The wildfires raging in Canada serve as a stark reminder that the climate crisis is here and now. But, what is its actual cost and how severe is it? This is where the concept of the social cost of carbon comes into play. It provides a quantitative measure that encapsulates the societal cost of climate change, offering a tangible representation of the severity of the crisis.
The latest report from the Canadian government indicates that each tonne of carbon causes $250 in damage to society.
This is not a number to be taken lightly; it offers a way to determine the "optimal" level of climate action.
For example, electric car subsidies cost $340 per tonne of carbon, while energy-efficiency measures (insulation, heat pumps, etc.) can reduce the cost to less than $100 per tonne, according to Dunsky. The economic logic is that any policy that reduces a tonne of carbon below the social cost of carbon is desirable and should be applied.
But the reverse is not necessarily true. Even though a policy is costly, it can still be desirable. There are other elements to consider, such as biodiversity, climate justice, economic benefits and innovation.
Do not confuse this with carbon pricing
However, be careful not to confuse the social cost of carbon with the price on carbon; they are two very different things. While the former is an information on the social cost of a tonne of carbon — particularly useful in cost-benefit analyses — the latter is a national policy; the price that must be paid by polluters.
Moreover, the social cost of carbon does not generally equal the price on carbon.
In Canada’s case, the price of a tonne of carbon is $65 and will reach $170 by 2030, significantly lower than the social cost of carbon which reaches $250.
But why do they differ? The short answer: politics.
Economic thinking is elegant in this regard: in the presence of pollution, a price (or a subsidy) equal to the social cost of carbon must be put in place to regain economic optimality.
Therefore, we should equalize the price on carbon to the social cost of carbon. That would be a great 2035 target. Note that by 2035, the social cost of carbon will be slightly above $300.
The federal program is redistributive
Such a price on carbon is challenging. Increasing the carbon tax risks increasing the price of polluting goods and could damage the financial situation of households.
But the federal government has included this aspect in its carbon pricing policy. It uses the double dividend — the revenue collected from the carbon tax — to redistribute wealth: an Alberta family of four receives $1,500 per year.
And, because the rich consume more, 80 per cent of Canadian households receive more carbon credits than they pay. So this policy is not only fighting climate change, it is also redistributive!
Our way of life is unsustainable
Outside the realm of public policies, the social cost of carbon also informs people about the sustainability of their way of life.
To provide a clearer picture, consider this example: A round-trip flight from Toronto to Paris imposes a societal cost of $500 per passenger. In comparison, an SUV and an F-150 pickup generate annual costs of $1,000 and $1,750, respectively.
Compact cars, such as a Corolla, significantly reduce these damages, with an annual cost of $500. While electric vehicles present considerable societal cost reductions, public transit and cycling remain the greenest transportation options, virtually eliminating such costs.
In terms of dietary choices, a vegetarian lifestyle imposes roughly half the societal costs compared to the average Canadian's diet, with yearly costs at $375 and $750, respectively. A flexitarian diet, which significantly minimizes meat intake — particularly red meat — presents a balanced alternative, causing approximately $500 worth of societal impact annually.
The social cost of carbon puts a price on our habits, underlying how unsustainable our way of life is. To reduce the negative impact one has on the climate, switching to public or active transportation is the way to go. Electric vehicles and flexitarianism are imperfect but are still steps in the right direction.
Remember this
To tackle the climate crisis we will need both great policies and individual actions. The former incentivizes businesses to invest in cleaner means of production and allows the government to finance projects such as public transit. But policies alone will not suffice.
People need to act accordingly and this is where the social cost of carbon plays a significant role: it quantifies the damages our daily action has on the climate.
So, $250 per ton of carbon is a reminder our way of life is unsustainable.
It is a call to action.
Hugo Cordeau is a PhD student in economics at the University of Toronto.
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