‘Seriously flawed’: Experts clash over social cost of carbon

By Maxine Joselow | 08/24/2021 05:38 AM EST

Lord Nicholas Stern and then-Fed Chair Janet Yellen speak at the British Academy in 2017. Stern says the U.S. should move past the social cost of carbon. AP Photo/Frank Augstein

An academic debate over a key metric for greenhouse gases is heating up, just as a high-profile courtroom battle is scheduled to begin.

Prominent economists are clashing over the Biden administration’s approach to the social cost of carbon, which assigns a dollar value to the harm caused by 1 metric ton of greenhouse gas emissions.

The feud comes as a federal court is slated to hear oral arguments tomorrow in a lawsuit brought by Republican state attorneys general over President Biden’s plans to increase the social cost of carbon.

"There’s a conversation going on in the economic world," and in the courts, about the crucial climate metric, said Hana Vizcarra, a staff attorney at the Environmental & Energy Law Program at Harvard Law School.

The dispute kicked off on Friday when a prominent group of economists published a paper in Science magazine titled "Keep climate policy focused on the social cost of carbon."

Led by Joseph Aldy, a professor of public policy at the Harvard Kennedy School and a former environmental aide to President Obama, the economists warned against shifting away from the social cost of carbon in U.S. climate policy.

"[A] shift from use of the SCC and cost-benefit analysis to an alternative approach for evaluating policy that focuses on costs alone would be misguided," they wrote. "Rather than advocate for alternative approaches, now is the time to support efforts to update the SCC and its application to official climate policy evaluation."

The paper was a direct rebuke of recent conclusions by two of the world’s leading climate economists: Nicholas Stern, who chairs the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, and Joseph Stiglitz, a Nobel laureate and a professor at Columbia University.

In a February report, Stern and Stiglitz wrote that instead of using the SCC in cost-benefit analyses, the Biden administration should embrace an alternative approach that’s more commonly used in the European Union and the United Kingdom (Climatewire, March 9).

Under the alternative approach, the Biden administration would set a specific policy goal, such as reaching net-zero greenhouse gas emissions by 2050, and then evaluate the most cost-effective methods of reaching that target.

"With my co-authors, we have some strong reservations about that [approach]," Aldy said in an interview with E&E News. "We think it’s critically important to inform the public and decisionmakers of the benefits and costs of the actions that are being undertaken, and this approach completely ignores the question of benefits."

In an email to E&E News, Stern countered that he thinks the arguments in the Science paper are "seriously flawed."

Stern referred further questions to Stiglitz, who he said is "closer to the U.S. discussion." Stiglitz wasn’t immediately available for an interview.

Carbon in the courts

Meanwhile, in Missouri, legal foes of the social cost of carbon are poised to have their day in court.

Judge Audrey Fleissig of the U.S. District Court for the Eastern District of Missouri is scheduled to hear oral arguments tomorrow in Missouri v. Biden, in which 13 Republican-led states are suing over Biden’s plans to increase the social cost of carbon.

Fleissig, an Obama appointee, will consider a motion from the red states that asks the court to block Biden’s plans through a preliminary injunction. The judge will also weigh a memorandum from Biden’s Justice Department that urges the court to toss out the lawsuit.

Led by Missouri Attorney General Eric Schmitt (R), the 13 states originally filed their complaint in March (E&E News PM, March 8). It challenged the legality of Biden’s Jan. 20 executive order on climate change, which created an interagency working group tasked with recommending an interim social cost of carbon within 30 days — and a final social cost of carbon by January 2022.

The working group has already endorsed an interim number of $51 per ton. Under former President Trump, the figure had fallen to as little as $1 per ton.

The final metric under Biden could be even higher. It will be used in cost-benefit analyses underpinning a host of major rules, such as EPA’s emissions standards for coal-fired power plants.

Vizcarra of Harvard Law School said she thinks the states’ lawsuit is premature because it targets the interim social cost of carbon, which has yet to be finalized or incorporated into regulations.

"There are some procedural hurdles you have to get through to make a case ripe for judicial review," Vizcarra said. "And I think the AGs are going to have a hard time showing that this is the right time and place for the court to get involved."

Chris Nuelle, a spokesperson for the Missouri attorney general’s office, pushed back on the notion that the complaint was premature.

"Using the ‘Interim Values’ published by the Interagency Working Group, our Office did an analysis based on annual emissions and found that the ‘social costs’ related to those greenhouse gases amounted to billions, potentially trillions, in costs that would be offset by federal agencies through expansive regulations," Nuelle said in an email to E&E News.

"It’s easy to see how these ‘interim values’ represent a blank check handed to federal agencies to issue regulations as they please, which is why we had to take immediate action," he said.

Discount rates

Another debate flaring over the social cost of carbon — both in academic circles and in court — is whether to tweak a wonky tool called a discount rate.

For decades, economists have used the tool to predict how the value of money declines over time due to inflation and other factors. Under a 3% discount rate, for instance, a dollar today would be worth 97 cents in a year.

When crafting climate regulations, federal agencies use discount rates to represent the value of avoiding future harms due to global warming. The lower the discount rate, the more value is placed on spending money today to prevent harms to future generations.

The Obama administration used a standard 3% discount rate, resulting in a social cost of carbon of $52 per ton. The Trump administration often relied on a 7% discount rate, resulting in a figure of as little as $1 per ton.

Two high-profile economists — Tamma Carleton of the University of California, Santa Barbara, and Michael Greenstone of the University of Chicago — argued in a recent paper that the Biden administration should use a discount rate of 2% to justify a social cost of carbon of $125 per ton.

But in their lawsuit, the Republican attorneys general expressed concern that "the task of selecting a discount rate is highly indeterminate" and "speculative." They added that a lower discount rate could justify costly new climate regulations that affect every American.

"The use of such numbers necessarily entails a great expansion of the scope and reach of the federal government’s regulatory power, reaching into every aspect of everyday life," they wrote.

Matthew Kotchen, a professor of economics at the Yale School of the Environment and a co-author of the paper in Science, said the Biden administration still appears likely to embrace a lower discount rate to support a higher social cost of carbon.

"People make the moral argument that we should be using a lower discount rate to place a higher value on protecting future generations," he said. "But even if you don’t add the ethical argument and you just look at the economic argument, you still get a lower discount rate."

Vizcarra said the Republican attorneys general may have intended the suit as a messaging tool to signal that red states are resisting Biden’s early moves on climate.

"There’s likely to be some grandstanding" at the oral arguments tomorrow, which begin at 1 p.m. local time in St. Louis, she said.

Members of the public can tune in via the court’s YouTube channel.

This story also appears in Energywire.