Treating carbon as a cost in government projections

2008-11-24

in Economics, Politics, The environment

A document from the British government defining their ‘shadow cost’ of carbon (PDF) also discusses an approach to government planning that has a lot of potential. Essentially, the document estimates what the maximum amount a rational actor concerned about both the present and the future should pay to reduce carbon emissions. It then calls for that price to be incorporated into government planning and assessments, just as any other cost would be. For instance, two different proposals for the design of a hospital could be compared in a way that treats the social cost of carbon just like any other expense. The result is a cost-benefit analysis that operates as though a socially optimal carbon tax exists, even when no such instrument exists in the wider economy.

In situations where carbon costs have already been partly or fully taken into account – for instance, if a government building is using electricity on which an upstream carbon tax has already been applied – then only the remaining portion of the shadow price of carbon would be applied.

The approach is exciting because it could spur carbon-rational government action, without the need to wait for an economy-wide price of carbon to emerge. That means earlier results. It also means opportunities to secure economies of scale. The government is a major purchaser of products and services, and a push to incorporate the social cost of carbon into government procurement would affect which products are available to the economy as a whole, and at what price. Another advantage is that each layer of government has the power to impose the requirement; provinces and municipalities that wish to move forward could do so without the need for cooperation from the layers of government above them.

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{ 3 comments… read them below or add one }

R.K. November 24, 2008 at 10:06 am

That does seem like a good idea, from a climate standpoint.

The one problem I can anticipate is allegations that this system isn’t providing the best possible value to taxpayers. After all, they might end up paying for a hospital that costs more than a more heavily polluting one would. The challenge of taking into account the interests of future generations is making people willing to pay for it in the here and now.

Milan November 24, 2008 at 11:47 am

I think there would be a lot less public opposition to the government taking future generations into account in financial planning than there is to implicitly forcing everyone to do so, by means of a carbon tax.

Making very long-term plans is an explicitly acknowledged role for government, though it is only very hesitantly and imperfectly accepted by the population as a whole.

. June 8, 2013 at 9:01 pm

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

http://archive.defra.gov.uk/evidence/series/documents/shadowpriceofcarbondec-0712.pdf

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