Estimating the Value of Carbon: Two Approaches

Researchers from Resources for the Future's (RFF's) Social Cost of Carbon initiative worked with the New York State Energy Research and Development Authority (NYSERDA) to provide input for the Value of Carbon Guidance published by the New York Department of Environmental Conservation. The department states that this guidance "establishes a value of carbon based on an estimate of net damages incurred as a result of climate change that can be used by State entities to aid decision-making and used as a tool for the State to demonstrate the global societal value of actions to reduce greenhouse gas emissions."

The value of carbon is a monetary estimate of the value associated with small changes in emissions of carbon dioxide (CO2) and other greenhouse gases (GHGs). Pursuant to the Climate Leadership and Community Protection Act (CLCPA), the New York State (NYS) Department of Environmental Conservation (the Department), in consultation with the New York State Energy Research and Development Authority (NYSERDA), is directed to establish by January 2021 a value of carbon for use by NYS agencies,[1] expressed in terms of dollars per ton of carbon dioxide equivalent (CO2e).[2]

In establishing a value of carbon for NYS, the CLCPA requires the Department to consider the two main analytic approaches for quantifying the dollar value of avoided CO2 emissions. These are:

• The social cost of carbon (SCC) approach, or marginal damages approach, provides monetary estimates of the future environmental and social impacts caused by a small (1 metric ton) increase in greenhouse gas emissions in a given year. Equivalently, the SCC approach values the economic benefit that results from reducing greenhouse emissions by the same amount in that year.
• The marginal abatement cost (MAC) approach, or target-consistent approach, provides monetary estimates for greenhouse gas emissions based on the marginal abatement cost for achieving a given emissions reduction target—that is, the cost of abating the last metric ton of carbon dioxide needed to meet a particular emissions target at least cost to society.

The value of carbon is an important analytic input in policy deliberations and appraisal, including for benefit-cost analysis and regulatory impact assessment of policies that affect emissions and for estimating the economic benefits of existing climate policy. In applying the value of carbon, NYS policymakers can also be expected to evaluate policy options based on criteria such as their ability to deliver the specific emissions reductions required by the CLCPA and whether they will deliver such reductions at lowest cost.

In support of the Department’s issuance of guidance on the value of carbon, this memo reviews both the SCC approach and the MAC approach to carbon valuation, with attention to specific considerations for the application of each approach to inform policy analysis and decisionmaking in NYS. This memo also presents associated estimates for the value of carbon, and certain other GHGs, issued and adopted by the US federal government, US states, and several European countries, including estimates that are calculated at a range of discount rates. Though the SCC and MAC approaches provide distinctly different information, they may play complementary roles in the NYS policy process to drive emissions reductions.

[1] Governor Andrew Cuomo signed the Climate Leadership and Community Protection Act (CLCPA) into NYS law on June 18, 2019. Section 75-0113 of the CLCPA addresses the value of carbon.

[2] The emissions from various greenhouse gases are converted to carbon dioxide equivalent (CO2e) by multiplying by their global warming potential (GWP) over a specific timescale. As discussed in this memo, the social cost of carbon dioxide (SC-CO2) is the $ damage per ton of CO2. Any other greenhouse gas, such as methane (CH4), would be multiplied by its respective GWP value to determine its CO2 damage equivalent (e.g., tons CH4/ton CO2) and derive its $ per ton CO2e. This memo suggests using direct estimates for the social cost of methane and the social cost of nitrous oxide, and developing direct estimates for the social cost of other common greenhouse gases, while using $ per ton CO2e when a gas-specific estimate of social cost has not been established.