The social cost of carbon and its policy implications

The shadow price, or 'social cost, of carbon is an important indicator of the global incremental damage done by emitting greenhouse gases today. Cost-benefit analysis would set the optimal amount of greenhouse-gas-emission reduction at the point where this social cost just equals the incremental cost of controlling emissions. The higher the value for the social cost of carbon, the more control is warranted. This comparison assumes that cost-benefit analysis is the correct way of determining climate-change policy, and many believe this is not the case because of the very long-term, irreversible, and potentially catastrophic nature of global warming. But, in the short run at least, a comparison of cost and benefits is required, and, in any event, all decisions imply costs and benefits. But what is the 'right' figure for the social cost of carbon? This paper reviews the UK government's assessment of the cost and concludes that it has been set far too high because of a misreading of the integrated assessment models used to balance costs and benefits. Moreover, adoption of the UK government's shadow price would have formidable implications for energy policy in the UK, and for policies on afforestation.