Omitted Damages: Whats Missing From the Social Cost of Carbon

The 2013 Interagency Working Group on the Social Cost of Carbon (IWG) updated the U.S. social cost of carbon (SCC) for 2015 from a central value of $24 to $37. SCC is an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, conventionally one metric ton, in a given year. The SCC is meant to be a comprehensive estimate of climate change damages and includes, but is not limited to, changes in net agricultural productivity, human health, and property damages from increased flood risk. However, given current modeling and data limitations, it does not include all important damages.  This report focuses primarily on omitted damages due to the likelihood that their inclusion would have a significant effect on the SCC. The Cost of Carbon Project is a joint project of the Environmental Defense Fund, the Institute for Policy Integrity, and the Natural Resources Defense Council.

The SCC is estimated using Integrated Assessment Models (IAMs), which integrate a simplified climate model and a simplified economic model into a cohesive numerical model to capture the feedback effects between the two. This paper focuses on cataloging the more significant damages omitted from the recent versions of the three IAMs used by the Interagency Working Group (DICE-2010, FUND 3.8, and PAGE09), and the latest version of DICE (DICE-2013).

The SCC is the global cost to all future generations from one additional unit of carbon pollution in a given time period; forest fires, drought, and disease are just some of the costly consequences of climate change that would be included within it, according to this assessment. Thus, the SCC captures the benefit of reduced carbon pollution from a policy in terms of expenses avoided.

The report explains that the current social cost of carbon estimate is "biased downwards,"  in which the estimate doesn't consider climate impacts well-established in scientific literature, but not easily quantifiable as a cost. While some have questioned the increase in the SCC as too high, a thorough examination of the latest scientific and economic research shows that $37 should be viewed as a lower bound. This is because the studies available to estimate the SCC omit many climate impacts - effectively valuing them at zero. Where estimates are available for a given type of impact, they tend to include only a portion of potential harms. This paper represents the first attempt to systematically examine and document these omissions for the latest versions of the three IAMs used by the IWG, as well as earlier versions when they are used in calibrating the updated models.
 

These omissions to the SCC considered in this analysis include climate impacts on the following market sectors:

  • agriculture, forestry, and fisheries (including pests, pathogens, and weeds, erosion, fires, and ocean acidification);
  • ecosystem services (including biodiversity and habitat loss);
  • health impacts (including Lyme disease and respiratory illness from increased ozone pollution, pollen, and wildfire smoke);
  • inter-regional damages (including migration of human and economic capital);
  • inter-sector damages (including the combined surge effects of stronger storms and rising sea levels), exacerbation of existing non climate stresses (including the combined effect of the over pumping of groundwater and climate-driven reductions in regional water supplies);
  • socially contingent damages (including increases in violence and other social conflict);
  • decreasing growth rates (including decreases in labor productivity and increases in capital depreciation);
  • weather variability (including increased drought and in-land flooding); and
  • catastrophic impacts (including unknown unknowns on the scale of the rapid melting of Arctic permafrost or ice sheets).

The report proposes that to develop consistent estimates of climate damages, the current pipeline of damage estimation, whereby scientists estimate potential damages and economists draw on these estimates in their studies independent of input from scientists, must be replaced with collaborative research between the disciplines. This type of research ensures that economists understand the science behind the climate impacts that they are citing, but also ensures that the scientific estimates are developed with the final impact measurement, that is, the dollar impact, in mind.

 

Publication Date: March 13, 2014

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