The Capitol building, Washington monument and Lincoln memorial against a sunrise

The USA currently values a tonne of carbon dioxide at $51 dollars, but a new study suggests it should be nearer to $200. Image © Steve Heap/Shutterstock

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The cost of carbon dioxide may be four times higher than thought

In American carbon markets, carbon dioxide could be being undervalued by over 70%, making the cost effectiveness of climate action appear much lower than it actually is. 

Researchers have recommended adopting a higher value, based on updated data, for the country's future decision making. 

The world's largest economy could be drastically underestimating the cost of damage caused by carbon dioxide

A study published in Nature found that the USA's value of one tonne of carbon dioxide should be $185 – almost four times the current cost of $51. These monetary values are used when the government and businesses weigh up the benefits and costs of acting on climate mitigation

By undervaluing the cost of carbon, the value of these climate mitigation projects is being significantly underestimated in the USA. Updating the value would strengthen the case for faster and more immediate climate action both in the USA and other countries which could follow its lead.

The researchers attribute this gulf between the values to outdated methods and information.

Dr Kevin Rennert, the lead author of the new study, says, 'Our work provides a comprehensive scientific update to all of the pieces of social cost of carbon estimation, brought together in a new, open-source model.'

'The updates include reliance on a set of new probabilistic projections, models and a discounting approach that accounts for uncertainty.  In short, it's a completely updated model compared to what the US government has been using to date.' 

An industrial chimney releasing gas into a blue sky

Carbon dioxide makes up the vast majority of global greenhouse gas emissions. Image © AYDO8/Shutterstock

How is carbon dioxide valued?

Anthropogenic climate change is caused by a variety of greenhouse gases which cause the Earth to trap more of the Sun's heat. Over time, this leads to the planet gradually becoming hotter and hotter, which is having impacts on other processes such as the weather.

Although some other gases are better at trapping this heat than carbon dioxide, It is the sheer volume of carbon dioxide that we are emitting that makes it so damaging, making up around 80% of all emissions. Therefore, the vast majority of climate change policies target cuts in the amount of carbon dioxide being produced.

To judge how cost-effective such strategies of cutting CO2 are, a tonne of carbon dioxide is assigned a monetary value, with different countries using a variety of methods to estimate this. 

In the UK a target consistent approach is used, where the value of carbon dioxide is calculated based on the cost of reducing emissions by another tonne of carbon dioxide.

As a result, the value of carbon dioxide generally increases as more is removed, because once the easy cuts are made increasingly complex measures are often needed to reduce emissions further.

While this method has some disadvantages, such as being limited to one point in time, the UK government considers it a step up on the previous method, which calculated the social cost of carbon dioxide (SCC). This measure values the environmental and social cost that a tonne of carbon dioxide would have over its lifetime.

The SCC is still used in the USA but has fallen out of favour in other nations because of the difficulty in accurately estimating the value of damage that climate change will cause in the long run.

There are also concerns over how well the models involved in calculating the SCC can cope with the evolving impacts of climate change, which aren't likely to increase in a linear way. 

The new paper hopes to account for some of these issues by updating how the SCC is calculated and changing the underlying data that is used to calculate it – some of which has not been updated in years. 

The building of the US Academy of Sciences with a US flag in front

The US National Academy of Sciences recommended in 2017 that the SCC methodology should be updated. Image © Bill Perry/Shutterstock

Why is the new social cost of carbon dioxide much higher than the previous value?

The newly calculated SCC for the USA is much higher than previous values for two main reasons, with the first being political. Since 2009, the nation's SCC had been calculated by the US Interagency Working Group on the Social Cost of Greenhouse Gases (IWC), which aimed to update the SCC every two years.

However, the IWC was disbanded in 2017 by then President Donald Trump and was only re-established under President Joe Biden in 2021. As a result, a number of updates which should have taken place did not, while legal disputes in the USA have also affected the use of the SCC.

Secondly, the scientific information and modelling used to calculate the figure are simply out of date. Even before the 2017 disbanding of the IWC, the US National Academy of Sciences had suggested a series of improvements to make the SCC more accurate. 

The new estimate proposed by Kevin and his co-authors is based on a series of new projections of population change, economic and emissions growth over the coming decades. This is combined with a modern climate model and improved estimates of the damages of climate change, such as temperature-related deaths and sea level rise.

The most important factor, however, was the discounting rate, which is used to estimate how much something in the future would be worth in today's money taking into account, for example, inflation.

'We found that the greatest contributor to the difference between our central estimate and that of the US government is our change to a 2% discount rate to reflect economic data from the last 30 years,' Kevin explains. 'The federal government is still using a 3% discount rate calculated in 2003 based on older data.' 

'The other scientific updates contribute significantly as well, however. Even using the same 3% discount rate as the US government, we find that our updated SCC is $80 per tonne of carbon dioxide, a roughly 57% increase over the US government’s current estimate of $51.'

The scientists hope that their approach to the SCC, and their estimated value, will be adopted by the US government. This would make climate action significantly more cost-effective and could drive greater investment into green technologies as well as mitigation and adaptation to climate change.

They add that the SCC should be updated every five years to take account of the latest information as the realties of the Anthropocene become clearer to us all.