Experts have long clarified the serious consequences of unabated carbon emissions, which include among others the rising of sea level, increased temperature, displacement of wildlife and human populations, as well as drought, but these seemingly devastating implications do not appear to be reflected in majority of economic analyses of climate change.
A new study published in Nature Climate Change on Jan. 12, however, offers an explanation as to why this is the case and reveals that, once the right corrections are applied to current models, the cost of carbon that was set by the government is significantly off by a factor of 10. The U.S. government also places the social cost of carbon to $21 per ton, which the authors put at $200 per ton.
The effects of future climate change are often estimated using integrated assessment models, where changes in temperature cause an immediate impact on economic activities, which could account for lost crop, improvements in infrastructure and increased demand for cooling.
With current pricing models, the government calculates the cost of a ton of emitted carbon dioxide at $37 per ton, but researchers from Stanford say that these pricing models do not consider all the economic damage that each ton of carbon dioxide causes.
The problem with these models is that they assume that there is no permanent damage to things such as the productivity of workers and gross domestic product. They also assume that the capital available before the climate problem is still the same.
"We estimate that the social cost of carbon is not $37 per ton, as previously estimated, but $220 per ton," said study researcher Frances Moore from the Emmett Interdisciplinary Program in Environment and Resources at the Stanford University.
The researchers in essence say that the primary problem with the current pricing models is that the prediction mechanism does not take into account economic growth but only the effects of environmental damages to the economic output.
"These models have been criticized for lacking a strong empirical basis for their damage functions, which do little to alter assumptions of sustained gross domestic product (GDP) growth, even under extreme temperature scenarios," the researchers wrote.
The researchers in general conclude that there is a number of ways that the effects of a changing climate could have negative effects on the GDP rate such as damage to capital because of extreme events. The changing climate can also remove some returns on investments such as money spent to develop agricultural infrastructure in places that have become unsuitable for most of the crops.