Putting a Price Tag on Carbon Emissions


The atmospheric concentration of carbon dioxide surpassed 400 parts per million (ppm) in 2016. The United States alone emitted approximately 5.3 gigatons of carbon dioxide  in 2015, a quantity roughly in line with its emissions for each of the last several decades. While these numbers may seem large, it is hard to intuitively understand  precisely what they mean for the environment. It is even more challenging to take these metrics and use them to understand how the carbon footprint of a single person or group will affect our society as a whole.

This is the idea behind estimating the social cost of carbon. By combining both economic and climate models, we can begin to understand the relationship between our financial decisions in the present and their effects on climate in the future. This understanding makes it possible to put a concrete price tag on our carbon emissions.

Calculating the social cost of carbon

The most straightforward way to account for these costs is to simply calculate how much carbon dioxide is released from, say, a gallon of gasoline, then divide the price of that gallon by its corresponding carbon dioxide emissions to estimate the cost of carbon. Unfortunately, this type of approach ignores long-term and indirect costs that are not incorporated into the immediate sales price (what economists call externalities). For example, there is no mechanism for the price at the pump to reflect how much an extra ton of carbon dioxide will contribute to fishery or agricultural degradation caused by global warming in the future.

Here is where environmental economists come in. Their job is, broadly speaking, to study how long-term changes to the climate affect global economic output, and then use that information to put a price tag on what we emit today that accurately reflects costs that will occur in the future. For instance, extreme droughts can have devastating impacts to the agricultural economy of a country. Climate scientists predict that increases in global temperature will lead to severe drought conditions becoming more common. If we have a model for how increases in carbon dioxide are related to increases in global temperature and severity of drought conditions, and another model that tells us how much those drought conditions will cost the economy in the long run, economists can determine how we should adjust the price of carbon dioxide emitted today to reflect its long-term impact.

Going from data to prediction

This is precisely what William Nordhaus, an economics professor at Yale University, set out to do. Beginning with work in the 1970s that continues  today, he has sought to present an integrated picture of how humans impact climate change. He is perhaps best known for his development of the Dynamic Integrated Climate-Economy (DICE) Model, which takes a variety of economic and environmental factors and simulates the economic impact of climate change under various conditions. While there is much debate over what precise parameters to use in these models, with more conservative models suggesting a price around $20 per ton and more pessimistic models suggesting prices over $100, the takeaway is clear: there will be strong economic impacts from climate change.

By neglecting to factor in these costs, human civilization is taking out an enormous loan without making any payments.

By neglecting to factor in these costs, human civilization is taking out an enormous loan without making any payments. Every year that we continue to avoid these payments, our debt grows. This is the argument for a carbon tax, where money collected from carbon emitters would be invested in the long-term sustainability of our economy through better infrastructure, renewable energy production, and scientific research. The option is not whether or not we should pay a tax on carbon, but rather whether we want to pay a small amount today or an astronomical amount in the future.

In 2016 Seed Consulting Group, a non-profit consultancy that works with environmental and public-health groups, worked with the California Institute of Technology to develop a carbon pricing method for the university’s department of sustainability.

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Noah Olsman serves as Chief Analytics Officer for Seed Consulting Group and is the Editor-in-Chief of Seed Insights. He joined Seed in 2015 and has previously taken the role of consultant, project manager, and occasional IT technician. Noah is also a Ph.D. student in the department of Computing and Mathematical Sciences at the California Institute of Technology, where he does research on synthetic biology. Outside of his environmental work, he tries publish scientific papers in various areas of applied math and plays the slide guitar and mandolin.


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