Essay co-authored by HEEP faculty affiliates Joseph Aldy, and Robert Stavins, and FAS Professor James Stock
Four prominent environmental economists present their case against a recent push to change the standard measure for determining the benefits of climate policies in a new paper published in the journal Science. The article, titled “Keep climate policy focused on the social cost of carbon,” posits that the social cost of carbon (SCC) remains the most objective, credible, and holistic tool for measuring the potential upsides of a particular climate policy, and that a shift away from that approach would be misguided.
The paper is co-authored by Joseph E. Aldy, Professor of the Practice of Public Policy at Harvard Kennedy School; Matthew J. Kotchen, Professor of Economics at the Yale School of the Environment; Robert N. Stavins, A.J. Meyer Professor of Energy and Economic Development at Harvard Kennedy School; and James H. Stock, Harold Hitchings Burbank Professor of Political Economy at the Harvard Faculty of Arts and Sciences. Aldy, Stavins, and Stock are faculty affiliates of the Harvard Environmental Economics Program.
In a paper published earlier this year by the National Bureau of Economic Research (NBER), economists Nick Stern and Joseph Stiglitz argue that the SCC is ineffectual because, “in practice the use of the estimates from standard Integrated Assessment Models (IAMs), focused on marginal damages from climate change, has resulted in estimates of the SCC that are markedly lower than the prices required to guide the economy towards trajectories in which climate change is limited to 1.5 to 2 degrees C.” Instead, they advocate setting carbon policy based solely on minimizing the compliance costs of any specified politically determined climate objective. Such an approach has been termed the “target-consistent approach.”
In their essay, Aldy, Kotchen, Stavins, and Stock counter that argument, claiming that setting climate policy by cost targets alone “could set back climate policy, just as the United States is poised to take meaningful climate action.” They base their argument on the four pillars below.
Politics plays an oversized role.
As the authors write, “The target-consistent approach replaces scientific assessments of damages from storms, floods, fires, and a myriad of other climate impacts with subjective judgments about policy targets and choices. The starting point and necessary condition for the target-consistent price is a political decision about the goal: an emissions objective in a specified future year. Much of the developed world has adopted a target of net zero emissions by 2050, but ultimately that is a political decision.”
Too much uncertainty about future technological change
“The target-consistent price calculation depends not only on assumptions about future politically determined public policies but also on critical assumptions about technologies that are not commercially available today. Many energy-economic models that can solve for ambitious climate goals—such as limiting warming to 1.5°C or net-zero emissions by 2050—do so by assuming aggressive global deployment of bioenergy with carbon capture and storage in the power sector,” the authors write.
Legal and regulatory uncertainties
The authors argue, “Under Executive Orders issued by Democratic and Republican presidents since 1981, federal regulatory agencies are required to compare the costs of major regulations with their benefits. Because the target-consistent price is based on costs, with no regard for benefits, it would not fulfill these requirements, posing substantial legal hurdles for officially adopting the approach in the coming years.”
A target-consistent approach is essentially a ‘go-it-alone’ approach
“By contrast,” the authors contend, “the SCC inherently builds in the notion of reciprocity among countries because it reflects the global damages of emissions. A future in which all countries seek to guide domestic policy by using the SCC can lead to progress on addressing climate change in a globally efficient and least-cost way. The same cannot be said of the alternative approach.”
As a result of these obstacles Aldy, Kotchen, Stavins, and Stock conclude that policymakers should remain committed to improving the accuracy and efficacy of social cost of carbon calculations rather than scrapping their use in policy analysis altogether.
“It is critically important to maintain focus on the benefits of addressing climate change as a means for evaluating and justifying climate policy. With this goal in mind, now is not the time to change lanes and advocate the alternative approach. Instead, we need credible and updated estimates of the SCC,” they write.
The paper is published in the August 20, 2021 edition of the journal Science.
By Doug Gavel