The “social cost of carbon” is super wonky—and hugely significant
BY JAMES STEINBAUER | MAR 22 2021
Right-wing free-market fundamentalists hate it.
Progressive policy wonks love it.
Some climate advocates say that without it the United States has little chance of getting a grip on our greenhouse gas problem. It’s been called “the most important figure you’ve never heard of.”
What’s the answer to this riddle? It’s something called “the social cost of carbon.”
The social cost of carbon is an estimate of the damages, measured in dollars, caused by an additional metric ton of CO2 released into the atmosphere. This includes (but isn’t limited to) climate-related consequences such as death and illness from extreme weather; property damage caused by hurricanes, floods, and wildfires; decreased agricultural production from drought or unseasonal rains; increased risk of violent conflicts; mass migration out of uninhabitable regions; and disruption to energy systems—very much like the one that walloped Texas in February. Plainly speaking, the social cost of carbon provides government officials with a way of calculating the price we collectively pay for unchecked greenhouse gas emissions.
After being essentially tossed aside during the Trump administration, the social cost of carbon is now making a comeback.
On February 26, while the country was focused on the COVID relief legislation making its way through Congress, the Biden administration reinstated the social cost of carbon developed under President Obama—$52 per ton of CO2 or CO2 equivalent. The Biden White House also said it was working on its own, potentially higher estimate of the social cost of carbon. Announcing the temporary estimate, Heather Boushey, a member of the Council of Economic Advisers, wrote, “This administration will follow the science and listen to experts.”
Biden has set a goal for the United States to have a “carbon-pollution-free” power sector by 2035 and a 100 percent clean energy economy with net-zero emissions by 2050. The social cost of carbon may sound esoteric, but it will likely play a crucial role in determining whether the Biden administration can meet those goals. That’s because the social cost of carbon provides a measuring stick for understanding both the damage caused by each ton of CO2 as well as how much we can save from each ton avoided. And that function, in turn, makes the social cost of carbon an essential tool for federal agencies to do the legally mandated work of conducting cost-benefit analyses for major rules and regulations—including those designed to reduce carbon emissions. The social cost of carbon is, as one pair of wonks has described it, “the straw that stirs the drink” for most domestic climate policies.
The Obama administration formed an Interagency Working Group on the social cost of carbon in the wake of the Supreme Court’s decision in Massachusetts v. EPA, which gave the federal government the authority to regulate greenhouse gases under the Clean Air Act. The working group eventually arrived at the $52 per ton of CO2 figure. It also convened a National Academies of Sciences committee to keep the estimate in line with the latest science and economics. In 2017, the NAS committee suggested replacing the existing models it was using to calculate the social cost of greenhouse gases—which experts agreed was underestimating the costs of climate change impacts—and developing a custom framework that would evolve as new science became available.
Instead, the then-new Trump administration decided to junk everything. Trump disbanded the Interagency Working Group, swept the NAS guidance under the rug, and replaced the Obama-era social cost of carbon with an economic estimate that was more in line with his “America First” doctrine. While the Obama estimate factored in the global damages caused by climate change, the Trump administration only considered damage within US borders. It set the social cost of carbon at just $1.
Trump then used this laughably low social cost of carbon to undermine Obama’s flagship climate policies, including the Clean Power Plan and automobile fuel efficiency standards. As the Trump administration raced to roll back the auto-efficiency standards in spring 2020, it claimed the economic benefits outweighed the costs of any damage caused by climate change by about $17 billion.
In reality, the proposed Trump rollbacks could likely have the opposite effect. The CO2 released by gas-guzzlers over the next few years could cause $15 billion in damages, according to research by Tamma Carleton, an economist at the University of California, Santa Barbara, and Michael Greenstone, who was the chief economist for Obama’s Council of Economic Advisers. “In the past four years,” they wrote, “the controversial and substantially lower SCC [social cost of carbon] estimates used by the Trump administration have helped to pave the way for the rollback of environmental regulations” that wouldn’t have been justified with the Obama estimate.
While the Biden administration has, so far, only reinstated the Obama-era status quo, competing forces are already battling over the figure—evidence of how important the social cost of carbon is.
In early March, 12 Republican attorneys general filed a lawsuit alleging that Biden’s efforts to update the social cost of carbon would harm industries across the country. “In practice, President Biden’s order directs federal agencies to use this enormous figure to justify an equally enormous expansion of federal regulatory power that will intrude into every aspect of Americans’ lives,” the attorneys general wrote, “from their cars, to their refrigerators and homes, to their grocery and electric bills.”
For their part, some climate action champions feel that the $52 per ton of CO2 figure is too low and could prevent Biden from meeting his environmental goals. According to a working paper published in January by Carleton and Greenstone, a more realistic social cost of carbon could be $125. And in another paper published just before the Biden administration’s announcement, Joseph Stiglitz, who chaired the council under Bill Clinton, warned that a return to the Obama estimate would amount to accepting an increase in global temperatures of 3.5 to 4 degrees Celsius. “Almost surely,” Stiglitz wrote, “the US would be committing itself not to achieve the Paris goals.
These constructive critiques raise the question, Why is it so difficult to get the social cost of carbon right? The answer mostly has to do with the fact that climate change impacts almost every aspect of human civilization. Estimating the social cost of carbon requires models that simultaneously examine the interactions between human systems—demographics, energy use, industrial activity, agricultural production—and the climate system. In other words, developing a social cost of carbon demands oversimplified versions of our entire world. “They incorporate methods from the entirety of science,” says Richard Newell, who cochaired the NAS committee that provided recommendations for improving the social cost of carbon. “Just understanding the climate requires an absolutely massive computational model. On top of that, we have to express everything in economic terms. To get an accurate social cost of carbon, we need a high-level representation of the whole system.”
This isn’t easy. The Obama-era Interagency Working Group, for example, relied on three different climate change models—two of which didn’t take into account the fact that carbon emissions are acidifying the ocean so quickly that it’s losing its ability to absorb CO2, accelerating warming. That is, the Obama era estimates were likely underestimating climate-change-related damages. “We’ve seen an explosion of well-done research that estimates the damage caused by additional warming,” said Carleton. “All that data suggests the damage will be larger.”
But even if the best, most up-to-date climate change models are used, arriving at an accurate calculation of the social cost of carbon can be frustrated by the economic side of the equation. One reason Trump was able to drive the social cost of carbon so low was because of something called the discount rate—an economics term that, in this case, basically refers to the interest rate used to calculate the present value of future happenings. Because CO2 can persist in the atmosphere for up to 1,000 years, the emissions released today will wreak havoc for centuries. While the social cost of carbon represents the damage each ton of CO2 will inflict throughout its entire lifetime, the discount rate places a lower value on the damage that happens farther into the future.
There are two rationales for this. The first is purely economic: Because societies tend to get wealthier over time, economists believe that people in the future will be richer than they are today—and one additional dollar means less to someone who has more. The second is one of priority: As a rule, people tend to care more about the present than the future. Morally, we might think this is wrongheaded—some environmentalists argue the discount rate represents just how little we care about our children’s future. Economically, it holds up—when we get a paycheck, we spend most of it now.
The discount rate is so wonky that even economists who think about it every day admit that it defies easy explanation. But the federal government uses it all the time in its analysis of long-lasting infrastructure projects: roads, bridges, even guard rails. The guidelines for federal regulatory analysis, known as the Circular A-4, suggest that policymakers employ a default discount rate of 7 percent. In the case of the social cost of carbon, the Obama estimate followed a discount rate of 3 percent. That a 7 percent discount rate was (and remains) the official recommendation of the federal government made it easy for Trump to lower the social cost of carbon to the point that it did more harm than good.
“This is where good economics and blind adherence to regulatory guidance kind of run afoul of one another,” Newell says. “The solution is to update the guidance.”
The good news is there are signs that the Biden administration is preparing to do just that. Among the batch of climate change directives that Biden signed within hours of his inauguration was a presidential memorandum calling on the Office of Management and Budget to update the guidance used by the White House to analyze the costs and benefits of regulations. It ordered “thorough revisions” of the Circular A-4.
That climate action is touching on even the most arcane and inaccessible federal policymaking so early in Biden’s term is an example of what administration officials like to call his “whole of government” approach to the climate crisis. Biden’s speedy and comprehensive push to rein in greenhouse gases has already left oil industry leaders on the defensive. His efforts to update the social cost of carbon haven’t escaped their notice—and they’re nervous. A week before the interim estimate was announced, 11 groups representing some of the country’s most extractive industries—from oil and gas to cement, steel, and lumber—sent a letter to the Biden administration angling for seats at the table as it determines a new social cost of carbon and updates the Circular A-4. “As members of the regulated community,” the letter reads, “we look forward to participating in this process.”
The Circular A-4, the discount rate, modular frameworks—it’s all a bit dizzying. But in the end, all of the policy debates and legal wrangling over the social cost of carbon can be distilled down to this: What price do we place on society’s health and well-being in the epoch of climate chaos? How valuable to us is a livable future? Surely that’s a riddle we know the answer to.
(Sources: Sierra Club)
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