The Use of a Social Cost of Carbon in Canadian Cost-Benefit Analysis

The Social Cost of Carbon (S CC) is being adopted for systematic use in cost-benefit analysis (CBA) conducted by the Government of Canada. Although there are potential efficiency gains from its application, we argue that the SCC may be inappropriate for use in CBA for three reasons. First, as currently calculated, the SCC typically excludes the potential for catastrophes and certain types of climate damages, and assumes perfect substitutability between natural and human capital. For these reasons, it is likely to be biased downwards, and as such would provide misleading advice to policy-makers. Second, the SCC is a global measure of benefits, whereas standard practice in CBA is to include only domestic costs and benefits. Accounting for costs borne outside of Canada and along only one dimension (carbon damage) risks reducing economic efficiency and confusing the users of CBA studies. Third, SCC-based decision-making is unlikely to be consistent with Canadian commitments to international partners on emissions reductions; so its adoption risks institutionalizing non-delivery of those commitments.