(Maria) Jimena Alvarez

The economics of Climate Change: the social cost of carbon dioxide from the RCP emission scenarios

The Social Cost of Carbon Dioxide (SCCO2) is equal to the extra net present value of global climate change impacts that would be caused if one more tonne of CO2 is emitted into the atmosphere. According to the Polluter pays principle, the polluter should bear the cost of impacts caused by their pollution; hence the SCCO2 is what anyone who puts a tonne of carbon dioxide into the atmosphere should have to pay.
The SCCO2 is calculated using the PAGE09 integrated assessment model. Previous calculations using PAGE09 gave a mean SCCO2 value of $100 for a business as usual scenario and $50 for a low emissions scenario. But these scenarios are based upon the SRES A1B scenario which are over a decade old.
The IPCC Fifth Assessment report which will be published in 2014 includes 4 new scenarios known as Representative Concentration Pathways (RCP). The research objectives of this dissertation are to calculate the SCCO2 under both RCP 4.5 and RCP 8.5 scenarios and to investigate the similarities and differences between them.
The results for the mean SCCO2 in 2010 are: 134-139 and 350- 361 $/ tCO2 for RCP 4.5 and RCP 8.5 respectively. In both scenarios, the variables which affect the SCCO2 the most are the transient climate response and the pure time preference rate. Sensitivity analysis shows that the socio- economics of the scenarios have a greater effect over the result than the emissions.
A further analysis was performed calculating the mean SCCO2 for 2020, 2030, 2040 and 2050. The results show that the later the mean SCCO2 is calculated, the higher the result, with average growth rates of 1.8% per year for RCP 4.5 and 2.4% for RCP 8.5. The later emissions are expected to cause greater incremental damage given that they are emitted when climate change is expected to be more severe. The increase of SCCO2 over time highlights the importance of putting a carbon tax based on the mean SCCO2 into practice very fast.
The SCCO2 obtained with PAGE09 is measured for someone with the mean GDP per capita in the EU. Given that the EU has an average GDP per capita considerably higher than the world average, the mean SCCO2 was estimated for other regions of the world. China, India and Argentina have mean SCCO2 values 80%, 93% and 54% lower than the EU while US has a mean value 29% higher.
The real SCCO2 should be higher than the results obtained from PAGE09 due to reasons related to time horizon and omitted impacts. Current carbon prices in the EUETS are under 5 EUR/ t CO2 (PointCarbon, 2013), under 7 US$/ t CO2 (Bloomberg, 2013), which is only 5% of SCCO2 under RCP 4.5 (mean: 136.68 $/ t CO2) or under 2% of SCCO2 under RCP 8.5 (mean: 355.87 $/ t CO2).
There is an urgent need to put policy in place that will reinforce the carbon pricing scheme on a worldwide scale. Even though the history of carbon pricing shows that is not an easy quest, this research stresses that the need for more stringent measures is vital to ensure a transition to a low- carbon economy and that the sooner the carbon tax based upon the mean SCCO2 is put in place, the better.