Geoscience Reference
In-Depth Information
applied, the market price of all activities using carbon would rise by the
carbon price times the carbon content of fuels they used. We would not
know how much of the price is due to the carbon content, but we would
not need to care. We could make our decisions confi dent that we are
paying for the social cost of the carbon we use.
To summarize: You can see why economists emphasize the many
advantages of using carbon prices to reduce carbon emissions. They
provide strong incentives to reduce emissions; they do so in an even-
handed way; they affect all aspects of the economy from production to
innovation; and they economize on the information that people need to
make effi cient decisions.
SETTING THE RIGHT CARBON PRICE
Economics teaches us that unregulated markets will not put the
correct price on externalities like CO
2
—because they are external to
the marketplace. So how should the price be determined? Economists
have used two approaches to estimating the appropriate carbon price.
The fi rst is to estimate the damages from climate change with a concept
called the “social cost of carbon.” The second is to estimate the required
price of carbon that would attain different environmental objectives
using integrated assessment models.
Begin with the social cost of carbon. This concept represents the
economic damage caused by an additional ton of CO
2
emissions (or,
of carbon are a critical ingredient in climate-change policy. They pro-
vide policymakers a target to aim for in setting a carbon tax, or in set-
ting the level of emissions reductions in a cap-and-trade system, or in
international negotiations on minimum carbon prices.
Another application is in rule making where countries do not have
comprehensive policies covering all greenhouse gases. In this context,
regulators might use the social cost of carbon in a calculation of social
costs and benefi ts of policies involving energy or climate-affecting de-
cisions. For example, the U.S. government has used the social cost of
carbon in setting regulations or subsidies for installation of low-carbon
energy sources, for effi ciency standards in buildings, for fuel effi ciency
