Facing up to the real cost of carbon

Frank Ackerman and Elizabeth A. Stanton*

Your house might not burn down next year. So you could probably save money by cancelling your fire insurance.

That’s a “bargain” that few homeowners would accept.

But it’s the same deal that politicians have accepted for us, when it comes to insurance against climate change. They have rejected sensible investments in efficiency and clean energy, which would reduce carbon emissions, create green jobs, and jumpstart new technologies – because they are too expensive.

While your house might not burn down, your planet is starting to smolder. Extreme weather events are becoming more common, and more expensive: in the first half of 2011, Mississippi River floods cost us between $2 and $4 billion, while the ongoing Texas drought has cost us between $1.5 and $3 billion, according to the National Climatic Data Center. And there’s much worse to come: climate-related extremes are already forcing millions of people from their homes worldwide; ice sheets and glaciers are melting much faster than expected; the latest research shows we are rapidly heading for summer temperatures at which crop yields in America will start to plummet.

How expensive are these damages? The Bush administration simply ignored the question. The Obama administration, to its credit, took it on – but addressed it with antiquated models, developed long before we understood the urgency of the climate crisis. Using early 1990s economics, they concluded that the damages from carbon emissions are worth a mere $21 per ton of carbon dioxide. If you paid for it at the gas pump (which no one has proposed), that would be just $0.21 per gallon.

But our new research, published by the E3 Network, finds that suffering the impacts of climate change could cost us far more than that. Our report finds deep flaws in the U.S. government’s $21 per ton estimate. That inaccurate estimate promotes inaction, with enormously harmful consequences.

Our research incorporates an up-to-date understanding of climate risk and uncertainty, and finds that the true cost of carbon emissions could be almost $900 per ton today, and more than $1,500 by 2050. Granted, these are the high end of the range of 16 scenarios that we studied. We aren’t sure that the costs will be that high – but we also can’t be sure that climate change won’t be that expensive. It’s the fire insurance problem: you buy insurance because you can’t be sufficiently sure that your house won’t burn down.

How much would it cost to buy climate insurance, to invest in emission reduction? The early stages would cost little or nothing; many energy efficiency measures, and the most cost-effective forms of clean energy, such as wind power in suitable locations, are already competitive with fossil fuels. To control the climate crisis, we’ll need to move on beyond those early stages; several research groups have estimated the costs of very ambitious worldwide emission reduction scenarios at $150 to $500 per ton of carbon dioxide by 2050.

That sounds expensive, unless you compare it to the cost of inaction. Of our 16 scenarios, 14 find that the costs of climate damages – the costs we’ll suffer if we do nothing – will be equal to or greater than the costs of ambitious emission reduction. Those 14 scenarios reflect real risks, measuring how badly climate change could turn out – and those risks mean that inaction is the more expensive and shortsighted choice. Financial prudence in Washington requires immediate action on climate change, to stop paying for climate damages and to start investing in guarding against them.

*Elizabeth A. Stanton is the co-author (with Frank Ackerman) of Climate Risks and Carbon Prices: Revising the Social Cost of Carbon, a report commissioned by the E3 Network, a national network of over 200 economists. Stanton is a senior economist at the Stockholm Environment Institute’s US Center at Tufts University.