Using 2020 as a baseline and a 3 percent average discount rate (explained further below), the IWG calculated the Social Cost of Carbon at US$51/metric ton (mt), the Social Cost of Methane at US$1,500/mt, and the Social Cost of Nitrous Oxide at US$18,000/mt. This represents a dramatic reversal in the federal government’s valuation of the impacts of climate change, as under the prior Administration these social costs were set at essentially insignificant levels.
The revised SC-GHG valuations, and the revised calculation of the Social Cost of Carbon (SCC, also SC-CO2) in particular, will have far-reaching impacts on both federal and state-level regulatory actions, including the crucial cost-benefit analyses that government agencies undertake as part of permitting and rulemakings, among other things. The above values are interim measures and further evaluation is expected this year, including the opportunity for public comment, leading to a more comprehensive update to be issued by January 2022.
The Social Cost of Carbon explained
Although the recent Biden Administration announcement addresses the entire SC-GHG—and puts prices on emissions of carbon dioxide, methane, and nitrous oxide—this alert focuses primarily on the SCC. The SCC, as explained below, was created in 2008 and has been used in a variety of agency rulemakings and other actions. The Social Cost of Methane and Social Cost of Nitrous Oxide metrics were formulated in 2016 under the Obama Administration and created a broader SC-GHG framework. However, most of the discussion historically and today centers on the SCC, which addresses carbon dioxide, the most prevalent greenhouse gas in our atmosphere today that is linked to human activity.
The SCC is an estimate that attempts to quantify the long-term economic damage that results from a 1 metric ton increase in carbon dioxide in a year, and is established by the IWG. It monetizes the future cost of carbon dioxide and other greenhouse gas emissions, discounted to today’s value, to aid regulatory agencies in their cost-benefit analyses. The SCC has historically been used by both federal and state regulatory agencies to evaluate regulatory options and aid decision-making. Key IWG issuances are the “Technical Support Documents” that set forth the costs of various greenhouse gases under certain discount rates and other factors.
The initial valuation of the SCC came in response to a 2008 Ninth Circuit decision that upheld challenges to the National Highway Traffic Safety Administration’s (NHTSA) fuel economy standards. The Petitioners in that case argued that NHTSA failed to properly assess the costs and benefits of its new standards by failing to consider carbon emissions in its rulemaking. The Ninth Circuit held that, while it may be difficult to place a value on the cost of carbon, there does exist an associated cost and that cost is “certainly not zero.” Ctr. for Biological Diversity v. NHTSA, 538 F.3d 1172 (9th Cir. 2008). This case established the regulatory need for, and prompted the development of, the initial SCC valuations.
The Obama Administration established the IWG, which uses various models and data to develop a new methodology to estimate the SCC. The estimate for the SCC was updated three times over the course of the Obama Administration, and was estimated at roughly US$36 per metric ton by the end of his Presidency, presuming a 3 percent average discount rate.
The estimate itself can vary depending on the parameters used in the models, including, for example, whether the impact of carbon dioxide emissions is considered on a global scale or only domestically, what average discount rate is used, and whether intergenerational impacts are taken into account.
The SCC dismantled under Trump and reinstated under Biden
Soon after former President Trump assumed office, he dismantled the IWG and the SCC plummeted to between US$1 to US$6/mt under his Administration, which meant that it was not a significant factor in agency regulatory activities. The Trump Administration’s analysis focused on domestic climate change implications, largely ignoring effects outside the United States as well as certain effects on future generations. Furthermore, the Trump Administration used a discount rate as high as 7 percent. The higher the discount rate used, the less society would pay today to avoid future harm associated with carbon emissions.
In one of many Executive Orders issued on his first day in office, President Biden reinstated the IWG. The IWG then published a Technical Support Document on February 26, 2021, that provides justification for using the Obama-era SCC—as well as the Social Cost of Methane and Social Cost of Nitrous Oxide—calculation methodology. Using the Obama-era SCC today results in a US$51/mt estimate after inflation adjustments (when using a 3 percent average discount rate and 2020 dollars, although the reinstated IWG indicated that a 3 percent discount rate may be too high). The Biden Administration plans to again consider the global implications of federal actions on greenhouse gas emissions and use a lower discount rate than that adopted by the Trump Administration.
How is the SCC used?
The SCC is a powerful tool that can be used to shape regulatory decision-making for federal and state agencies or to challenge the cost-benefit analysis used to support regulatory actions. It has been used to justify actions across the federal government, including by the Environmental Protection Agency (EPA), the Department of Energy (DOE), and the White House Council on Environmental Quality (CEQ). Some examples of federal rulemaking that have used the SCC estimate include national emission standards for hazardous air pollutants, light-duty vehicle emission standards and Corporate Average Fuel Economy standards, and DOE efficiency standards.
The SCC was also used to justify both the Clean Power Plan (CPP) and its replacement, the Affordable Clean Energy (ACE) Rule. The CPP was a 2015 rule that placed limits on carbon pollution from U.S. power plants, with a goal of cutting 30 percent of carbon pollution from the power sector by 2030. While the cost of the plan was as much as US$8.8 billion annually, the CPP was estimated to provide climate and health benefits of up to US$93 billion per year in 2030. To justify the CPP, the EPA used SCC estimates from the IWG to value the benefits of carbon reduction from the plan. However, the Trump Administration repealed this rule and instead enacted the ACE Rule, which relied on the much lower Trump-era CPP estimate. The lower CPP lessened the monetary value of the reduction of carbon pollution and justified a more lenient rule regulating power plant pollution. The U.S. Court of Appeals for the District of Columbia recently vacated Trump’s ACE Rule.
However, the SCC is not just a tool for federal rulemaking, as many states have also applied the estimate to their cost-benefit analyses and regulatory actions. According to a 2019 study by the Government Accountability Office that analyzed states’ use of the SCC, nine states were identified as using the Obama-era SCC estimates, with no states identified as using an alternative valuation. Examples of ways in which states have used the SCC include the California Air Resources Board’s use of the SCC when evaluating policy options related to its 2030 CO2 emissions target, and the Minnesota Public Utility Commission’s adoption of a mandate that utilities use an SCC estimate in their integrated resource plans.
The significance of the SCC for states is illustrated by the New York Public Service Commission (NYPSC) Clean Energy Standard (CES) that created a market for carbon dioxide reductions. The CES was established in 2016, as part of setting the goal of obtaining 50 percent of New York State’s electricity generation from renewable sources by 2030. One component of the CES is the Zero-Emissions Credit (ZEC) program, which provides credits to certain nuclear power plants in the state for a period of twelve years to help prevent their shutdown and the resulting increase in carbon emissions. The program recognized the role nuclear generation plays in combating climate change and used the SCC to help determine the credit value of the ZECs. For one nuclear plant, the ZEC program was estimated to pay about US$125 million annually, but this figure pales in comparison to the potential benefit of nuclear plants in reducing future carbon emissions when measured using the SCC.
By using the SCC to place a monetary value on carbon dioxide emissions, the NYPSC was able to quantify the value of carbon emissions avoided by nuclear plants. This program was challenged and upheld by the U.S. Court of Appeals for the Second Circuit in 2018. A similar program in Illinois was also upheld in 2018 by the Seventh Circuit.
And this is just the start. Under the new Administration, the SCC is expected to be an important factor in every agency action that requires a cost-benefit analysis and involves an environmental impact. As the SCC becomes a routine part of federal decision-making, courts and states will likely turn to it more in evaluating environmental impacts of planned actions and in evaluating climate programs.
When the Obama IWG first developed the SCC, some argued that the integrated assessment models the IWG relied upon were flawed and based on too many uncertainties. They argued that changing certain assumptions (e.g., discount rate, climate sensitivity, time horizon, etc.) in the models would result in drastically different results, demonstrating excessive malleability in the SCC determination. Additionally, there was concern that the IWG failed to follow the OMB discount rate guidelines for the cost benefit analysis.
On the other hand, some argued that Obama’s SCC metric did not go far enough and failed to consider the full range of effects of climate change, including impacts related to extreme weather such as forced migration. The New York State Department of Environmental Conservation issued guidance last year that set the SCC at US$125 per metric ton. These same arguments, and others, are likely to resurface as the Biden Administration considers its next steps and as federal agencies begin to promulgate rules and regulations using the SCC.
We can expect litigation challenges from both those who believe the SCC has been set too high and those who believe it has been set too low. These challenges will likely arise in disputes over the validity of regulations that rely on the SCC in their cost-benefit analyses. It may be difficult for the courts to displace the judgments of the experts as to exactly where the SCC should be set, but the IWG is both engaging climate experts and inviting public comment.
Since the SCC will likely be used in shaping a wide range of regulatory actions across different agencies and sectors, interested stakeholders should consider providing input. We can expect that all aspects of the SCC—as well as the Social Costs of Methane and Nitrous Oxide—will be on the table for the January 2022 update, including discount rate, methodologies for calculating the cost, and how the estimates should be used by agencies and other stakeholders. The notice detailing requests for public comment will be published in the Federal Register soon.
Authored by Amy Roma, Mary Anne Sullivan, Jennifer Adams, Sachin Desai, Rob Matsick, and Juliya Grigoryan