Coherent Identifier About this item: 20.500.12592/p329s9

A Practical Guide to the Economics of Carbon Pricing /




The price of carbon is set according to what is known as the “social cost of carbon” — the quantified value of the impact that an emitted tonne of carbon today will have on humans in the future (adjusted to present value). [...] As a result, whatever the social cost of carbon is determined to be, the carbon price must be discounted below it by the marginal cost of public funds (MCPF) — that is, the economic cost of the government raising an additional dollar of tax, on top of what is already being raised. [...] The SCC is the discounted present value of annual marginal damages computed over the lifetime of the incremental CO2 residency in the atmosphere. [...] A common approach in economic theory is to compute the discount rate using the so-called Ramsay formula, which decomposes it into two parts: the pure rate of consumer time preference (the rate at which individuals discount the value of consumption delayed by a year), plus a term representing the change in the marginal value of income. [...] The profits from the initial switch to gas would not be credited against the cost of the policy since the switch would have happened anyway even if the policy had not been implemented.


environment politics economics air pollution economy greenhouse gas global warming social cost of carbon taxation carbon dioxide prices tax emissions carbon tax taxes carbon pricing carbon price economy, business and finance carbon taxes co climate sensitivity