Cost-Benefit Analysis is Problematic
When Applied to Social Cost of Carbon
Kozo Torasan Mayumi
The Kyoto College of Graduate Studies for Informatics
Abstract

If the 2014 Report by the Intergovernmental Panel on Climate Change (IPCC) is credible, applying
cost-benefit analysis (CBA) to climate change, as in calculating the social cost of carbon (SCC), is
problematic and potentially dangerous. This essay argues against the possibility of a social cost ofcarbon by critically examining three fundamental tenets that form the theoretical edifice of CBA inconventional economics: the ideas of scarcity, substitution and discounting. The application of thesetenets to climate change by calculating the social cost of carbon exceeds the legitimate scope of CBA
in which these concepts were originally formulated. A brief discussion of an alternative approach to
CBA for assessing climate change is presented, more applicable to an issue like climate change inwhich decision-making is urgent, stakes are high, values are in dispute and knowledge is uncertain.

■

1. Introduction

Climate change is a typical problem of the postnormal science (Funtowicz and Ravetz

The social cost of carbon (SCC) is a monetary1993)--decision-making is urgent, stakes aremeasure representing the long-term social cost ofhigh, values are in dispute and knowledge isan increase in a unit of carbon dioxide emission.

uncertain.

The SCC approach, usually represented in termsof the discounted marginal cost of climate change
damage, falls within the framework of cost-■ 2. Essential points of the IPCC reportbenefit analysis (CBA). CBA seeks to offer a

There are five important conclusions from themonetary proxy for the evaluation of adaptation

IPCC Fifth Assessment Report which are crucial

and mitigation of climate change. CBA provides

for my critique of the social cost of carbon. First,

decision makers and concerned publics with amost anthropogenic climate change is pervasive

guide for future collective discourse and policy

and irreversible on a multi-century to millennial

formation. However, if the Fifth Assessment

time scale unless there is sustained reduction in

Report by the IPCC (2014) is credible, applying

greenhouse gas (GHG) emissions. Second, in

CBA to climate change is problematic. This essay

many regions, changes in precipitation or snow

draws upon this 2014 IPCC report to argue thatand ice melt have altered hydrological systems

CBA and the social cost of carbon cannot be

including underground water, causing severe

applied to climate change. I develop my argument
by discussing the fundamental tenets of scarcity,

climate related impact such as heat waves,

substitution and discounting that form theclimate variability presents significant danger totheoretical edifice of CBA. The essay argues that
applying scarcity , substitution and discounting toecosystems, particularly in developing countries

climate change exceeds the scope of CBA within

reefs will face progressively lower oxygen levels

which these concepts were originally formulated.

increased ocean acidification, with associatedI close with a brief discussion of an alternative

risks exacerbated by rising ocean temperature.

approach to CBA applied to climate change.

Global redistribution of marine species anddroughts, floods, cyclones and wildfires. Suchwith low income. Third, marine life such as coral

NAIS Journal81

reduction of marine biodiversity in sensitive
regions will endanger fisheries that rely on
healthy ecosystems. Fourth, urban areas are
subjected to increased future risks affecting
people, assets, economies and ecosystems,
including risks from heat stress, storms andextreme precipitation, inland and coastal
flooding, landslides, drought, water scarcity, sealevel rise and storm surges. Rural areas will
likely experience major impacts on watera v a i l a b i l i t y a n d s u p p l y, f o o d s e c u r i t y,
infrastructure and agricultural incomes,
including shifts in the production areas of foodand non-food crops. And fifth, while adaptation
options exist in all sectors, the consequences of
implementing those options to reduce potential
climate related risks differs across sectors andregions.
The IPCC report implies that unless fossil fuels
can be replaced by alternative primary energy
sources with no significant GHG emissions,
irreversible climate change is likely for centuries.
Furthermore, climate change seriously threatens
Net Primary Production (NPP) (Vitousek et al.,1986), the most important biophysical basis forbiological life on the Earth and which ultimately
regulates economic production from agriculture,
fishery and forestry. NPP is non-substitutable,
and yet human life depends upon it.

■

The scarcity refers to the situation in which apersistent gap exists between available goods andlimitless wants. The modern world is full of
economic goods that allow a reasonable lifestyle,but there are not enough of those goods to satisfy
limitless wants (Samuelson and Nordhaus, 2010).
Hubin’s term (Hubin, 1989),‘moderate scarcity’,exactly corresponds to the definition of scarcity
given by Samuelson and Nordhaus. The essenceof the scarcity concept appears in Existence of an
Equilibrium for a Competitive Economy (Arrowand Debreu, 1954). Exactly parallel to themoderate scarcity in conventional economics,

they assume that “every individual could
consume out of his initial stock in some feasible
way and still have a positive amount of eachcommodity available for trading in the market”.
However, an economy must make the best useof its sufficient yet limited available resources
compared with unlimited wants, i.e., under thecondition of moderate scarcity, that brings to theefficiency criterion. This efficiency criterion
requires that CBA is used to choose investment
projects that maximize the present monetary
value of total net economic benefits accruing overa certain time period with a certain discount rate.
The scarcity concept in conventional economics
does not therefore refer to‘severe scarcity’, in

3. Reconsidering scarcity, substitution anddiscounting in conventional economics

3.1 Scarcity
The conventional economic framework dates
back to the socioeconomic conditions prevailing in
England in the nineteenth century during theindustrial revolution. At that time, people started
to anticipate that perpetual economic growthc ould b e ma int a ine d b y a co m b ina ti o n o fabundant fossil fuels and the expanding economic
production. Since then however, limitless desire
for goods and money in anticipation of perpetual
growth has become the foundation of the scarcity

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concept in conventional economics.

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which it is very difficult either to satisfy basic
needs or else to obtain necessary provisions for
subsistence. Often used in CBA, the Contingent
Valuation Method (CVM) asks people how muchmoney they are willing to pay for protecting theprovision of goods coming from ecosystems.
However, in the case of‘severe scarcity’, themarket mechanism cannot give all individuals an
acceptable share of goods, so, the most importantquestion to ask is rather what type of subsistence
good is necessary for a decent life. In particular,poor people in developing countries often lackenough purchasing power, so that the monetary
value that they report in CVM is necessarily too

small, ultimately leading to ruining theirsubsistence resources for survival. If, as the IPCC
report suggests, irreversible climate change
threatens NPP, severe scarcity of economic goods
must eventually occur. The situation envisioned
by conventional economics—that of the moderatescarcity assumed by CBA-- cannot deal withclimate change.

no essential difference between consumer choice
and production. In particular, the substitution ofprimary energy sources in economic production(i.e. renewable energy for fossil fuels) is the key
element in mitigating climate change. However,
it is striking that IPCC does not seriously
investigate the possibility of substituting primaryenergy sources to replace fossil fuels and reduce
GHG emissions. In fact, Working Group III of the

3.2 Substitution
In conventional economics, smooth substitution
among goods and production factors, one of thepillars of CBA, is essential for price mechanisms
to work.
According to Marshall (1920), quasi-constancyof the marginal utility of money-- the change inthe satisfaction or benefit, called utility, from anincrease in additional money spent--is assumed
to be compatible with a society of‘middle-classindividuals’ in which a substantial part of income
is spent on numerous mere conveniences. In
relation to total income, most mere conveniences
involve marginal expenditures. So, a slightincome variation causes one or more such
conveniences to disappear from the individual’s
budget (when income goes down) or to appear as
one or more new entries in the budget (whenincome goes up). In such conditions, it isreasonable to assume that the marginal utility ofmoney for all conveniences is almost the same
because individuals are indifferent to buying any
one particular convenience. Consequently,
substitution between these convenience goods is
said to be‘smooth’.
On the other hand, substitution in the
production process is much less smooth.
Production process is conditioned by the physicalproperties of material objects for particularpurpose, so the complete substitution usuallyrequires a considerable time period. The typicalexample is the substitution of wrought iron forsteel by open hearth furnaces where excesscarbon and other impurities are burnt out of pig
iron to produce steel. But in conventional
economics, substitution is treated as if there were

IPCC AR5 Report devoted only 3 pages to 7.4.1
Fossil Fuels, 7.4.2 Renewable Energy and 7.4.3
Nuclear Energy, within the full document of 1454
pages.
It is absolutely necessary to understand thenature of the primary energy substitutions that
happened in the human history. For this purpose,the concept of entropy is introduced. Entropy is arelative index of the amount of unavailable energy in agiven system. The transition from coal to oil, fromhigh entropy energy to low entropy energy, isatypical. On the other hand, the development
process of the coke blast furnace can be regarded
as a typical example of primary energy
substitution. There occurred a scarcity problem of
low entropy resource, wood. A substitutable
resource, coal, is of high entropy, so that aroundabout process is needed to remove mixing
entropy of coal when burned directly with ironore due to the poor quality of coal. Unless aparticular primary energy source is of low
entropy such as oil or there is a possibility oftransforming a high entropy resource (i.e. coal)
into relatively low entropy resource (i.e. coke), thesubstitution transition is difficult to achieve. We
must recognize that technology is only a‘catalyst’
to induce the latent ability of energy resources toemerge.
There are formidable barriers to achieving thesmooth substitution of primary energy sourcesthat is assumed within the theoretical basis of
CBA. Three of these barriers areheavilydependent on fossil fuels to generate electricity;
the insufficient reserves of uranium 235 and the
difficulty in creating commercial nuclear breeder
reactors; and the limited supply of silver for

NAIS Journal83

multi-crystalline silicon wafer-based solar cells in
the Photovoltaic (PV) systems. These threebarriers will be discussed in turn.
TABLE 1
Coal
USA
France
China
India
Japan
World

2008
2015
2008
2015
2008
2015
2008
2015
2008
2015
2008
2015

Oil
52
34
4.4
2
89
70
82
83
28
34
47
39

Natural Nuclear Hydro
Bio&
Others
Gas
Waste
1.4
18
23
2.3
1.3
2
1
32
19
6
2
5
1.6
4.1
84
4
0.4
1.6
0
4
78
10
1
5
0.8
0.9
2.3
6.5
0.1
0.1
0
2
3
19
1
4
4
6.7
1.7
4.2
0.5
0.5
2
5
3
1
2
4
12
24
30
3
1
2
10
40
0
8
4
4
6
21
16
6
2
3
4
23
11
16
2
5

Table 1. Percentage Share of Primary Energy
Sources for Electricity Generation in 2008 and2015,

compiled from data in EDMC(2011) and

EDMC (2018) Handbook of Energy & Economic
Statistics, Energy Conservation Center, Tokyo
Although electricity is considered to be thecleanest form of energy, electricity generation
depends heavily on fossil fuels with two thirds ofthe world electricity in 2015 being generated thisway (Table 1). To generate sufficient electricity
without using fossil fuels is crucial for mitigatingclimate change. Unfortunately coal, the mostintensive source of GHG emissions, still
contributes almost 40% of electricity generation.
Thanks to shale oil gas production, the USA
reduced coal-fired electricity generation from 52%
in 2008 to 34% in 2015. However, that reduction
is likely temporary. Along with the USA anddespite government claims, China and India
remain heavily dependent on coal-fired electricity
generation.
In relation to nuclear energy, Table 1 showsthat electricity generation in France comesmainly from nuclear power generation. Yet total
uranium-235 supply does not satisfy current
world demand.
Uranium oxide product (U3O8) cannot directly
fuel nuclear reactors without reprocessing. Only
0.7% of U 3O 8 is fissile. The proven reserve of
uranium-235 is surprisingly limited at about 7.6
million tonnes (2015 estimate). If nuclear energy
were to supply the total world primary energy

84

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consumption of 2008, the U3O8 reserve would lastless than 8 years (Nuclear Energy Agency, 2016).
Under these limiting circumstances, supportersof nuclear power generation have been trying toestablish a fast breeder reactor that uses Mixed
Oxide consisting of Plutonium dioxide andUranium dioxide. But developing a commercial
fast breeder reactor involves four phases: (i)experimental reactor; (ii) prototype reactor; (iii)
demonstration reactor; and (iv) commercial
reactor. Japan, for example, has only reached thesecond phase of such development, thenabandoned the plan for the Manju breeder andstarted its decommissioning in 2016. Overcoming
this barrier to energy substitution seems unlikely
in the foreseeable future.
A third barrier to smooth substitution in theenergy sector concerns solar PV. Direct use ofsolar energy such as PV systems is considered to
be a good candidate for a globally available
renewable primary energy source to substitutefor fossil. PV installations based on first
generation multi-crystalline silicon wafer-basedsolar cells represents the most widely adopted
technology worldwide, with a market share ofabout 95% (Fraunhofer Institute for Solar Energy
Systems, 2018). Indeed, despite development of
second generation (thin-film) and third generation
solar cells, the share of crystalline silicon waferbased solar cells holds firm with no apparent signof decline.
Silver is used in a specialized paste for thecontact metallization of silicon wafer-based cells.
Although the decrease of silver consumption percell has been remarkable in recent years, down to
36 mg/W on average in commercial technologies
in 2014, in the case of a solar PV deployment tocover 30% of the current yearly global electricity
demand (4.6TW of new installations), the total
silver usage could reach 33% of the currently
estimated world silver reserves (Lo Piano andMayumi, 2017). The silver requirement for alarge-scale electricity generation by PV systems
is a formidable problem and again challenges theprinciple of substitution that is central to theoperation of CBA.

is justified in conventional economics. The
superiority of money is supported institutionally

3.3 Discounting
A third tenet of CBA, and hence of thecalculation of the social cost of carbon, is thenotion of discounting. It is customary to calculate
the present monetary value of an investment
without considering the origin or justification of
discounting.
Unlike all other material objects, money defies
the first and the second laws of thermodynamics.
Defying the first law, money can be created out of
nothing by national banks and financial agents.
Defying the second law, money does not decayfunctionally, even though the physical structureof a coin, for example, decays. Every material
object has a material structure, i.e. a structuralcomponent and every material object has aparticular purpose for use, i.e. a functional
component . As the structural component of amaterial object decays due to the second law ofthermodynamics, its functional component also
decays. The material object becomes unsuitable
for the particular purpose for which it was
originally intended (Mayumi and Giampietro,2018). However, money is different. Even if its
physical structure decays, money still functions
as its originally intended purpose. As US law
stipulates:“Lawfully held mutilated paper
currency of the United States may be submitted
for examination in accord with the provisions inthis subpart. Such a currency may be redeemedat face value if sufficient remnants of any
relevant security feature and clearly more than
one-half of the original note remains” (Legal
Information Institute, 2017). A decayed banknote
still functions as a banknote.
Thus, the function of money does not changeover time. A qualitative gap expands asmoney maintains its original purpose whilematerial objects lose original purpose. Only
money grows quantitatively over time as interest
emerges. In this way, discounting monetary value

and legally, allowing the owner of money todictate in principle the timing of transactions
with people who have to sell goods in order tolimit structural decay of those goods.
Money is usually regarded as the wealth of anindividual. Money is also a debt for the wholecommunity because money entails a promise to
pay the bearer in term of existing goods or the
production of future goods. Consequently, money
puts the whole community into long-term
biophysical debt. Economic production entails a
deficit in terms of entropy (Georgescu-Roegen,1971) because useful energy and materials arec o n s u m e d i r r e v o c a b l y, r e s u l t i n g i n f e w e r
exhaustible resources remaining. Therefore,
money has a dual nature: as a form of wealthfrom an individual perspective, but as amanifestation of debt from a communal
perspective (Mayumi and Giampietro, 2018).
Other financial assets also have such dual
nature. As used in CBA, maximizing the present
m o n e t ar y val u e r e p r e s e n t s an i n d i vidu a lperspective. Bromley (1990) properly states:“it isa value judgement for the economist to claim that
economic efficiency ought to be the decision rulefor collective action”. Considering monetaryevaluation according to an individual perspective
is not suitable for facing climate change. W. S.
Jevons (1965), a founder of conventional
economics explicitly states that discounting
should not take place. Concerning the time
horizon to be considered in conventional economic
analysis, Stiglitz (1997) declares that economic
analysis is concerned with only‘the next 50–60
years’. It must be emphasized, however, that thepower of discounting even in monetary value isremarkable. The present value of $1 decreases
over time horizon of 50 years to $0.61 at 1%
discount rate, to $0.087 at 5%, and to just $0.0085
at 10%.

NAIS Journal85

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4. An alternative way to deal with climatechangeThe risks of climate change have a number of

unique features that cannot adequately be
captured by the calculation of its economic
externality, i.e., the social cost of carbon, whether
this value is 1,19 or 1,500 euro per ton of CO2
emitted. The real challenge does not consist in
calculating the social cost of carbon in monetary
terms but in considering how to distribute therelated inter-generational and intra-generationalburdens and gains that result from climatechange in a sustainable and equitable way. As
noted by Tainter et al. (2015), there is a moremodest and practical approach to dealing withsustainability problems such as climate change
which avoids CBA and the social cost of carbon.
This approach asks four questions: (i) what is tobe sustained?; (ii) sustained for whom?; (iii)
sustained for how long?; and (iv) sustained withwhat kinds of gains and sacrifices?
Based on such an approach, four elements are
crucial for mitigating climate change:(i)reaching a constructive agreement throughdeliberation and cooperation on what should
be sustained;

allocation of resources cannot be achieved.
Second, to mitigate climate change, alternative
primary energy sources to fossil fuels are
essential, yet as shown above, nuclear energy andPV systems are not hopeful candidates. In otherwords, the smooth substitution of energy generation
assumed in CBA cannot be guaranteed. Third,
discounting the future value of money may bejustified for individual monetary decisions.
However, if the criterion of maximizing presentmonetary value is adopted for the problem of
allocating a given amount of an exhaustible
resource, for example, the physical quantity ofthat resource to be allocated for successive
periods must decrease over time. So, discounting isvery difficult to be accepted for collective
decisions. Using the social cost of carbon todetermine the long-term cost of climate change isbased on the individual perspective and thus far
from satisfactory.
It is instructive to conclude this essay with thefollowing consideration. William Nordhaus, oneof the founding fathers of the SCC and a Nobel
Prize Winner in economics, once presented an
equation for calculating the cost of climate change( )(Nordhaus,1992, 1316): (t) = 0.0133[ ]2, where3(ii) discussing seriously the local, regional andd(t) is the fractional loss of global output fromglobal distribution issues related to intragenerational and inter-generational equity;

greenhouse warming in period t . T ( t ) is thetemperature in period t , usually measured in(iii) educating ourselves in such discussions todegrees Kelvin. Because d(t) is a dimensionless

look further ahead than in most current

number, the relation does not make sense unlesseconomic analysis:

appropriate dimensions are assigned to both(iv) itemizing, as far as possible, the gains andconstants in the equation, 0.0133 and 1/3. It issacrifices that are achievable in a

depressing to see that the procedure adopted byhierarchically organized world in which

the economist to calculate the social cost ofsocioeconomic conditions are skewed.

carbon is nothing but a curve-fitting practice,■ 5. Conclusion
I have based my argument on three points.
First, scarcity in conventional economics cannot
be applied to situations such as climate change
where severe scarcity prevails. Therefore, using86

the social cost of carbon to deliver an efficient

NAIS Journal

completely ignoring the dimension of variables.
The social cost of carbon results in a formalism
nonsense (Mayumi and Giampietro, 2012).

■ Acknowledgment
I would like to express my gratitude to myfriends, Herman Daly, Silvio Funtowicz, Mario
Giampietro, Tiziano Gomiero, John Gowdy,
Shunsuke Managi, Shigeru Matsumoto, Giuseppe
Munda, John Polimeni, Jesus Ramos-Martin, vand e r S l u i j s , J o s e p h Ta i n t e r a n d H i r o k iTanikawa who gave useful comments, moral
support and reference materials. Remaining
errors are all mine.

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equilibrium for a competitive economy’, Econometrica,
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◆著者紹介

眞弓

浩三

Kozo Mayumi

京都情報大学院大学教授
京都大学工学研究科修了工学修士
京都大学経済学研究科博士（経済学）
元徳島大学教授

NAIS Journal

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