Why The ‘Social Cost Of Carbon’ Can Not Be Used In Cost-Benefit Analysis

The social cost of carbon (SCC) quantifies the economic damage associated with emitting a ton of carbon dioxide into the atmosphere. Regulatory impact analyses from U.S. federal agencies utilize the SCC to estimate the benefits of regulations related to global warming. These analyses in turn provide justification for regulations that can have costs that extend into the billions of dollars.

SCC estimates are calculated using Integrated Assessment Models (IAMs), economic growth models that incorporate a range of assumptions that carry significant uncertainty. IAM models have been heavily criticized due to their sensitivity to various input parameters. This has led some to consider these models too experimental for practical policy application. Given the costs of climate regulations are real, benefits that stem primarily from hypothetical computer simulations seem ill-suited for comparison.

This article aims to shed light on one additional, often-overlooked problem with the SCC models: namely, their unsuitability for use in cost-benefit analysis. This problem stems from the fact that these models rely on an arbitrary social welfare function methodology instead of calculating the costs and benefits associated with CO₂ emissions exclusively in monetary terms, which is what standard cost-benefit analysis requires.

Read the full article on Forbes.