For those who care about the climate change challenge, you should read this NY Times OP-ED by Michael Greenstone and Cass Sunstein and this Bloomberg piece.
The social cost of carbon (SCC) represents the following thought experiment. Consider all 7.3 billion people on the planet. The SCC = the sum of each of their willingness to pay to avoid being exposed to an extra ton of carbon dioxide.
So, if a coal fired power plant emits an extra ton of CO2, this raises atmospheric climate change concentrations and this exacerbates the risk of more severe climate change. Such climate change impacts each of us along many different margins. Some economists claim they have a model to add up all of these impacts and to generate a single number.
Permit me to make several points.
1. The Social Cost of Carbon is greater than zero. There is a negative externality. But, it is almost impossible to estimate the SCC or to even bound it.
2. All of our existing computable general equilibrium models for measuring the SCC should not be used in the policy arena. MIT's Robert Pindyck proposes an alternative approach of polling experts here.
3. The SCC is likely to be an increasing function of the global aggregate CO2 concentration.
4. The SCC is a decreasing function of urbanization and technological change. I work on this topic.
Read my Climatopolis revisited.
The economists who are active in the climate policy arena need to claim that they roughly know the SCC but do they? If they wrote down their model and their assumptions that justify the SCC that they claim, their mothers would giggle.
When policy is several yards ahead of academic knowledge, how do we proceed? Given the known unknowns, it is wise to say that the SCC is very high but how do we know this?
My challenge for Martin Weitzman and others who claim that the SCC is enormous is that there is not spatial component to their models. In a world featuring mobility of capital and labor and constant innovation and investment, the adaptation possibilities are almost infinite. The economists who write down deterministic equations of the "laws of motion" of their stationary economies ignore such evolutionary possibilities and each of these helps to lower the SCC. Read my NBER January 2017 paper with Zhao.
So, the SCC is really a political construct to help policy economists to draw a line in the sand for determining which carbon mitigation policies are "good". If the SCC is $300 then even cash for clunkers was good! If the SCC is $10, then only the best bang per buck (carbon reduction per $ spent) are worth it. But, how do we know the SCC? How do you know it? Is it a stationary parameter? Go read your Lucas critique. It is a reduced form parameter. If we become good enough at adapting to new climate risks, then the SCC converges to zero over time.