Social Cost of Carbon: The Most Important Number You’ve Never Heard Of

By Helen Sanders

Leading economist Michael Greenstone coined the term “social cost of carbon” (SCC), calling it “the most important number you have never heard of.” SCC measures the cost of the damage resulting from emitting one ton of carbon dioxide. It predicts future damage from climate change effects and translates it into today’s dollars. A discount rate is used to solve the value of future costs into a present cash value so we can determine a direct cost-benefit analysis for climate change mitigation strategies.

Discounting the Future

The value of a future dollar is less than the current dollar in financial terms. This is because people place a higher value on current consumption, and we predict our future selves to be wealthier. As such, one future incremental dollar is worth proportionally less.

The U.S. Office of Management and Budget recommends 3% and 7% discount rates in cost-effectiveness evaluations. It notes that 7% provides “a broad measure that reflects the returns to real estate and small business capital as well as corporate capital” and that a lower rate is more appropriate “when regulation primarily and directly affects private consumption.”

What is the appropriate value of the discount rate used for SCC? In the context of climate change, many believe the discount rate should be closer to zero. The U.S. government currently uses an estimate for the SCC of $51/ton of CO2 emissions (3% discount), with an update expected soon.

SCC and Energy Codes

Building energy codes slowly have increased in stringency because there’s a need to meet simple cost-effectiveness measures. For example, accrued financial savings from improved energy efficiency based on market energy prices compared to higher construction cost.

Fenestration performance improvements often are throttled because of this simple payback approach, both in codes and in building project decision-making. It misses the impacts of carbon emissions, occupant comfort and building resilience.

SCC’s use in energy code development could accelerate the rate of code efficiency increases since it raises the value of accrued energy savings. A code change proposal is more likely to be cost-effective based on SCC than the simple energy cost-payback method.

SCC cost-effectiveness calculations can now be presented alongside the regular energy cost savings (at 3% and 7% discounts) for the 2024 International Energy Conservation Code (IECC) proposals.

The IECC’s SCC calculation increases energy cost (and accrued energy savings) between 25% and 44%, depending on the energy source. This could make some fenestration energy-efficiency measures cost-effective that otherwise wouldn’t be based on energy cost savings alone.

IECC committee members can consider this information to evaluate and vote on code change proposals. The goal is to drive more stringent requirements for fenestration, increasing demand for our industry’s already proven, readily available, value-added products.

Helen Sanders Helen Sanders is a general manager of Technoform North America Inc. based in Twinsburg, Ohio. Read her blog each month at usglassmag.com/insights.

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