How Expensive Should CO₂ Be? Fuel for the Debate on Optimal Climate Policy

Most people are convinced that climate change is a threat and that it should somehow be dealt with. It is also clear that CO2 emissions are still too cheap and must be priced higher to sufficiently curtail emissions. Yet how high should a carbon tax be? Answering this question requires scientific insights on the costs and benefits of a carbon tax but also ethical – and thus political – judgements on how we value the damages from climate change that will happen in the near and in the far future. This paper reviews the evidence on the social cost of carbon and discusses global and unilateral policy options. It finds that a price of $77 per metric ton of carbon is defensible if we give 95% weight to damages occurring two generations (or 50 years) from now but higher if we want to further reduce the risk of catastrophic change. It is best implemented as part of trade agreements and in combination with R&D investment