Contributing to climate change is once again expensive — at least in the eyes of the federal government.
That’s after the Biden administration on Friday raised the social cost of carbon to about $51 per ton. The figure factors into a wide variety of policy decisions including EPA regulations and government spending.
The move dramatically raises the value of carbon, which had fallen to as little as $1 under President Trump. The figure used by Biden mirrors estimates from the Obama-era, when it was $50 a ton. And it stands to go higher in January after the administration completes a comprehensive overhaul of carbon’s value.
In a post on the White House’s blog Friday, White House Council of Economic Advisers member Heather Boushey said the new figures would enable agencies to "immediately and more appropriately account for climate impacts in their decision-making while we continue the process of bringing the best, most up-to-date science and economics to the estimation of the social costs of greenhouse gases."
The new interim figures are likely to appear in actions the Biden administration takes in its first year, including EPA draft rules for automobiles and oil and gas infrastructure, along with leasing programs and government procurement decisions. They’ll balance out the cost of regulation, arguing for more stringent efforts to address global warming.
For now, the Biden administration hasn’t made any changes to the Obama administration’s last 2016 figures beyond updating them for inflation. Friday’s announcement came after a one-week delay — the president’s day one executive order set a deadline of Feb. 19 for the release of the new interim figure. That caused some experts to speculate the interagency working group responsible for the figure was weighing more significant changes.
Ultimately, the Biden administration used the Obama-era formula for a central social cost of carbon for 2020 of $51 a ton, with methane and nitrous oxide, which both pack a stronger climate punch than CO2, at $1,500 a ton and $18,000 a ton in 2020, respectively. These would rise to $85 a ton for CO2, $3,100 a ton for methane and $33,000 for nitrous oxide by 2050 as damage from warming is expected to progress.
These social cost figures replace the $1-to-$7-per-ton CO2 values and $55-per-ton methane value of the Trump administration, which were produced by ignoring all climate damages that occur outside the continental United States.
More changes ahead?
Friday’s White House announcement also signals the Biden administration plans to reconsider the federal government’s two-decades-old benchmark for how it weighs expenditures today against the value of avoiding suffering and damage in the future — which could deliver far more sweeping changes to the social cost figures next year.
"Research, such as our understanding of the appropriate approach to discounting, has advanced rapidly over the past few years and we are collecting dedicated public comment through an upcoming Federal Register notice on how to improve our approach," Boushey wrote in her blog post Friday.
A more detailed technical guidance that accompanied the announcement showed that a 3% discount rate is still the basis for the interim figures. That rate comes from a 2003 White House Office of Management and Budget directive providing guidance for all government cost-benefit analyses that, like climate rules, pertain to consumption.
The George W. Bush administration picked 3% because in the years before OMB issued its Circular A-4 directive to standardize cost-benefit analyses, that was the yield 10-year U.S. Treasury bonds commonly delivered. Two decades later, Treasury yields are persistently much lower than that. Stock markets tumbled last week because the 10-year Treasury yield spiked above 1.6% for the first time in a year, worrying investors that higher mortgage and borrowing rates might be on the horizon.
And the lower the discount rate, the higher the social cost of greenhouse gases because less of a premium is placed on avoiding spending in the near term for benefits that will be realized in the future. The Trump administration arrived at its low figures not only by taking an "America first" approach to climate damages abroad, but by looking at both 3% and 7% discount rates — with the lowest values associated with the highest discount rates.
Cost-benefit experts have long said the use of a 3% discount rate for cost-benefit analyses is due for a review because it no longer represents a risk-free return on investment. And President Biden in a separate Inauguration Day executive order directed OMB to review how it conducts regulatory oversight, including standards for cost-benefit analyses.
Even experts who advocate lowering the discount rate for the social cost of carbon say the interagency working group — chaired by OMB, the White House Council of Economic Advisers, and the Office of Science and Technology Policy — was right not to get out in front of that more comprehensive review when issuing the interim figures last week.
"There needs to be a consistency between the approaches used for the social cost of carbon and other regulatory actions," said Richard Newell, president and CEO of Resources for the Future and a co-chair of a 2017 report by the National Academies of Sciences, Engineering and Medicine on how the social cost figures should be updated and maintained. Lowering the discount rate for the social cost of carbon only and not for regulatory analyses more generally, he said, "would be a mistake and would actually open the estimates to criticism for inconsistency," including in the courts.
But in her blog post Friday, Boushey hinted the interagency working group might look beyond the Treasury bond yield to take account of other factors in valuing the avoidance of climate damage.
"As this process proceeds, we are committed to engaging with the public and diverse stakeholders, seeking the advice of ethics experts, and working to ensure that the social cost of greenhouse gases consider climate risk, environmental justice, and intergenerational equity," she wrote.
Environmental justice
Environmental scientists including Michael Greenstone, who co-chaired Obama’s interagency working group that constructed the social cost estimates between 2010 and 2016, say the formula should be broadened to take into account damage done to vulnerable and overburdened communities that are likely to suffer disproportionately from climate change.
Other climate economists agree.
"The impacts of climate change affect some people much more than others," noted nine economists in a list of recommendations for the social cost of carbon published in Nature two weeks ago. "Rich individuals might lose more money but be able to withstand the change, whereas a loss of $1,000 might mean homelessness to a poorer person."
Gernot Wagner, a climate economist at New York University’s Department of Environmental Studies who was lead author of that article, said next year’s social cost estimates and OMB’s broader work to modernize regulatory review practices should both consider ethical judgments when setting discounts for regulations and other public decisionmaking, rather than have that important input be "simply something you read off of Treasury bonds."
Social cost figures support an administration’s agenda, from the regulations it writes to the way it spends public funds.
"As the government undertakes actions to address climate change and to reduce greenhouse gas emissions, one of the important inputs to those decisions is looking at the benefits of those actions and how much is that worth to society," said Newell. "And that’s what the social cost of carbon does. It puts a multitude of different damages that society is facing and will face from climate change into a monetary metric."
Whether a social cost figure actually helps to determine the stringency of a rule or the fate of a public infrastructure project — or whether it merely appears in a press release — depends on the statutory limitations Congress has placed on a federal agency in a given law.
Some laws don’t allow an agency to set standards based on an analysis of costs and benefits.
Take Title I of the Clean Air Act, which directs EPA to set limits to hazardous air pollutants to protect human health. Congress gave EPA no ability to base those protective standards on costs and benefits for fear that needed public health safeguards would be overridden because industry balked at the costs.
That prohibition was confirmed by the Supreme Court in its 2001 decision in the case of Whitman v. American Trucking Associations Inc. So, while a social cost of carbon would likely appear in the regulatory documents for a new National Ambient Air Quality Standard because a tighter standard would deliver climate co-benefits, it would play an informational role.
Other sections of the Clean Air Act require EPA to consider costs and benefits in setting standards — though precisely how to do that has sometimes been controversial. The Trump administration attempted to codify more consideration of compliance costs as part of a rule it finalized in December that is now under review.
But for the most part, the cost-benefit methodology has been set by executive orders implemented by OMB.
"That kind of parallel world has existed really since the Reagan administration, which is why you see so much talk about the benefits and costs of federal rules when EPA issues one or when EPA proposes one," said John Walke, clean air director for the Natural Resources Defense Council. EPA’s ability to show that it used a credible cost-benefit analysis in its rulemaking can help it defend a rule in court, he noted.
The Trump administration’s lower social cost of methane helped it repeal Obama-era rules for new oil and gas infrastructure. The Obama EPA estimated its rule would save society $2.7 billion in social costs from avoided methane leakage, while the Trump administration’s social cost figure brought that benefit down to $933 million, changing the cost-benefit calculation.
The Trump EPA’s replacement rule, which removed direct regulation of oil and gas methane, did not survive court challenge.
The methane rule was one of half a dozen petroleum-sector standards the Trump administration targeted for repeal largely based on its change in social cost estimates, a Resources for the Future analysis found.
"We found that the social cost of carbon that you use, whether you use the global social cost of carbon or the domestic social cost of carbon, was determinative in whether the benefits exceeded the cost of repeal or the costs exceeded the benefits," said Alan Krupnick, a senior fellow with Resources for the Future and one of the authors of that report. "So it’s a critical parameter, certainly for rules where greenhouse gas reductions are a major source of the benefits."
But beyond their use in regulation, Newell said, social cost figures could prove particularly influential in government procurement decisions where agencies are required to balance benefits and costs, and in setting royalty rates for fossil fuels leasing on federal lands.
States might also adopt federal social cost figures for use in their programs, Newell said, as New York did with zero-emissions credits for production of clean power.
"There are cases where the social cost of carbon is in fact the number that you see in the policy rather than just being an input to the decisionmaking process," he said.
