Cost of carbon emissions

by paulfchristiano

Many are concerned about the long-term environmental effects of carbon dioxide and other greenhouse gasses. Based on this concern, they may make sacrifices to reduce their own energy consumption. I wonder: how serious are such concerns?

First, for background (Note: I’m making generous assumptions where possible.)

  • Burning a gallon of gas produces about 0.01 tons of carbon dioxide, so at $3 a gallon: $300 of gas = 1 ton of carbon.
  • Getting a kwh out of coal produces about 0.001 tons of carbon dioxide; electricity prices are variable, but at 20 cents a kwh: $200 of residential electricity from coal = 1 ton of carbon. (Natural gas is probably between 20 and 50% better, but the differences are all very small compared to uncertainty in electricity prices.)
  • A cow produces around 1 carbon equivalent of methane a year (at an exchange rate of 25 tons of carbon ~ 1 ton of methane). A typical cow lives about 3 years and costs about $900 at slaughter, so: $300 of beef = 1 ton of carbon.

So how much should we value reductions in emissions? Naturally it’s a bit hard to pin down the social cost of carbon. The US government bases regulatory decisions on an estimate of a social cost of $21 / ton of carbon, with a 90% confidence interval of $5 to $65, based on IPCC climate models and crude models of climate impacts on human activity.

If we believe these numbers, the social cost of the carbon emissions from beef, electricity, and gas, is about 5-20% of the purchase price. (Maybe going all the way up to 50% if we look at unusually cheap coal-powered electricity and use the most pessimistic estimates of social impact.)

However, if we don’t trust those estimates, we can obtain a more conservative bound by asking: how much would it cost to purchase an offsetting reduction in carbon emissions?

  • European electricity producers face limits on carbon production, but are allowed to buy and sell credits to allocate carbon production effectively. The market price for carbon offsets has varied as demand has varied, with prices sometimes dropping near 0 because limits were set much higher than real production. When supply is limited, prices seem to be around $45 / ton (they were at this level previously, and are anticipated to return to this level). Buying offsets on these markets, when the supply binds, should reduce near-term carbon consumption on a 1-for-1 basis, though the long-term effects are less clear. Overall, it looks like we can reduce emissions in the short term by about $45 / ton by buying carbon offsets. 
  • McKinsey published a report on cost curves for abatement measures which suggests that under realistic scenarios marginal abatement costs about $50 / ton. Their estimates look unrealistically optimistic for small amounts of abatement, I think because they neglect issues like manager attention, but for abatement at scale they look plausible.
  • It may be the case that carbon offsets are largely meaningless, because we are just going to burn all of the oil and coal eventually anyway, and this will dominate total emissions. If we just buy barrels of oil and bury them, we reduce emissions by $160 / ton of CO2 by burying oil in the ground.
  • The state of voluntary offset markets is pretty muddled, and I’m too uncertain about their legitimacy to derive an estimate from them.

So it looks like directly offsetting the greenhouse gasses produced by gas, electricity use, or beef,  only adds 25 – 50% to the cost.

I don’t know much about it, but if we blindly trust some meta-analyses of econometrics (as reported here), the price elasticity of gasoline demand is around 1/2 in the long term, suggesting we buy about 2 – 30% more gasoline than would be socially efficient (neglecting all externalities besides carbon emissions).

I wouldn’t take any of these numbers very seriously, but I think they at least give a sense of what’s going on.