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Tuesday
May122015

The CCA's implicit social cost of carbon

At least $30/tCO2-e in 2020 AUD.


I’ve had occasion recently to review climate abatement schemes – notably the Victorian Energy Efficiency Target (VEET) – and in the course of doing so realised that Australia doesn’t have an official “social cost of carbon”.

(I also realised that in previous work I’d referenced the wrong section of legislation, but sssh.)

The social cost of carbon dioxide emissions (or greenhouse gases generally) is their cost to society. It signals what society should, in theory, be willing to pay now to avoid the future damage caused by greenhouse gas emissions.

Plenty of assumptions and models are required derive a value, but for the sake of making a cost/benefit tradeoff it’s vital to have an idea of the benefits we get from abating a tonne of greenhouse gas emissions. Moreover, it’s important to have an officially recognised figure, both for credibility and to reduce search costs.

The official USA 2013 central estimate of the social cost of carbon emitted in 2015 is US$39/tCO2-e, in 2011 USD. (Another commonly quoted figure of US$37/tCO2-e is the same estimate in 2007 USD, as far as I can tell.)

The UK has an official cost of carbon, too, though their approach has changed a little over time. In 2002, the official social cost of carbon was £19/tCO2-e, rising at a rate of £0.27/tCO2-e per year. In 2007, the UK switched from a social cost of carbon to a shadow price of carbon:

“The SPC [shadow price of carbon] is based on the SCC [social cost of carbon] for a given stabilisation goal, but can be adjusted to reflect:
- estimates of the MAC [marginal abatement cost] required to take the world onto the stabilisation goal; and
- other factors that may affect UK willingness to pay for reductions in carbon emissions, such as political desire to show leadership in tackling climate change.”

In 2009, the UK ditched the shadow price of carbon and, in a fairly baffling change of tack, decided to value carbon as a traded commodity at a level consistent with the UK Government’s domestic and international targets in the short and long term.

“This new methodology has replaced the previous approach based on damage cost estimates.”

Quite.

Regardless: the USA has (and the UK had) an official social cost of carbon. Australia doesn’t, as far as I can tell.

But! Australia’s Climate Change Authority (CCA), in its 2014 Targets and Progress Review, recommended that Australia pursue a minimum reduction in GHG emissions of 19% by 2020 (vs. 2000). In modelling that target, the CCA estimated that it would involve carbon prices of up to $30/tCO2-e in 2020, in real terms. (See p. 135)

The CCA used the damage costs of carbon (i.e. the social costs) in making its recommendations. While not explicitly stated, the CCA’s preparedness to recommend an abatement target that imposes costs of $30/tCO2-e in 2020, in real terms, implies the CCA regards the social costs of carbon as ≥$30/tCO2-e.

Q.E.D.

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