 30 Middle East Africa Billion tonnes of CO 2 25 Other Asia India 20 IPCC says we China 15 must be around here by 2050. Other industrial 10 Europe 5 US -
The hard math on carbon taxes • $40/tonne tax = 5-20% of gap between fossil fuels and renewables. - Negligible impact on CO 2 emissions • $200 billion/year tax burden ($40 X 5 Gt) $1,700 per household - ~ 2017 tax cut - Highly regressive - Imposed on middle class -
Conclusions on carbon taxes • There is no level of carbon tax that can reduce CO 2 emissions in a meaningful way without serious damage to the economy. • A carbon tax is a national sales tax disguised as an environmental policy. Easy to increase by “discovering” that SCC is - actually $60/tonne or $80/tonne
Conclusions on carbon taxes • There is no level of carbon tax that can reduce CO 2 emissions in a meaningful way without serious damage to the economy. • A carbon tax is a national sales tax disguised as an environmental policy. Easy to increase by “discovering” that SCC is - actually $60/tonne or $80/tonne
Thank you
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