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The Social Cost of Carbon and the Shadow Price of Carbon: what they are, and how to use them in economic appraisal in the UK

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  • Price, Richard
  • Thornton, Simeon
  • Nelson, Stephen

Abstract

This paper sets out: - a definition of the social cost of carbon, hitherto used in UK government appraisals to reflect the external costs of greenhouse gas emissions; - the rationale for adopting a shadow price of carbon (SPC) for use in policy and investment appraisals across UK government; and the factors which the SPC reflects which the social cost of carbon (SCC) does not; - our approach to setting the appropriate level for the shadow price of carbon (SPC), now and in the future; and - how the SPC should be used in policy advice, and why it differs from other carbon price and cost concepts. Our conclusion is that we should adopt as our starting point an SPC based on an SCC consistent with range of atmospheric concentrations of carbon identified by the Stern Review as the target for global action. Consideration will also be given to adjusting the SPC in the future in order to bring it progressively in line with the level of marginal abatement costs (MAC) consistent with our abatement goal. It will become possible to do this as our knowledge of UK and global MACs improves over the next couple of years.

Suggested Citation

  • Price, Richard & Thornton, Simeon & Nelson, Stephen, 2007. "The Social Cost of Carbon and the Shadow Price of Carbon: what they are, and how to use them in economic appraisal in the UK," MPRA Paper 74976, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:74976
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    File URL: https://mpra.ub.uni-muenchen.de/74976/1/MPRA_paper_74976.pdf
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    References listed on IDEAS

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    1. Stern,Nicholas, 2007. "The Economics of Climate Change," Cambridge Books, Cambridge University Press, number 9780521700801, January.
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    Cited by:

    1. Eory, Vera & Topp, Cairistiona F. E. & Moran, Dominic & Butler, Adam, 2014. "Assessing uncertainty in the cost-effectiveness of agricultural greenhouse gas mitigation," 88th Annual Conference, April 9-11, 2014, AgroParisTech, Paris, France 170784, Agricultural Economics Society.
    2. Dietz, Simon & Fankhauser, Samuel, 2010. "Environmental prices, uncertainty, and learning," LSE Research Online Documents on Economics 31905, London School of Economics and Political Science, LSE Library.
    3. Marten, Alex L. & Newbold, Stephen C., 2012. "Estimating the social cost of non-CO2 GHG emissions: Methane and nitrous oxide," Energy Policy, Elsevier, vol. 51(C), pages 957-972.
    4. Jan Kunnas & Eoin McLaughlin & Nick Hanley & David Greasley & Les Oxley & Paul Warde, 2014. "Counting carbon: historic emissions from fossil fuels, long-run measures of sustainable development and carbon debt," Scandinavian Economic History Review, Taylor & Francis Journals, vol. 62(3), pages 243-265, November.
    5. Greasley, David & Hanley, Nicholas & Kunnas, Jan & McLaughlin, Eoin & Oxley, Les & Warde, Paul, 2012. "How Environmental Pollution from Fossil Fuels can be included in measures of National Accounts and Estimates of Genuine Savings," Stirling Economics Discussion Papers 2012-16, University of Stirling, Division of Economics.
    6. Dietz, Simon & Fankhauser, Samuel, 2009. "Environmental prices, uncertainty and learning," LSE Research Online Documents on Economics 37613, London School of Economics and Political Science, LSE Library.
    7. Wei, Chu & Löschel, Andreas & Liu, Bing, 2013. "An empirical analysis of the CO2 shadow price in Chinese thermal power enterprises," Energy Economics, Elsevier, vol. 40(C), pages 22-31.
    8. Stephen C. Newbold & Charles Griffiths & Chris Moore & Ann Wolverton & Elizabeth Kopits, 2013. "A Rapid Assessment Model For Understanding The Social Cost Of Carbon," Climate Change Economics (CCE), World Scientific Publishing Co. Pte. Ltd., vol. 4(01), pages 1-40.
    9. M. Shaw & Linwood Pendleton & D. Cameron & Belinda Morris & Dominique Bachelet & Kirk Klausmeyer & Jason MacKenzie & David Conklin & Gregrory Bratman & James Lenihan & Erik Haunreiter & Christopher Da, 2011. "The impact of climate change on California’s ecosystem services," Climatic Change, Springer, vol. 109(1), pages 465-484, December.
    10. Simon Dietz & Samuel Fankhauser, 2009. "Environmental prices, uncertainty and learning," GRI Working Papers 10, Grantham Research Institute on Climate Change and the Environment.
    11. Andreas Økland & Nils O. E. Olsson & Marte Venstad, 2021. "Sustainability in Railway Investments, a Study of Early-Phase Analyses and Perceptions," Sustainability, MDPI, Open Access Journal, vol. 13(2), pages 1-21, January.
    12. Dirk Heine & Susanne Gäde, 2018. "Unilaterally removing implicit subsidies for maritime fuels," International Economics and Economic Policy, Springer, vol. 15(2), pages 523-545, April.
    13. Rodríguez-Entrena, Macario & Espinosa-Goded, María & Barreiro-Hurlé, Jesús, 2014. "The role of ancillary benefits on the value of agricultural soils carbon sequestration programmes: Evidence from a latent class approach to Andalusian olive groves," Ecological Economics, Elsevier, vol. 99(C), pages 63-73.
    14. Kalra, Nidhi & Hallegatte, Stephane & Lempert, Robert & Brown, Casey & Fozzard, Adrian & Gill, Stuart & Shah, Ankur, 2014. "Agreeing on robust decisions : new processes for decision making under deep uncertainty," Policy Research Working Paper Series 6906, The World Bank.
    15. Vera Eory & Cairistiona F. E. Topp & Adam Butler & Dominic Moran, 2018. "Addressing Uncertainty in Efficient Mitigation of Agricultural Greenhouse Gas Emissions," Journal of Agricultural Economics, Wiley Blackwell, vol. 69(3), pages 627-645, September.
    16. Eory, Vera, 2015. "Evaluating the use of marginal abatement cost curves applied to greenhouse gas abatement in agriculture," Working Papers 199777, Scotland's Rural College (formerly Scottish Agricultural College), Land Economy & Environment Research Group.

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    More about this item

    Keywords

    Cost of carbon Climate change Environment Evaluation Appraisal Policy Shadow price;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H4 - Public Economics - - Publicly Provided Goods
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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