The Most Important Number You’ve Never Heard Of


If prices for fossil fuels reflected their true cost to society—in deadly heat waves, water stress, disappearing crops—they’d be a lot higher than they are now. How much higher? Ask Michael Greenstone.

Greenstone is the Milton Friedman Distinguished Service Professor in Economics at the University of Chicago. In the early years of the Obama administration, he and legal scholar Cass Sunstein co-led the team that developed what’s known as “the social cost of carbon.” Think of it as the baseline value of a viable future—or, as Greenstone puts it, “the benefit, in money terms, of reducing carbon emissions.”

The formula Greenstone and his team developed pegged the social cost of carbon dioxide emissions to more than $50 per ton last year. The way the thinking goes, agencies should factor in that cost whenever they’re pricing out a new policy. The Trump administration all but zeroed out the formula, but on Wednesday, President Joe Biden directed his agencies both to bring it back and more generally modernize regulatory rules to take into account health, growth, racial justice, and the environment. Not only that, he gave his staff 30 days to publish interim cost estimates for CO₂, nitrous oxide, and methane.

Before the inauguration, Bloomberg Green spoke with Greenstone about discount rates, inequality, and Milton Friedman.

Why calculate the social cost of carbon?

What policy is trying to do, in many different forms, is reduce carbon emissions, and that is costly to do—if it weren’t costly, we’d be doing it already. The social cost of carbon allows you to calculate the benefits and then figure out which policies have benefits that are greater than costs.

Tell me if I have this right: One of the trickiest ingredients in the social cost of carbon is the discount rate. If, over time, investments return at a high rate—Trump used 7%—then the social cost of carbon will turn out small. If this discount rate is lower—Obama used 3%—the social cost of carbon comes out higher. What's the right number?

The social cost of carbon could be evaluated at the stock market rate of return. But historically it has been evaluated at the 10-year Treasury return. That’s what the Obama administration did. In 2009 it looked like the government could borrow at about 3% real if you went and looked at U.S. Treasury markets.

There’s been deeply profound changes in international capital markets that make it impossible, in my estimation, to defend using a 3% discount rate. And in fact, if you look at the 10-year TIPS return, which is an inflation-protected 10-year Treasury bond, the average rate of return since its inception in 2003 is just 1.01 percentage points. The data don’t support using 3% anymore. Three percent is not, like, a universal constant that came from God or the Constitution. 

The Most Important Number You’ve Never Heard Of

You just wrote a paper advocating an update to the social cost of carbon. What else has happened that makes you think your original calculations ought to be revisited?

Due to advances in computing and access to data, our understanding of the damages of climate change are much more nuanced than they were. That shows up in work that I’ve been involved in on what the impacts of climate change will be on mortality, energy consumption, on labor supply, agriculture, and on and on and on.

The current approach to estimating social cost of carbon does not account for the fact that people don’t like uncertainty. And there’s very straightforward economic tools to bring that into the calculation of the social cost of carbon.

The costs of climate change are not going to be spread evenly. Right now, the way we estimate the social cost of carbon, we treat a $100 climate loss to Jeff Bezos the same as we treat $100 of climate damages to a low-income, single-parent family. Taking $100 away from Jeff Bezos—not such a big deal. Taking $100 away from someone who’s struggling to make ends meet—that’s a big deal.

Your endowed chair at the University of Chicago is named after Milton Friedman. Tell me about him.

Milton Friedman famously said that the job of corporations was to make profits. His viewpoint was that policy can’t be made by individual corporations. The rules of the road have to be set by government. And having a robust social cost of carbon does not contradict that in any way. In fact, I think he would support it as a means of setting the rules of the road for markets, so that CO₂ emissions are accounted for in people’s decisions.

Have you ever thought of renaming the “social cost of carbon”?

The best name I’ve ever been able to come up with or come across is the “most important number you’ve never heard of.” There is no good name for it. It’s a terrible name. I don’t know, have you come up with a better one?

The “alpha price”?

I like that.

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