Social Costs and Carbon – 8/22/16

The issue of social costs versus private costs comes up often in economics. When measuring the costs and benefits of policies, economists do not just total up expenses and revenues of all affected firms to get an idea of how a policy would affect the economy because they recognize that in the best interest for businesses may not be best for society as a whole.

For example, free trade introduces competition that can cost domestic firms business while bringing the benefits of greater specialization of labor and lower prices for consumers. There are always costs and benefits to any action, but part of the government’s purpose is to curb the worst excesses of markets to see that certain “bad” outcomes don’t arise. Anti-dumping tariffs keep cheap Chinese steel from drowning out domestic suppliers, watchdog agencies keep an eye out for fraud.

If trade is tricky, then climate change is trickier. Though public opinion is moving towards a broad acceptance that climate change exists, there is still a lot of conflict over the issue. Pumping toxic sludge into a river has obvious social costs as that kind of pollution kills off downstream activities that require clean water. On the other hand, pumping CO2 into the air is not so noticeable nor so obviously disruptive in the U.S. that most people are willing to reduce usage of the relatively cheap fossil fuels that keep the economy humming along sans some sort of government intervention. And that intervention may soon become a reality.

A federal appeals court in Chicago recently approved a regulatory practice that would help account for projected costs of climate change following a White House issued guidance to Federal agencies. The regulation would have every level of government adding a new line to their balance sheets to consider the social cost of carbon when making decisions. Soon government agencies may decide that current fossil fuel prices do not reflect social costs which would prompt actions such as the increased taxes on fuels or restrictions on pollution for power plants.

The Obama administration has estimated the cost of carbon emissions to be about $36 a ton in 2015. Companies involved in the debate have generally accepted that there is an unspoken social cost greater than $0 that governments consult when drafting climate policy. Even so, the change in accounting comes as hard-fought and will likely continue to make its way through the courts on the urging of critics who know that once the cost gets an explicit line on balance sheets, it will be much harder to take it off.

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