Carbon Pricing Dynamics: Importance of Social Cost of Carbon in Climate Action

Abstract

The global threat of climate change requires coordinated action of the international community to reduce greenhouse gas emissions and limit global warming to prevent dangerous anthropogenic intervention with the climate system. However, current targets, policies and emissions reduction mechanisms are not sufficient to meet the target set by the Paris Agreement of keeping global temperature increase below 2 degrees Celsius. To address this gap, the concept of social cost of carbon, estimated through integrated assessment models, is considered as an alternative approach to traditional carbon pricing methods and successfully achieve international emission reduction targets and mitigate climate change. Using emissions projections as an instrument, carbon pricing dynamics are analysed within the scope of the EU and California emission trading systems and their performance is evaluated through a comparative analysis. Despite the uncertainty about the evolution of climate change, social cost of carbon estimates aim to provide a more holistic approach to carbon pricing and account for the substantial impacts of carbon dioxide emissions, and ultimately achieve the emissions reduction targets.