Decarbonizing the U.S. Economy Has Substantial, Impressive Benefits
| Author | Joseph E. Aldy |
| Position | Economist on the faculty at the Harvard Kennedy School |
| Pages | 15-15 |
MAY/JUNE 2021 | 15
Reprinted by permission from The Environmental Forum®, May/June 2021.
Copyright © 2021, Environmental Law Institute®, Washington, D.C. www.eli.org.
An Economic Perspective
President Biden has called for
reducing net emissions of U.S.
greenhouse gases to zero by 2050.
e ambitious nature of this goal reects
a growing understanding of the signi-
cant risks that climate change poses to
our well-being. e good news is that
such rapid decarbonization of the econ-
omy would deliver dramatic benets:
the International Monetary Fund esti-
mates that U.S. carbon dioxide emis-
sions last year will cause nearly $200
billion in climate-related damages.
e IMF calculation builds on the
pioneering work of William Nord-
haus of Yale University, in which he
estimated the Social Cost of Carbon
as the present-day value of the eco-
nomic damages of an additional met-
ric ton of carbon dioxide emitted to
the atmosphere. Since a single mol-
ecule of CO2, once
emitted, could reside
in the atmosphere
for centuries, an eco-
nomic assessment of
this molecule must
account for its im-
pacts next year, and
the following year, and for hundreds
of years into the future. We calculate
the SCC using models that integrate
the globe’s economic, energy, and cli-
mate systems over the long run.
To inform its ambitious climate
agenda, the Biden administration re-
cently announced that it would use
estimates of the SCC based on the in-
tegrated assessment modeling work of
the federal government’s technical ex-
perts in 2016. e Biden White House
also launched an interagency working
group to update the SCC over the next
year to reect the latest insights from
the research community.
Recent scholarship has advanced
our understanding of climate change
damage functions, such as how heat
waves under a changing climate
could increase premature mortality
and reduce labor productivity, as well
as how changing temperature and
precipitation patterns could aect
agricultural production.
Economists use a percentage called
the discount rate to monetize future
benets in present-day terms. Recent
understanding of discount rates —
as revealed by behavior in nancial
markets — suggests that lower rates
should be employed, increasing the
present value of future benets. e
updated damage functions and the
lower discount rates would each result
in integrated assessment models pro-
ducing higher estimates of the SCC.
is metric can play several key
roles in public policy. First, some stat-
utes require regulatory agencies to set
standards based on explicit consider-
ation of the regulation’s benets and
costs, such as for the energy eciency
of appliances and the
fuel economy of cars
and light trucks. In-
deed, the George W.
Bush administration
rst used a SCC in
evaluating regulations
in response to a 2008
federal court ruling that remanded a
Department of Transportation fuel
economy standard because it had ini-
tially failed to account for the benets
of reducing carbon dioxide in the set-
ting of the standard.
Second, regulatory agencies must
conduct regulatory impact analyses of
their major rules. For those regulations
that reduce carbon dioxide emissions,
the SCC can illustrate how the benets
justify the costs. Public communica-
tion of these results can enhance un-
derstanding of the serious risks posed
by climate change as well as demon-
strate that a given regulation represents
a good investment on behalf of the
American people.
Finally, the SCC can also inform
the design of new policies. For ex-
ample, some economists have advo-
cated for an economy-wide carbon
tax that is set equal to the SCC. If
new legislation set a carbon tax equal
to the interim SCC adopted by the
Biden administration of $50 per ton,
then it would result in a tax on gaso-
line of about 45 cents per gallon and
a tax of about 5 cents per kilowatt-
hour of coal-red power. Economic
models of such a carbon tax suggest
this would halve U.S. carbon dioxide
emissions economy-wide by 2035.
A federal clean electricity standard
could require increasing shares of re-
newable and other zero-carbon power
in the electricity sector. Building on
the experience under some states’
renewable portfolio standards, a na-
tional clean electricity standard could
include an alternative compliance
payment that would eectively cap
compliance costs. is could provide
insurance that the costs of the policy
— and hence the increase in utility
rates — do not become unexpectedly
high if there is insucient supply of
clean power. e SCC could serve as
the basis for setting such an alterna-
tive compliance payment.
e SCC can also play a role in in-
ternational diplomacy. It signals to the
rest of the world that the United States
accounts for the global benets of its
greenhouse gas emission reductions. If
other countries reciprocate — each tak-
ing actions that also reect the global
benets of doing so — then the world
can make meaningful progress on the
goals set forth in the 2015 Paris Agree-
ment limiting future temperature in -
creases.
Decarbonizing the U.S. Economy
Has Substantial, Impressive Benets
The U.S creates
$200 billion of
climate-related
damages each year
Joseph E. Aldy is an e conomist
on the facult y at the Harv ard Ken-
nedy School . You can contact hi m at
Joseph_Aldy@hks.harvard.edu.
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