The Social Cost of Carbon: Valuing Inequality, Risk, and Population for Climate Policy

The Monist, 2019, 102, 84–109 doi: 10.1093/monist/ony023 Article The Social Cost of Carbon: Valuing Inequality, Risk, and Population for Climate Policy ABSTRACT We analyze the role of ethical values in the determination of the social cost of carbon, arguing that the familiar debate about discounting is too narrow. Other ethical issues are equally important to computing the social cost of carbon, and we highlight inequality, risk, and population ethics. Although the usual approach, in the economics of costbenefit analysis for climate policy, is confined to a utilitarian axiology, the methodology of the social cost of carbon is rather flexible and can be expanded to a broader set of social-welfare approaches. 1. INTRODUCTION The Social Cost of Carbon (SCC) is likely the most important economic concept in the design and implementation of climate change mitigation policies. The SCC provides a monetized value of the present and future damages caused by the emission of a ton of CO2. The SCC depends on ethical premises because it depends on how climate change impacts are valued and aggregated. Estimates of the SCC are a crucial component in the cost-benefit analysis of climate policies. Policy makers can use the SCC in either of two ways: to set the optimal carbon tax, or to fix the emission reduction target in a cap-and-trade system. The higher the value of the SCC, the larger the optimal mitigation effort. More broadly, the SCC provides regulators with guidance for the introduction of climateaffecting policies, such as energy efficiency standards in buildings and transportation, incentives for the installation of low-carbon technologies, and measures for the protection of forests.1 Efforts to compute the SCC have given rise to a lively discussion in the literature and policy arena. The Stern-Nordhaus debate is probably the most notable example. Nordhaus (2008) was in favor of a very low SCC around $8 per ton of CO2,2 but Stern (2006) proposed a much larger value of $85 per ton of CO2. Because the two analyses share comparable assumptions about the evolution of the climate and the MFl: Princeton University, MFe: Harvard University, MB: University of Vermont, FD: Yale-NUS, KMW: Graz University, RS: Princeton University, DS : University of Austin, SZ: Paris School of Economics. C The Author(s) 2018. Published by Oxford University Press on behalf of the The Hegeler Institute. This is an Open Access V article distributed under the terms of the Creative Commons Attribution Non-Commercial License (http://creativecommons.org/licenses/by-nc/4.0/), which permits non-commercial re-use, distribution, and reproduction in any medium, provided the original work is properly cited. For commercial re-use, please contact  84 Marc Fleurbaey, Maddalena Ferranna, Mark Budolfson, Francis Dennig, Kian Mintz-Woo, Robert Socolow, Dean Spears, and Stephane Zuber The Social Cost of Carbon  85 2. WHY AND HOW TO COMPUTE THE SCC 2.1. Cost-benefit analysis and externality pricing The “social cost” of carbon is defined in opposition to the “private cost,” which is borne directly by the economic decision makers who choose how much fossil fuel to use. The private cost reflects the scarcity of fossil fuels and the economic resources needed to produce the final carbon-emitting product that is ultimately consumed. In size of its impacts, the divergence in results is mainly attributable to different ethical values, in particular concerning discounting, i.e., the reduced weight assigned to future monetary values (Nordhaus 2007).3 The range of cost estimates stemming from different ethical assumptions is also reflected in the official U.S. SCC estimates by the Environmental Protection Agency (EPA), which up to recently4 provided a range of values depending on the discount rate and the size of impacts (ranging from $11 to $105 for the year 2015, with a central value of $36). This paper analyzes the role of ethical values in the determination of the SCC. In particular, we go beyond the familiar debate about discounting. Other ethical issues are equally important to computing the SCC: namely, inequality, risk, and population ethics. An important question we examine in the process is whether the SCC methodology is tied to an excessively narrow (e.g., utilitarian, economistic) ethical approach, or whether it can accommodate a variety of relevant principles and values. The thesis defended here is that while usual practice is indeed unduly narrow, the methodology itself is rather flexible and can be expanded. The SCC belongs to a cost-benefit approach to climate policy which, in general, relies on a consequentialist and even more specifically a welfarist axiology. There are other approaches involving notions of harm, rights, or duties which may reach different conclusions about the appropriate mitigation efforts by individuals, organizations, and states. Broome (2012) argues that states can focus on the pursuit of goodness (understood, in his view, in broadly welfarist terms) while individuals can focus on avoiding actions that harm other people (in this case, future people), including by compensating potential harms through carbon offsetting. This moral and practical division of labor can be debated (individuals may also contribute to the good; groups and states may also be liable for harmful actions). However, it is widely accepted that coordinating the pursuit of the common good in the presence of diffuse externalities is difficult without the aid of public agencies suitably interconnected across the affected jurisdictions—in the case of climate, the whole world. The SCC is an important tool for such coordination and clearly pertains to this axiological public morality. The paper is structured as follows. Section 2 describes how to compute the SCC and why it is important for policy-making. Section 3 introduces the most widelystudied ethical aspects of the SCC and focuses in particular on inter- and intragenerational inequalities. The section is divided into two parts: the first focuses on the discounting problem, the second on the evaluation of nonmonetary damages. Section 4 discusses the additional considerations that should be taken into account when risk and uncertainty are introduced. Section 5 explains why ethical questions about population size matter for the SCC. Section 6 concludes. 86  The Social Cost of Carbon the absence of an externality, the private cost would embody the full extent of the cost to others of one individual consuming a unit of carbon-emitting goods. But due to the greenhouse effect, the consumption of that unit imposes a further cost on others: the damages due to climate change. This is the social cost. Against these costs, there are the benefits of activities that emit carbon, such as heating or traveling. Rational individuals who maximize a private objective will consume up to the point where their marginal private benefit is equal to the marginal private cost t (...truncated)