The Costs of Carbon and the Benefits of Cleaning Up - September 9, 2022
The Social Cost of Carbon
How much does a ton of greenhouse gas cost? This question has been vexing policy makers and stakeholders for years. Dubbed the “social cost of carbon” - researchers around the world have created varying estimates of the full cost of the damage from climate change attributed to adding one more ton of carbon to the atmosphere.
This is a critical measurement because it is used by governments to establish carbon taxes and calculate the economic implications of other climate policies. It is also used by companies to forecast the return on their climate investments. The US government estimates the “social cost of carbon” at $51 per ton, but a recent study in Nature implies that the cost should be substantially higher.
The analysis used updated methods and data to estimate that the actual cost of carbon should be $185 per ton, 3.6 times the current estimate. This new figure could significantly impact the cost-benefit analysis for decision-makers in businesses and governments. Kevin Rennert, the lead author of the study, said, “Our results suggest that we are vastly underestimating the harm from each additional ton of carbon dioxide, and the implication is that the benefits of government policies and other actions that reduce global warming pollution are greater than has been estimated.”
Doing Well by Doing Good
While estimating the true cost of a ton of carbon is theoretical, data flooding in from around the world shows that countries making the largest emission reductions also enjoy high rates of economic growth. This data explodes the myth that climate action harms the economy - on the contrary - the graph below shows a correlation between growth and carbon reduction.
The data supports the new Inflation Reduction Act (IRA) and similar policies spurring investment in clean energy. In the short time since President Biden signed the IRA, Toyota announced $2.5 billion for a lithium battery plant in North Carolina to support electric vehicle production and First Solar committed $1.2 billion for a solar power manufacturing plant in Ohio.
Ideology vs Economic Self Interest
Despite the data linking climate policy to growth, states like Texas and Florida are leading the ‘anti-woke’ crusade against ESG. Florida Governor, Ron DeSantis claimed he is “protecting citizens from woke capital” by prohibiting state funds from investing with ESG focused investors like BlackRock. BlackRock head of external affairs Dalia Blass, replied "Given our commitment to those saving for retirement, we are disturbed by the emerging trend of political initiatives that sacrifice pension plans' access to high-quality investments – and thereby jeopardize pensioners' financial returns."
Michael Bloomberg concurred with BlackRock saying, “Critics call it ‘woke capitalism.’ There’s just one problem: They don’t seem to understand capitalism.”
Texas has also come under fire for its boycott of ESG focused companies using MSCI ratings. Alison Taylor, a professor at New York University’s Stern Business School, described their approach as “completely bonkers,” adding that “anti-ESG investing is not really a thing unless you’re saying, we’re going to deliberately invest in poorly governed companies.” University of Pennsylvania’s Wharton School of Business published a study estimating that Texas’ vendetta would cost them between $303-$532 million in higher interest rates.
Climate Food Crisis
Climate change is wreaking havoc in the breadbaskets of the world. Heatwaves and droughts in the United States, the Middle East and Europe have already reduced crop yields, with maize, sunflower, and soybean yields down nearly 10% in Europe due to heat stress. Now, reports show that crop-eating pests in the U.S. like the corn earworm have been spreading farther north than usual due to record high temperatures.
The corn earworm cannot usually survive above a latitude of 40 degrees north, but a new study from N.C. State University shows that warming soil has led to an expanded survival range for the pest. “This is the canary in the coalmine for agricultural pests,” remarked Anders Huseth, co-author of the report. The report follows research from the University of Washington in 2018 that found 2C (3.6F) of warming would boost the number and appetite of insects globally, causing them to destroy 50% more wheat and 30% more maize than they do now.
In the Middle East, drought conditions have forced thousands of farmers to abandon Iraq’s breadbasket region. Agricultural experts in Nineveh - Iraq’s largest wheat-producing region - estimate that 90% of the province’s arable land has been impacted by desertification due to a lack of rainfall. Adding to the exodus, many of the region’s irrigation systems were destroyed during recent conflicts.
An unusual effect of the heatwaves is an increase in strangely shaped vegetables on drought-parched farmland. Farmers are urging supermarkets and consumers not to reject oddly shaped produce and create more food waste, which itself is a major source of greenhouse gas emissions.
Corporate Climate Goals Fall Short
In the lead up to November’s global climate meeting (COP27) in Egypt, an analysis from CDP and Oliver Wyman shows that current corporate emissions reduction targets are missing the mark in meeting the Paris Agreement’s 1.5°C goal. The report reveals that company climate targets in G7 countries add up to a temperature increase of 2.7°C above pre-industrial levels - nearly double the Paris goal.
The Accountability Crisis
These conclusions are based on CDP’s temperature ratings - which dig into the validity of corporate climate targets. Company targets aligned with the Paris goal of a 1.5°C warming scenario received a 1.5°C score, but unrealistic targets received a 3.2°C score.
While more companies are establishing credible, science-based targets, CDP says “Not enough companies have embraced target-setting and those that have are not nearly ambitious enough in their plans to reduce emissions.” These findings will urge companies to get serious about their emissions reduction targets at COP27.