Discussion: Calculating costs of climate change compared with costs of curbing it – in different countries
By The Conversation
How the ‘social cost of carbon’ measurement can hide economic inequalities and mask climate suffering
By Majid Hashemi, Adjunct Assistant Professor, Economics Department, Queens University, Ontario
The social cost of carbon (SCC) is an essential tool for climate decision-making around the world. SCC is essentially a large cost-benefit calculation that helps policymakers compare the benefits of reducing carbon dioxide (CO2) emissions to the society-wide costs of continued use.
The “right” SCC has long been an open debate, with several studies attempting to estimate it using a range of methods. In fact, there are more than 323 studies that provide varying SCC estimates in one form or another.
Most studies focus on the global level working with aggregate SCC values from countries around the world. This global value, however, hides an important nuance. When one looks at individual SCC values at the country level a clear picture emerges. Poorer countries have proportionally lower SCCs than richer ones.
To put this in context, the United States Environmental Protection Agency (EPA) recommends a global social cost of carbon at US$208 per ton of CO2 for 2024 (average of recent studies).
The Government of Canada uses the same EPA value after exchange rate. When this global estimate (i.e., the aggregate damages to the entire planet) is broken down to country-specific estimates (i.e., the damages to a particular country), it reveals SCCs of less than US$1 for poor countries.
Does this imply that poorer countries bear lower costs due to climate change impacts? Not at all, in fact the reality is quite the opposite. Studies reveal that the damages associated with climate change are proportionally higher for lower-income countries. These damages are often hidden in SCC values in ways that reveal much about the inequalities of our modern world.
Why is the social cost of carbon lower?
The answer is the modelling approach.
To estimate the social cost of carbon, a complicated model integrates multidisciplinary scientific evidence into a single framework to analyze climate change damages. These models incorporate “damage functions” that account for various pathways through which climate change impacts societies.
Pathways include some of the things that we can measure, such as reduced agricultural productivity, increased energy expenditures for space heating and cooling, flood-related property damages and premature death due to extreme temperatures and weather events.
Despite the comprehensive nature of these climate damage models, a critical disparity remains. The monetary value of damages is significantly smaller in poorer countries than in richer ones. Again, this does not mean the impacts are less severe; instead, it reflects the lower overall economic value of losses in these regions because of their lower overall income levels.
One of the three studies referenced by the U.S. EPA’s guidance on SCC finds climate-change-related agriculture damages and premature deaths account for 45 per cent and 49 per cent of the total global damages, respectively. In poorer countries these percentages are likely much lower given both a comparatively undervalued agricultural sector and lower ability to pay for life saving equipment.
Simply put, extreme global economic inequality hides the very real losses and damages experienced by many in poorer countries. This is because the comparative wealth gap between them and richer countries results in a lower relative SCC value.
What does this mean?
To a national policymaker, an almost zero SCC means that climate change-related projects will likely compete neck-and-neck with basic-needs projects (e.g., addressing malnutrition). From the global perspective, this leaves poorer countries with little incentive to allocate resources to the fight against climate change. Poor countries may even see their investments in such efforts as nothing more than donations to richer countries.
Indeed, from such a simple SCC-based perspective any CO2 emissions reduction step a poorer country takes could result in a higher SCC value in richer countries — a value which they are likely to receive very little of. What can be done to address this imbalance?
One proposed solution has been to use the differences in SCC values between poorer and richer countries to inform international climate negotiations on the implied historical responsibility and liability, commonly known as the loss and damage funds.
Additionally, international development assistance to climate adaptation funds should be more equitably aligned with SCC imbalances to ensure that richer countries — which will benefit more from emission reduction efforts — help bear the burden in supporting poorer countries’ adaptation and mitigation efforts.
While methods for estimating SCC values have become more sophisticated in recent years, addressing the global-versus-country-specific imbalance requires a combination of financial transfers and practical co-operation between richer and poorer nations. This will help ensure that the costs and benefits of global CO2 emissions reductions are shared more equally, accounting for both ethical and economic considerations.
