The “cost of carbon” has become a common term in the climate change ecosystem, but the nuances often get lost in the melee of decarbonization discourse. There are many uses for the term “cost of carbon”, from quantifying social impact to cap-and-trade tax systems. This discussion will focus on applying costs of carbon to identify the best use of decarbonization capital. When there are many options to decarbonize, how can the “cost of carbon” be used to minimize the price of impactful decarbonization? Below, I disambiguate the “cost” and “carbon” aspects of the cost of carbon. Then, we will recombine them in the real-world context of selecting a new personal vehicle.

We can generally understand “cost” to indicate the exchange of one thing for another. For the sake of this discussion, cost refers specifically to the per-unit dollar value for some quantity of an item or action. If a company were contemplating building a new factory to create widgets (a generic product for achieving some task), cost would represent the total dollar value required to make one widget. This would include capital costs like the upfront cost to purchase the widget-making machines, and operating costs such as the raw materials for the widget itself, the electricity bill to power the widget-making machines, labor costs for workers to operate the widget-making machines, annual property taxes on the widget factory land, and various other costs associated with manufacturing. The calculation of this cost is often performed using techno-economic analysis (also known as TEA), where you begin by defining the process for what you want to build or produce, including mass and energy balances, and then build up costs for each part of the process. You include both operating expenses and capital costs in this calculation. The result of TEA is a unit cost, or $ per widget, for the process of interest.

The next important step in understanding the cost of carbon is defining what exactly “carbon” means. At a high level, “carbon” conveys the concept of carbon footprint, or more simply, how much carbon a product or action emits. But what does this “carbon” include? Typically, “carbon” is a shorthand for carbon dioxide (CO₂), which is the most common greenhouse gas (GHG) associated with climate change.^[1] CO₂ is emitted during many modern industrial activities, such as combusting gasoline in our cars or burning coal for power. While CO₂ is the most common GHG, other gases, such as methane or nitrous oxide, similarly insulate the planet when present in the atmosphere. Some of these GHGs are better at insulating the Earth than others, and this phenomenon is described by each gas’s Global Warming Potential (GWP) value. GWPs are published by the United Nations Intergovernmental Panel on Climate Change (IPCC), which distributes periodic updates based on the best, most recent available data. The latest GWPs were published in the Fifth Assessment Report (AR5) in 2014.^[2] GWPs are specified for a given time horizon, often 100 years; this results from the fact that many GHGs will decompose over time in the atmosphere, at differing rates depending on the gas, reducing their insulating ability. For instance, methane’s GWP is 80 times that of CO₂ over a 20-year horizon, but only 28 times over a 100-year horizon. Specifying a time period thus enables incorporation of both the gas’s initial insulating ability and its decay over time. For the sake of comparing all the gases that contribute to global warming, GWPs are typically defined in CO₂ equivalents (CO₂e), which normalizes all gases relative to CO₂. “Carbon” thus represents not only CO₂, but all GHGs that have a similar planet-warming effect, normalized to CO₂e for a given period.

We discussed how TEA is used to derive unit cost, but how do we allocate carbon on a per-unit basis? The attribution of GWP to a specific process is often calculated using lifecycle assessment (LCA), which aims to assess all environmental impacts of a product or service. LCA can generate information about water impacts, particulate emissions, solid wastes, and GHG emissions. While both TEA and LCA focus on a per-unit basis, they differ in that TEA calculates cost while LCA sums GHG emissions (or other environmental impacts). Like TEA, LCA calculation requires a defined process that specifies all inputs, the lifecycle system boundary being assessed, and all system outputs. Software tools, such as Sphera or ecoinvent, provide curated, validated datasets of emissions factors for these various raw materials, energy inputs, and products, which enables the summation of emissions associated with the defined process. Ultimately, one output of this analysis will be a GWP in CO₂e normalized to a unit of product or service. Going back to the widget factory, the LCA would calculate a carbon footprint on a per-widget basis, typically reported normalized in kilograms or metric tonnes of CO₂e per widget. This carbon footprint value represents all the GHG emissions, CO_2, and others, associated with the widget’s lifecycle (cradle-to-grave).