Last week President Joe Biden signed an executive order reconvening a task force to update the “social cost of carbon” (SCC). Environmentalists are cheering the move, but it’s a loss for science-backed policy. We can find smart, sustainable answers to tough questions, but they don’t come from activists masquerading their political advocacy as science. They come from objective cost-benefit analysis.
The SCC is an estimate of the harm to “society” from emitting a ton of carbon dioxide pollution into the atmosphere. It’s important because the metric is used to decide how much to spend on regulations and other policies targeting global warming — policies that can end up costing billions. For example, if the SCC is set at $100 a ton, and a regulation reduces CO2 emissions by one million tons, then an economist might say that social welfare would fall if we spend more than $100 million implementing the regulation.
You might be forgiven for thinking that the SCC is measured in dollars, given that the number is, in fact, preceded by a dollar symbol. Indeed, many people describe it in just this way — as a measure of the “dollar cost” of emitting a ton of CO2 into the atmosphere. But that’s not exactly right. In fact, the units the SCC is almost always expressed in are units of “social welfare.” The relevant dollars are “wellbeing dollars,” not dollars like you have in your wallet. The SCC isn’t directly comparable to the dollars in your wallet, either, which is why most estimates of it can’t be used in cost-benefit analysis.
If you are left scratching your head, you aren’t the only one who is confused.
So, here’s a brief explainer: The SCC is calculated using “integrated assessment models” (IAMs), which are just fancy-sounding models that — beyond looking at weather and climate — incorporate how CO2 impacts the economy and other things people value. The catch is that these models — unlike those used in, say, physics or meteorology — also include a “social welfare function” that converts economic and environmental damages into wellbeing units.
As you can imagine, measuring society’s wellbeing is no easy task, and it turns out there is no agreed-upon method for doing this. Of course, that hasn’t stopped some economists from picking an equation — out of thin air more or less — and claiming they are measuring social welfare.
To understand what’s going on here, it might help to think about another area where a dollar symbol can be misleading: inflation-adjusted dollars. If an economist is measuring spending in 2012, and wants to compare it to spending in 2021, she might adjust the 2012 spending to 2021 dollars. The resulting figure would have a dollar symbol in front of it. But the adjusted value is not expressing units of money. Rather, what’s being reported is a quantity of real goods and services. The monetary value in 2012 has been converted into an equivalent value of real resources, using an index that accounts for changes in the purchasing power of money in different years.
In a similar way, the SCC value has a dollar sign attached to it. But what’s really being described is not money, but instead how a particular impact from CO2, at a specific moment in time, ranks on an index of social welfare. This index has no compelling basis in economics or in ethics.
Another way to think about the issue is that economists often make a distinction between “positive” and “normative” statements. Positive statements describe what is: “The shirt is red.” Meanwhile, normative statements express values, like “the shirt is ugly.” The SCC is normative. It’s an expression of a value judgment.
We can debate that value judgment on its merits, but only if we know it’s being made.
To be clear, there are good reasons for estimating the dollar cost of emitting carbon pollution. But that’s not what’s going on here. The true impacts of CO2 are concealed from the public after being distorted by the social welfare function in the IAM models underlying the SCC. Most estimates of the SCC can’t be used in standard cost-benefit analysis, because that analysis requires units to be expressed in more-straightforward (inflation-adjusted) dollars.
Don’t be fooled by the new administration’s proclamations about following science-backed policy.
The SCC, as currently constructed, is a tool of sheer political advocacy, conceived of by economists seeking to pull a fast one on an unsuspecting public. Crafting the right environmental regulations requires analysis we can trust.
James Broughel is a senior research fellow with the Mercatus Center at George Mason University. Follow him on Twitter @JamesBroughel.