Carbon emission values in cost benefit analyses

New infrastructure projects may affect CO2 emissions and, thus, cost benefit analyses for these projects require a value to apply for CO2. This may be based on the marginal social cost of emissions or on the shadow price resulting from present and future policies. This paper argues that both approaches are necessary, but for cost benefit analysis of infrastructure projects the latter should be the primary tool. A series of complications arise when applying this principle in practice. These are discussed in the paper. Even if the complications make the implementation of a shadow price approach difficult, we argue that the approach still is preferable to a social cost approach.

► Cost/benefit analysis CO2-value requires both a social cost of carbon and a shadow cost analysis. ► CO2-value in the cost/benefit analysis must align with the overarching climate policy. ► CO2-value should correspond to the shadow price of (current and expected) policies. ► Complications include non-transparent markets, multiple policy instruments and sectors.