How do the new estimates of transient climate response affect the social cost of CO2?

A new paper by Otto et al in Nature Geoscience has made an updated estimate of the transient climate response (TCR) implied by the climate change we have observed from 1970 to 2009. It finds the TCR to lie in the range 0.7–2.5 °C, with a best estimate of 1.4 °C. This is somewhat lower than an estimate based on temperatures just from the 1990s  which had a range of  0.9–3.1 °C, with a best estimate of 1.6 °C. The finding has been used by some commentators such as Matt Ridley to suggest that our policy on global warming is hopelessly misguided. But is this a reasonable conclusion?

The social cost of CO2 (SCCO2) measures the Net Present Value (NPV) of the extra damage caused by the emission of one more tonne of CO2 today.  So the SCCO2 represents the level at which we should set a tax on CO2 to internalise the impacts of climate change. So the relevant question for climate policy is, how does the new estimate of TCR affect the SCCO2?

The only way in which the  SCCO2 can be calculated is by the use of an integrated assessment model (IAM). Fortunately, I have one of the leading IAMs, PAGE09, in my possession, and I have used it with previously accepted estimates of the TCR to calculate that the mean value of the SCCO2 is about $100 per tonne of CO2.

What happens if we run PAGE09 with the updated estimate of TCR from Otto et al? The mean value of the SCCO2 goes down from about $100 to about $80 per tonne of CO2. So the price we should be charging energy users on each and every tonne of CO2 emissions is $80, about £50. As the UK’s carbon floor price is currently £16 per tonne, and that is only paid by the most energy intensive firms, we can indeed say that the new estimates of the TCR do show that our climate policy is misguided, but not in the direction that Matt Ridley believes; the new TCR estimates support a much tougher policy than the one we currently have in place.

Wonky details: The transient climate response is defined as the warming expected at the time when carbon dioxide in the atmosphere reaches double its original concentration, having increased at 1% per year, ie after 70 years. The default version of PAGE09 uses a triangular distribution for TCR with a minimum value of 1.0, a mean value of 1.3 and a maximum value of 2.8 to give a mean SCCO2 of $106 in 2010. The calculations reported here use a  triangular distribution for TCR with a minimum value of 0.7, a mean value of 1.4 and a maximum value of 2.5 and give a mean SCCO2 of $81 in 2010. All results are from 100,000 runs of the model which give a standard error of the mean SCCO2 of about $1.

Update added 10 June 2013: I have now had a chance to run PAGE09 with the TCR distribution (most likely value 1.3 °C with a 5-95% confidence interval of 0.9 to 2.0 °C) suggested in the comment below by Nic Lewis. It gives a mean SCCO2 value of $65 per tonne of CO2. Slightly lower, as one would expect, but still well above the UK’s carbon floor price.