When it comes to pricing CO2
By Daniel A. Gross
Most economists agree that if we want to efficiently reduce CO2 emissions, we’ll need to put a price on carbon. But a nagging question remains. How are we supposed to figure out a price for an invisible, amorphous gas that underpins the economy and transforms the climate?
It’s relatively easy to put a price on a t-shirt or a pound of apples. Calculate the cost of all the inputs, from raw materials to labor to shipping. Then add a margin for profit, and the product is ready to be sold.
Why do the costs of carbon vary from country to country?
The costs of carbon, by contrast, are diffuse and diverse—which helps explain why the estimated prices of CO2 vary wildly across countries and companies. The US government uses an estimate of $33 per ton of CO2, while Sweden uses the strikingly high figure of $168. In internal calculations, Google Inc. uses $14 per ton, while (perhaps surprisingly) oil companies like BP and Exxon-Mobil use fairly high prices of $40 and $60, respectively.
So where do these carbon price tags come from? Whenever you see dollar amounts tacked on to tons of carbon, economists likely used one of two methods to calculate them.
Calculation methods vary too
The first method is like a very long addition problem. The strategy, according to World Bank senior economist Stephane Hallegate, “is to look at the damages on the environment and societies and people that one ton of carbon would create.” In other words, economists use computer models to tally up all the negative impacts of carbon, and set a carbon price high enough to offset those costs. “If the damages are going to be high, that justifies quite a high carbon price,” explains Niven Winchester, an MIT environmental economist.
In practice, however, adding up the costs of carbon can be extremely tedious. “You’re solving a puzzle,” he says—but the puzzle has a huge number of finicky pieces. A dizzying array of factors can affect the estimated cost of carbon. For example: How much will solar energy cost in 30 years? How much meat will humans consume, one century from now? How much CO2 would cause the Greenland ice sheet to melt? Because there are so many factors to estimate, MIT outsources its calculations to a massive computing center 100 miles west of Boston, the Massachusetts Green High Performance Computing Center (MGHPCC). Unlike simplified models of the economy, “integrated models” may generate datasets of many terabytes — a reflection of the many environmental and economic processes that researchers hope to capture.