The Carbon Border Adjustment Mechanism (CBAM)
11 min
Level
In this article we’ll explore what the CBAM is, why it’s been created, and what importers need to know ahead of its introduction.
The voice of impact
ESG / CSR
Industries
Ecology
Greenly solutions
US
US
What is the Social Cost of Carbon?
Level
After witnessing first hand how global warming can have a profound impact on our economies, such as with the devastating destruction of Maui amidst rampant wildfires and the struggle for Americans to pay their taxes on time due to other natural disasters caused by climate change – new efforts such as the social cost of carbon are being implemented in order to secure a greater sense of control over the climate crisis.
The social cost of carbon refers to the method which will be used by politicians to help decipher the cost-benefit ratio of implementing a policy to decrease the current effects of climate change. Many are hopeful that the social cost of carbon can help to justify future, more stringent environmental regulations.
In this article, we’ll explain what the social cost of carbon is, why it is important in the midst of climate change, how to calculate the social cost of carbon, and what the future holds for this re-born, potentially efficacious method for policy makers.
How can you explain the social cost of carbon?
The social cost of carbon, often referred to as SCC for short, is a method used by lawmakers to help them weigh the pros and cons of potential climate policies and environmental regulations.
“ Think of the last time you had to make a difficult decision. Odds are, you created a list of the benefits and consequences of each choice before finally settling on a final option. The same goes for the social cost of carbon, as it helps policy makers determine if the potential downsides to a policy will ultimately prove beneficial for the region in the long-run. ”
Close
As a result of how climate change has impacted the economy, the social cost of carbon has risen to prevalence in hopes that it can help heal the negative effects several markets have experienced as a result of excess carbon emissions and overall global warming.
Having first been developed in 2009 by the Obama administration under the IWG, or Interagency Working Group, the social cost of carbon aims to determine the future cost of damage per each ton of carbon dioxide emissions produced each day.
Some general rules to remember when it comes to the social cost of carbon include:
- Higher social costs of carbon often allow lawmakers to justify a stricter climate policy;
- Lower social costs of carbon insinuates that a policy will prove too costly and not worthy of implementation considering the lack of potential benefits;
- The social cost of carbon, in theory, should rise over time due to inflation and the general consensus that various economic systems will continue to suffer the longer the negative effects of climate change continue.
👉 Overall, the easiest way to think about the social cost of carbon is to think of it as someone paying their dues either ahead of time or afterwards. For instance, if there is a restaurant you visit often, you may ask them to keep a running tab of your purchases to avoid needing to pay upfront. The social cost of carbon aims to do the same thing by calculating the future cost of damages to be created by climate change.
Why is the social cost of carbon important and what are the potential benefits?
The social cost of carbon is important in the midst of climate change, seeing as it can help policymakers develop the most effective climate legislation possible to help curb the negative effects of global warming.
“ Although climate science has become increasingly available to everyone due to the push for greater sustainability and transparency, it can still prove difficult for policymakers to develop an effective and economically viable plan to deter the effects of climate change – but the social cost of carbon can help with that. ”
Close
👉 It is important to note that the primary reason why the social cost is essential in today’s world is because it provides a benefit-cost analysis that can help to avoid future, detrimental impacts to our economic systems.
However, seeking to implement the use of the social cost of carbon can do the world a lot of good – and not just for financial-related reasons.
Here are a few other reasons why the social cost of carbon can be viewed as an indispensable tool:
- More Effective Policies – It’s easy to play it safe and set goals that we are well-aware we are capable of exceeding, and sometimes – policymakers choose to stay on the sidelines, even when they could go above and beyond. The social cost of carbon can ultimately help to encourage more rigorous climate policies that could effectively reduce emissions at the speed we need to in order to prevent exceeding dangerously high temperatures, such as the 3°C threshold.
- Improved Life Quality – The implementation of these more stringent measures will not only benefit the economy in that region, but could help to improve the quality of life for the residents in said economic region. This is because a higher social cost of carbon can indirectly help to rectify poor air quality, reduce future wildfires, and protect vulnerable coastal communities.
- Encourage Greater Action Across the Board – When we get into the groove of living under stricter conditions, it becomes easier for us to implement stronger incentives elsewhere – and can persuade people to start greener initiatives elsewhere in their lives and communities.
👉 Ultimately, the social cost of carbon is imperative as multiple markets continue to economically suffer as a result of climate change – and SCC can help to avoid future market-related issues.
How can you calculate the social cost of carbon?
The dollar amount for the social cost of carbon can be calculated by using algorithmic, computer models that will determine the social, economic, and physical impact of implementing a low or high social cost of carbon.
“ In order to reach the most effective and conclusive social cost of carbon, four main types of information should be input into whichever computer models one seeking to calculate the social cost of carbon may choose – including socioeconomic factors, predictions on the future of climate change, what sectors will be impacted, and discount rates. ”
Here are the four types of information integral to the social cost of carbon broken down:
- Socio Economic Projections – This refers to how the potential social cost of carbon could impact the economy, the future growing population of the area, and how many carbon emissions will be expected in the region as a result.
- Future of Climate Change – This includes how the surrounding environment will continue to respond to excess emissions, the rate at which sea levels and temperatures will rise, and other natural disasters that could have an economic impact on the region.
- Benefit-Cost Analysis – This area will help to determine if the social cost of carbon will be beneficial across the board, such as with energy usage, agriculture, and how workers will be affected by the implementation of the social cost of carbon.
- Discount Rates – This criteria will depict the rate society is willing to sacrifice current benefits for future ones, such as increased roadwork to build improved public transportation systems to decrease carbon emissions long-term in the future.
👉 Usually, a high discount rate insinuates that the region prefers to hold onto their money and not risk the potentially lucrative future benefits – whereas a low discount rate demonstrates a willingness to invest in programs which will benefit future generations in the area.
“ Once information is collected from these four areas of criteria, an estimate for SCC can be made accordingly – meaning that the social cost of carbon is bound to vary depending on the circumstances. ”
What is the social cost of carbon by country?
The social cost of carbon by country is as follows expressed in USD:
- India (around $90 per tonne of CO₂)
- United States (around $50 per tonne of CO₂)
- Saudi Arabia (around $47 per tonne of CO₂)
- China (around $40 per tonne of CO₂)
- Brazil (around $24 per tonne of CO₂)
👉 Although calculating the social cost of carbon can prove beneficial, its method has proven extremely controversial in previous years – and has been modified numerous times under different presidential administrations.
How has the social cost of carbon evolved over the years?
The social cost of carbon has evolved with the times, especially as the method to calculating the social cost of carbon has been viewed as controversial over the years.
“ The methods used to calculate the cost of social carbon have evolved over the years depending on the current administration, and it also varies depending on the country SCC is being calculated in. ”
The first approach to calculating the social cost of carbon was developed by the Obama administration, which included the social cost of carbon for the increased need to use central heating and cooling systems due to erratic temperatures, how carbon impacted agriculture, and the potential coastal damage that excess carbon dioxide emissions could cause.
While this was good, the social cost of carbon did not include other future damage costs for other natural disasters caused by climate change because the costs were uncertain, such as with wildfires, flooding, or respiratory diseases – many of which we have suffered a great deal in 2023 alone.
Once Trump became president, he disbanded the IWG and prioritized the economic impact of carbon to the US only – meaning that calculating the social cost of carbon left out several variables once more.
👉 Luckily, as of the end of 2023, the Biden administration has worked hard to restore the social cost of carbon – with the help of improved climate science and a newfound awareness on the importance of climate change, even if the White House has yet to declare it a national emergency.
What is the future for the social cost of carbon?
The future for the social cost of carbon is starting to look brighter, at least in the United States – as the Biden administration is making a consistent effort to ensure that SCC is more widely implemented in the coming years.
“ Implementing the concept of the social cost of carbon across the U.S. will not only help to reduce federal utility bills, but also help to curb the deleterious effects of climate change – which over the long-term, could help the economy as well. ”
Biden is seeking to widen the social cost of carbon, seeing as the U.S. spends over $630 billion annually on products and services – it is becoming essential for the U.S. government to take greater control of its impact on carbon emissions.
Currently, Biden’s goal is to implement the social cost of carbon into procurement, which will help to:
- Encourage a low-carbon economy
- Lower emissions from vehicles, factories, oil refineries, and power plants
- Motivate companies to create more low emission products
- Reduce prices for customers seeking to purchase these products
Overall, the social cost of carbon has the potential to help the world finally take control of the excess carbon emissions we’ve been polluting our planet with – and could help pave the way for a more sustainable and ecologically viable life for future generations.
What about Greenly?
If reading this article about the social cost of carbon has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!
Seeking to understand how the social cost of carbon could have an impact on your business may seem difficult, but don’t worry – Greenly is here to help! Click here to book a demo and get personalized expertise on how you can start to reduce your own emissions and decrease your environmental impact.
Greenly can help you make an environmental change for the better, starting with a carbon footprint assessment to know how much carbon emissions your company produces.
More articles
View all
California Climate Package: SB 219 & SB 252
11 min
Level
What is the California Climate Accountability Package, and how do SB 253 and SB 261 (SB 219), and SB 252 help the state work towards their environmental goals?
5 concrete solutions to help industrial companies reduce their emissions
3 min
Level
Here are five concrete actions industrial companies can adopt to reduce emissions.
Checklist: The 7 Steps to Start Your CSRD Compliance
2 min
Level
The CSRD imposes new requirements for non-financial reporting. Here’s a straightforward guide to start your compliance journey, without any unnecessary jargon:
Share
Subscribe to the newsletter