Equity Weighting Increases the Social Cost of Carbon
This article finds that using an “income weighting” approach would increase the social cost of carbon by a factor of eight by placing greater emphasis on climate’s impacts on the global poor.
Excerpt
While the effect of this lower discount rate on the social cost of carbon (SCC) is well understood, the new Office of Management and Budget guidelines also allow the use of income weighting. Agencies are not required to use income weights, but if they do, they must do so uniformly across all costs and benefits, and can either present such results as a sensitivity to a traditional unweighted analysis, or make the weighted results the primary analysis. Although the choice of a lower discount rate has received considerable public attention, we demonstrate that this potentially more controversial updated treatment of distributional concerns in Circular A-4 has even larger implications for the SCC. When summing up the benefits and costs across society from emitting one extra tonne of CO2, distributional weighting places weights greater than one on benefits and costs affecting groups of people who have lower incomes than the typical—e.g., median—American today, and correspondingly applies weights less than one to those who are wealthier.
Here, we show that applying the distributional weighting approach from Circular A-4 increases the SCC by nearly a factor of eight in the Greenhouse Gas Impact Value Estimator (GIVE) model, which is one of the three models used by the US EPA and is closely representative of EPA’s three-model average estimate of $190 per tonne. This large change in the SCC, on top of the more than threefold increase arising primarily from the lower discount rate, owes to the fact that most of climate change’s global welfare impact will occur outside US borders, where most people have lower incomes than the median American and hence receive greater weight.
Authors
Lisa Rennels
University of California, Berkeley
Frank Errickson
Princeton University
