Pricing Carbon When We Don’t Know the Right Price
This article in Regulation Magazine (Vol. 36, No. 2) notes that there is almost no disagreement among economists that the true cost to society of burning a ton of carbon is greater than its private cost. Burning carbon produces carbon dioxide and other greenhouse gases (GHGs) that accumulate in the atmosphere. Over time, an increasing concentration of atmospheric GHGs will result in unwanted climate change: higher global temperatures, greater climate variability, and possible increases in sea levels. Burning carbon thereby imposes an externality on society, the cost of which is not incurred by the consumer or firm that is doing the burning. This external cost is referred to as the social cost of carbon (SCC) and is the basis for the idea of imposing a tax on carbon emissions or adopting a similar policy such as a cap-and-trade system. However, agreeing that the SCC is greater than zero isn’t really agreeing on very much. Some would argue that any increases in global temperatures will be moderate, will occur in the far distant future, and will have only a small impact on the economies of most countries.
Robert S. Pindyck is the Bank of Tokyo-Mitsubishi Ltd. Professor of Economics and Finance in the Sloan School of Management at the Massachusetts Institute of Technology