Review of DEFRA paper: “The Social Cost of Carbon and the Shadow Price of Carbon: what they are, and how to use them in Economic Appraisal in the UK”

This paper sets out my comments on DEFRA's new guidance on how to price greenhouse gas emissions – 'carbon' for short – into economic appraisal in the UK. The DEFRA paper begins by drawing a distinction between the social cost of carbon and the shadow price of carbon for use in government economic appraisal in the UK. While the terminology is confusing, this is an improvement on previous guidance, because it correspondingly draws a distinction between setting overall government policy on greenhouse gas emission reductions (by how much and when?), and internalising the cost of emissions in what we might call 'everyday', or marginal, applications of economic appraisal. This liberates the discussion from more fundamental debates about the social cost of carbon and its role in formulating policy (see comments by Barker and Ekins on previous reports commissioned by DEFRA), and leads to the following observations: • For the purposes of 'everyday' policy and project appraisal, the most important objective is to be consistent with the overall policy of the UK government on greenhouse gas emission reductions; • If present government guidelines on appraisal encourage cost-benefit analysis, then the shadow value of emissions must be estimated, or else the implications of a particular investment for climate change will not be taken into account. Any further fundamental