Monetizing the Effects of Carbon

Guest Post by Willis Eschenbach

A few months ago [2012] in the New York Times Green Blog they talked about “monetizing” the “social cost” of carbon. The article said:

In 2010, 12 government agencies working in conjunction with economists, lawyers and scientists, agreed to work out what they considered a coherent standard for establishing the social cost of carbon. The idea was that, in calculating the costs and benefits of pending policies and regulations, the Department of Transportation could not assume that a ton of emitted carbon dioxide imposed a $2 cost on society while the Environmental Protection Agency plugged 10 times that amount into its equations.

How does one “monetize” something, and what is a “social cost” when it is in its native habitat?

First, the easy one. A “social cost” is generally some estimated or inferred cost to society from something, in particular a cost that is not reflected in the price of the item itself. For example, alcohol has a social cost in the form of a variety of societal problems. That cost is not included in the raw ex-factory price of alcoholic beverages.

Next, to “monetize” a social cost means 1) to attach some monetary value to that social cost, and then 2) to attach that monetary value to the retail cost of the product in the form of an increased price. In the case of alcohol, that is usually done through government taxes. Sometimes, the revenue from these taxes is dedicated to ameliorating that social cost. In the case of alcohol, that might be in the form of alcohol dependence programs or clinics. Other times the income goes into the general fund.

This is generally not a problem as long as there is widespread agreement about the existence of the social costs. In the case of carbon emissions, however, no such agreement exists. There is no evidence of current costs or damages, only models of possible imagined future damages. Accordingly, even among those who agree that there is a social cost to carbon emissions, there is wide disagreement about the size of those costs.

However, despite the differences, and despite the lack of evidence of any demonstrable costs, the attempt to “monetize” the imagined future damages from carbon emissions continue apace. As you might imagine, I object to the whole process. Oddly, they didn’t listen to me, and the article in the NY Times say that they have settled on a value of $21 per tonne of carbon. The article said one government agency was using $2 a ton and another was using ten times that, or $20 a ton. So I guess they took the average of the two and used that average of $21 per ton for all government calculations … but again I digress.

Over-riding everything in this question is the unthinking, un-acknowledged destruction from jacking up energy prices. This always hits the poor hardest, as I have discussed elsewhere. Energy taxes, including carbon taxes and “monetizations” are the most regressive tax of all. But I digress … I was discussing monetization of carbon.

Let me recapitulate my two main objections to carbon monetization. The first is that for many issues, including carbon, there is no agreed upon way to establish the monetary values. In the case of CO2 there are questions about the very existence of such costs, much less their value. As the NYT article points out, there is great disagreement over the $21 figure even among those who agree that there is some social cost to CO2. Since there is no actual evidence of any actual costs, this is all merely claims and counterclaims, even between adherents. There is no objective way to settle the disagreements.

My second objection is that while people are often in a hurry to monetize the social costs of something, they rarely take the necessary other step. They rarely are in a hurry to monetize the social benefits of something. But if you do one, you have to do the other. After all, this is why it’s called a “cost/benefit” analysis …

I have even had someone seriously argue that there is no need to monetize the social benefits, because they were already included in the market price. After all, he argued, the reason we buy something is because of the perceived benefits. So they are already included in the price.

I find this argument singularly unconvincing. Some benefits are already included in the price, and some aren’t. Since a single counter-example will serve to disprove the general theorem, let me take a social benefit of CO2 as an example. This is the known effect of atmospheric CO2 levels on plants, which is that they increase their production with increasing atmospheric CO2. Obviously, nobody goes out and buys gasoline for their car in order to help the plants, so it is not included in the market price. However, increased plant growth is an undoubted social benefit, a huge one that affects the whole world. Therefore, it is an un-accounted for social benefit, one which does not get included in the price.

Accordingly, let’s take a look at monetizing this un-accounted social benefit. Curiously, the value of increased plant production is both easier and less contentious to calculate than are the claimed social costs of CO2. Why?

Well, it’s because the claimed costs of CO2 are future, imaginary costs that cannot be measured, where the increased plant production is both real and measurable. But I digress.

The folks over at CO2 Science have looked at the experimentally measured increase in plant biomass due to a 300 ppmv increase in atmospheric CO2. The figures are here, in Table 2. The changes are different for each plant, ranging from about 30% to 60%. So let’s be conservative and use the bottom end, an average 30% increase from a 300 ppmv increase. CO2 levels have gone up about 115 ppmv since pre-industrial times. This means that there has been on the order of a 10% increase in the annual production due to CO2.

Now, how much is this 10% increase in global plant production worth? Well, the marvelous FAO database called FAOSTAT puts the value of the annual plant production at ten trillion dollars annually, so lets assume a third of that, say $3.3 trillion dollars. Is $3.3 correct? There you have the problem with monetization … no way to know. But assuming that a 10% increase from some smaller value is due to increased CO2, that puts the annual value of this one single solitary social benefit of CO2 at over $300 billion dollars.

How does that compare to the proposed $21 per tonne social cost? Well, at present we’re emitting about 9.5 gigatonnes of carbon annually. That would mean that the total monetized social cost would be $21 times that number of tonnes emitted, which gives us about $200 billion dollars per year.

So here’s the balance—we have a verified, measurable social benefit to the planet of $300 billion annually, and an unverified, unmeasurable estimated social cost of $200 billion annually. Which leaves me with just one burning question …

When do I get my check for the social benefits I’m providing? The US has provided somewhere around a third of the CO2 responsible for that social benefit, that’s $100 billion per year in benefits … three hundred million Americans, that’s about $333 per American per year …

w.

PS—What’s that I hear you saying? You think I calculated the benefits wrong?

Well, certainly, perhaps I did. After all, it was just a rough cut. But all that does is bring us back to my first objection to “monetizing” CO2 … it’s very hard to get agreement on the actual values.

PPS—Note that I’ve only considered one single social benefit, the increase in plant production. Since their claimed costs relate to claimed future temperature rises, how about the benefit of increased ice-free days at the northern ports if temperatures do rise? And the longer growing seasons if temperatures increase? How much are they worth worldwide? They likely have included the extra costs from air-conditioning to fight the fabled future heat, but have they included the reduction in winter heating? I could go on, but I’m sure you get the point. The whole thing is an exercise in fantasy, shifting sands with no clear answers.