While Assessing Carbon Pricing, We’re Missing the Big Questions
This blog post was originally published by Dr. Mark C. Trexler in Guardian Sustainable Business, Oct. 17, 2013.
In the 1983 movie War Games (starring Matthew Broderick), the US goes to the brink of nuclear war on the mistaken impression that the Russians have launched nuclear missiles. Matthew Broderick realizes just in time that Joshua, the US air defense computer called WOPR, for War Operations Planned Response, is only running battle scenarios in preparation for a potential strike. After dozens of simulated nuclear exchanges, Joshua concludes: “A strange game. The only winning move is not to play.”
We can’t truly know the future when it comes to climate change, or the details of what alternative mitigation or adaptation paths would look like. We know enough, however, to at least suggest that Joshua’s conclusion could very well apply to climate change. The risks of climate change – if we get to the 4oC, 6oC, or 8oC of future change we could see globally this century, and much sooner in some places – are so undeniably ecologically and societally disruptive that we’re likely to look back and ask: “What were we thinking when we started playing this game?”
The Social Cost of Carbon
For now, this isn’t the conversation we’re having. Instead, we’re debating the assumptions behind Exxon Mobil CEO Rex Tillerson’s battle cry: “We have spent our entire existence adapting, we’ll adapt!” We’re talking about the economics of climate change through the social cost of carbon (SCC) metric, which aims to put a price on carbon emissions. The idea behind the SCC is easy to understand and intuitively attractive: If we’re not pricing climate change impacts into activities that release climate-forcing gases like CO2, then our decisions are economically inefficient and lead to more emissions.
The SCC is receiving renewed attention because the US Office of Management and Budget issued updated guidance in May to federal agencies to use an SCC figure of approximately $35 per ton of carbon-dioxide emissions for analyzing regulatory impact under the National Environmental Policy Act. But even though the newly revised figure is substantially higher than the 2010 guidance of $21 per ton – and much higher than the $0 inferred by not accounting for the SCC in regulatory decision making at all – it still doesn’t incorporate risks such as ocean acidification and catastrophic climate change.
What if the $35-per-ton figure is too low by an order of magnitude or more? In the end, developing and then deploying a truly risk-averse SCC number for regulatory decision-making is politically inconceivable. The number would be too high.
Is This a Game We Want to Play?
In War Games, the computer, Joshua, didn’t conclude that nuclear war was inefficient because nuclear stockpiles could kill each person five times over. Nor did Joshua get bogged down in the exact temperature of the nuclear winter that would likely follow a nuclear exchange between Russia and the United States. Joshua focused on the forest instead of the trees, asking the broader fundamental question: “Is this a game worth playing?”
When it comes to climate change and climate policy, the real question is not “what’s the right SCC?” Settling on the economically efficient level of climate change – and all of the assumptions going into that calculation – are the trees of the climate change debate, not the forest. The models can certainly be useful tools to help inform decision-making, but they have to be viewed in the right context – and we need to make sure we’re asking the right questions as part of a broader societal and risk-based conversation.
In the case of climate change, the right question is something like: “How do we want to balance the potential risks of climate change to the advancement of future individual and societal welfare against the potential economic and societal risks of acting to mitigate climate change?” Answers to two other questions are needed to inform the conversation around this big question:
1) What is the probability distribution of net economic impacts (both positive and negative) from potential levels of climate change, accounting for the full range of “knowns” and “known unknowns” (including but not limited to catastrophic events, ocean acidification and adaptation costs)? This question clearly encompasses the SCC discussion, but does not require calculating “the correct” SCC value. It focuses on generating as complete a picture of the potential risk as possible by using a probability distribution that allows us to clearly observe the characteristics of any “fat tails” associated with the distribution.
2) What is the probability distribution of the net economic impacts (both positive and negative) associated with acting to limit climate change, accounting for the range of “knowns” and “known unknowns” (including but not limited to negatives such as stranded fossil fuel investments, higher energy prices and reduced economic growth; and positives such as technological innovation, cleaner air and improved energy security)? This question – and its answer – is just as important as the first for a risk-based conversation because it frames the discussion as a consideration of alternatives. Here, too, a great deal of analysis around the costs and implications of mitigating climate change has been done, and we can express the risks and benefits as a probability distribution.
Elements of both of these questions have been studied and evaluated. But what the public conversation about climate change hasn’t done, to date, is to address both questions simultaneously, using the same basic methodology and assumptions. As a result, we get mired in arguments about whether mitigating climate change is too expensive (compared to what?) or whether adaptation is the best option (compared to what?).
While calculations of “net economic damages” cannot dictate the appropriately risk-averse decision, they can inform societal decision-making in a more comprehensive way. To do that, we don’t need to agree on a specific SCC.
The real issue we face today is not how much we can agree to charge for emitting a ton of CO2, but rather whether we understand the societal, business and individual risks associated with acting vs. not acting to moderate climate change. Getting bogged down in the details of calculating the SCC is likely keep us lost in the trees of the climate change discussion. It’s time to figure out how to have a conversation about the forest.