HOW WE COMPENSATE
Social Cost of Carbon (SCC)
Åland Index help present the CO2 impact in both tons emitted and in monetary terms, to offer users the possibility to donate or invest based on the actual emissions emitted.
It was the Obama administration (in 2009) that summoned the Interagency Working Group to develop a social cost of carbon—a dollar estimate of the long-term societal damages caused by one ton of carbon emissions in a given year—for measuring the potential climate-related costs and benefits of federal agency rulemakings.
IWG Pricing Method is the chosen method by Trucost for its emission valuation that is based on the SCC – which reflect the full global cost of the damage generated by GHG emissions over their lifetime in the atmosphere.
It monetized damages associated with an incremental increase in carbon emissions in a given year. It is intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change
Out of the many studies that attempt to calculate the SCC, Trucost has chosen to use SCC estimates provided by the Interagency Working Group on the Social Cost of Carbon based in the United States (IWGSCC, 2013). The reasons for this include:
• Calculations are based on three well-established Integrated Assessment Models, which render the estimate more robust and credible than other approaches.
• The SCC takes into account the timing of emissions, which is key to the estimation of the SCC. For example, the SCC for the year 2020 represents the present value of the climate change damages that occur between the years 2020 and 2300, and are associated with the release of GHGs in 2020.
• Results are presented across multiple discount rates (2.5%, 3% and 5%) because no consensus exists on the appropriate rate to use. This allows flexibility in the choice of discount rate according to project objectives.
• The methodologies employed are continuously improved through regular feedback workshops, engagement with experts, and integrating the latest scientific evidence. As a result, the latest 2013 update provides higher values than those reported in the 2010 technical support document, and incorporates updates of the new versions of each underlying IAM.
The three IAMs used collectively span a wide range of Earth system and economic outcomes to help reflect the uncertainty in the literature and in the underlying dynamics being modeled. The use of an ensemble of three different models is also intended to, at least partially, address the fact that no single model includes all of the quantified economic damages. It also helps to reflect structural uncertainty across the models, which is uncertainty in the underlying relationships between GHG emissions, Earth systems, and economic damages that are included in the models. Bearing in mind the different limitations of each model (discussed in the 2010 TSD) and lacking an objective basis upon which to differentially weight the models, the three IAMs are given equal weight in the analysis.
Q: What is the Social Cost of Carbon referring to?
A: The greenhouse gas (GHG) emissions valuation is based on the social cost of carbon (SCC). The social cost of carbon (SCC) takes into account material externalitis which are not yet accounted for in the merchants pricing of products and services. SCC is a measure of the economic harm done by negative carbon impacts, expressed as the dollar or euro value of the total damages from emitting one ton of carbon dioxide into the atmosphere. The current social cost of carbon in Åland Index is set to $130 per ton in today's dollar value.
Q: How do you actually put a price on Carbon?
A: The SCC reflects the full global cost of the damage generated by GHG emissions over their lifetime in the atmosphere. The SCC can be used to monetize the impact of GHG emissions globally, which is not the case when using market prices found in emissions trading schemes (ETS), nor when using the marginal abatement cost (MAC). GHG emissions are usually expressed in metric tons of carbon dioxide equivalents (CO2e)1.
The marginal abatement cost is based on the known actual costs of existing reduction efforts. This renders it a valuable tool for informing policy discussions, prioritizing investment opportunities and driving forecasts of carbon allowance prices. Despite this, it too does not reflect non-traded carbon costs, and thus severely underestimates the true cost of GHG emissions. The MAC is highly time and geography specific with costs of reduction fluctuating over time, by sector and by geography, and estimates are influenced by fossil fuel prices, carbon prices and other policy measures.
Q: Who has decided upon the value of the Social Cost of Carbon (SCC), the price?
A: The SCC is an estimate of the monetized damages associated with an incremental increase in GHG emissions in a given year. The SCC valuation in Åland Index is based on the work conducted by the Interagency Working Group on the Social Cost of Carbon. The index make use of the values reported at the 95th percentile under a 3% discount rate, which represents higher than expected impacts from temperature change (IWGSCC, 2013).