Climate Economics Crosses the Border
How much economic damage is caused when climate pollution is released into the atmosphere? Through decades of research, scientists and economists have made tremendous strides toward answering this question, and the estimates they now produce — known as the “social cost of carbon” — are widely considered quite accurate, if not conservative.
Valuing the cost of climate pollution is tremendously useful for policymakers as they weigh the benefits and drawbacks of potential strategies to mitigate climate change. In theory, the valuation attached to the costs of emissions reflects the amount of money that society should be willing to pay upfront to avoid damages in the future. Countries around the world have invested substantially in developing accurate climate-damage valuations to inform rational climate policies that do not impose unjustified expenditures on polluters.
Earlier this year, Canada updated its climate-damage valuations for the first time since 2016. While some politicians have mischaracterized the update for political gain, in reality this commonsense update reflects the latest advances in science and economics.
Some brief history is useful here. The Canadian government has used estimates of the social cost of carbon in the benefit-cost analysis of regulatory proposals for more than a decade. Beginning in 2016, it pegged those valuations to estimates that the United States government began using several years earlier. This placed the value of carbon dioxide pollution emitted in 2020 at $54 per tonne. (This value increases incrementally in successive years as the stock of atmospheric climate pollution rises.)
But the United States’ valuations have always been recognized as a conservative underestimate, and have become increasingly outdated with time. Recent research consistently finds that the social cost of carbon is in fact much higher than the United States — and, by extension, Canada — had previously estimated.
In 2017, the U.S. National Academies of Sciences called for a new framework to estimate the social cost of carbon that incorporates the most recent data and methodologies. Experts outside the government took up that call and developed new climate-damage estimates. Unsurprisingly, those revised estimates were substantially higher than the valuations the United States had previously produced and Canada adopted.
Starting early in the Biden administration, U.S. government agencies have worked to incorporate these independent estimates into federal policy. Last November, the U.S. Environmental Protection Agency proposed an update to the social cost of carbon synthesizing many of these outside estimates. That proposed update, which has received praise from a wide range of expert climate scientists and economists, recently completed peer review and is expected to be finalized in the coming months.
Canada’s recent update to the social cost of carbon simply adopts the United States’ new valuations, adjusted for the currency exchange. The update raises Canada’s climate-damage valuation to $247 per tonne of carbon dioxide emitted in 2020.
While the update substantially increases Canada’s climate-damage valuation, this is merely in keeping with the latest science. As explained above, the update is both long overdue and based on voluminous evidence. It is consistent not only with independent estimates but also estimates applied by numerous foreign countries. Economist and Nobel laureate Eric Maskin was one of the experts who lauded the valuations as “a major, necessary step forward” yet “still likely conservative.”
Still, not all Canadian politicians have been on board. On Twitter, Saskatchewan Premier Scott Moe falsely equated the social cost of carbon with Ottawa’s carbon price and suggested that the update reflects a price hike. This criticism bears a close resemblance with attempts in the United States to equate the social cost of greenhouse gases with a tax, but both claims are wrong. Nobody pays the social cost of carbon — it is simply an economic valuation tool that is used to weigh the merit of proposed policies.
By readopting the United States’ valuations, Canada’s update also exemplifies the importance of international cooperation and reciprocity in designing climate policies and tools. While some have criticized the social cost of carbon for valuing climate damages on a global rather than purely domestic scale, this transnational cooperation proves what economists have argued for years: that using global climate-damage valuations promotes international cooperation and thereby facilitates global reductions in climate pollution that benefit all nations.
Canada’s recent update to the social cost of carbon reflects a sensible approach that will help the nation devise better climate policies in the future. It’s good economics that will have benefits within and beyond the nation’s borders.
