Carbon valuation for policy appraisal no longer uses the Social Cost of Carbon.
The Social Cost of Carbon (SCC) measures the full cost of an incremental unit of carbon (or greenhouse gas equivalent) emitted now, calculating the full cost of the damage it imposes over the whole of its time in the atmosphere. It measures the externality that needs to be incorporated into our decisions on policy and investment options.
The SCC matters because it signals what society should, in theory, be willing to pay now to avoid the future damage caused by incremental carbon emissions.
Because the amount of damage caused by each incremental unit of carbon in the atmosphere depends on the concentration of atmospheric carbon today and in the future, the SCC varies according to the emissions and concentration trajectory the world is on.
The SCC is conceptually different from:
- the market price of carbon, which reflects the value of traded carbon emissions (for example, through the EU Emissions Trading System, EU ETS)
- the marginal abatement cost, which reflects the cost of reducing emissions (rather than the damage if those emissions continue).
Background
In January 2002, a Government Economic Service working paper Estimating the Social Cost of Carbon emissions suggested £19/tCO2 within a range of £10 to £38/tCO2. This cost was set to rise at a rate of £0.27/tCO2 per year to reflect the increasing marginal cost of emissions.
Following the publication of the 'Stern review on the economics of climate change', and work commissioned by the Inter-departmental Group on the Social Cost of Carbon, the methodological approach was changed to incorporate use of the Shadow price of carbon.
Research
The Inter-departmental Group on the Social Cost of Carbon commissioned the following research: