The Value of Carbon in Decision-Making
In the absence of a carbon pricing framework that translates monetary value to one tonne of CO2, either through a tax or through the market price set by an emission trading system, policy and corporate leaders must create their own carbon cost estimate to use in decision-making. The Social Cost of Carbon attempts to put a price on damages arising from climate change, demonstrating what society or a company should be willing to pay now to reduce carbon emissions.
- Economists use two main tools to inform policy and business decision-making in relation to valuing carbon: the Social Cost of Carbon (SCC) or the Marginal Abatement Cost (MAC). The SCC and the MAC are often applied alongside each other, because they measure different things.
- The SCC represents the marginal cost of global damage from climate change, and is used by policy-makers to examine the benefits of climate policy in a cost-benefit analysis.
- The MAC reflects the cost of one unit of emission reduction to meet a specific emissions target. It allows policy-makers to make three critical policy decisions: what the emission reduction target should be, the best way to achieve it, and how much each approach will cost. Further, it facilitates the comparison of the cost of emission reductions across sectors, and to assess the overall economic cost of a particular policy.
- The SCC and MAC are valuable tools, but users of these metrics must understand their strengths and weaknesses, and where they can be used appropriately. For the SCC, it is more prudent to examine a range of values by means of sensitivity analysis, versus relying on one absolute number.
- The absence of a precise value for any of the two main methods of carbon cost estimates (SCC or MAC) should not delay action on implementing climate change policy. In fact, some researchers believe that instead of using the SCC, the focus should be on identifying ‘the least-cost strategy for eliminating carbon emissions as rapidly as possible.
- Underestimating the SCC encourages weak climate policy and mitigation actions, and so will not spur the necessary stringency of regulations, and individual and company decisions, to shift towards a low-carbon economy. On the other hand, a low MAC just means that it is cheap to reduce emissions, which may encourage decision-makers to incentivize more abatement activities. So it is important to understand how and why the SCC and the MAC differ, and how they are estimated and used.