The Reemergence of the Social Cost of Carbon as an Important Policy Tool in Tackling Climate Change

By Jeffrey Karp, Senior Counsel, and Pratishtha Date, Summer Associate

In January 2021, President Biden signed an executive order "Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis."[1] This order provided a clear signal that the Biden administration was recommitting the United States to climate initiatives "guided by the best science."[2] With a renewed federal focus on addressing the climate crisis, federal agencies have been tasked with "captur[ing] the full cost[] of greenhouse gas emissions as accurately as possible" in order to engage in informed decision and policy making.[3] Consequently, agencies have been examining both old and new methods of measuring greenhouse gas emissions. One such measure that government agencies have readopted is the "social cost of carbon."

In light of this reinstatement, the Environmental Law Institute (ELI) hosted a webinar at which environmental experts discussed the social cost of carbon and its use as an analytical tool in measuring climate change.[4] Carol Jones, Ph.D., a visiting scholar at the ELI, moderated the webinar and hosted four distinguished panelists working in various areas of the environmental sphere. The panelists (in order of presentation) were Ann Wolverton, Ph.D., senior research economist at the U.S. EPA, Richard Newell, Ph.D., President and CEO of Resources for the Future, Rachel Cleetus, Ph.D., policy director and lead economist of the climate and energy program at the Union of Concerned Scientists, and Steven Rose, Ph.D., senior research economist at Electric Power Research Institute.

What is the social cost of carbon?

There was consensus amongst the panelists that the social cost of carbon can be defined as a measure used to estimate, in dollars, all economic damage that would result from emitting one ton of carbon dioxide into the atmosphere. The measure indicates how much it is worth in today’s dollars to avoid the damage that is projected for the future. Ann Wolverton framed the social cost of carbon as a way for policy makers to monetize the benefits of reducing carbon emissions, allowing for environmental impact to be incorporated into cost-benefit analyses. Dr. Wolverton also noted that the calculation will always be an estimation of cost, but is "intended to be a comprehensive measure of climate change damages, including but not limited to human health, net energy demand, changes in agricultural productivity, property damages from increased flood risk, and value of ecosystem services."

Approaches to calculating the social cost of carbon

Dr. Wolverton outlined a four-step process for estimating the social cost of carbon. First, agencies create projections of future population levels and gross domestic product in order to generate a carbon emissions path. Next, the carbon emissions path informs predictions of how much the average global temperature will change. Using the mean temperature change, agencies aggregate and monetize the expected amount of damages. Finally, since damages have decades-long affects, agencies use a discount rate to apply a present value in today’s dollars. This process, when used to estimate as far into the future as 2050, reveals that "future emissions [are] expected to produce larger incremental damages as [the] economy grows, and physical and economic systems become more stressed from greater climactic change."[5]

Richard Newell followed Dr. Wolverton’s presentation by explaining Resources for the Future’s (RFF) similar, but slightly different, approach to estimation – born out of a 2015-2017 study by the National Academy of Sciences. According to Dr. Newell, the impetus for RFF’s social cost of carbon initiative came from the Trump administration’s low prioritization of improving estimation processes. Based on their study, the National Academy of Sciences recommended building an integrated framework to "unbundle" the process of social cost of carbon estimation into four modules: a socioeconomic module, a climate module, a damages module, and a discounting module.[6] RFF has been working on ways to implement each module by drawing on recent research to keep estimation processes updated.

Applying the social cost of carbon to the electric power sector

Steven Rose applauded the strides made towards improving the social cost of carbon estimation process but stressed the importance of continuous imparovement in order to truly reap the benefits of estimation in the electric power sector. Most notably, he discussed how the current processes for estimation are not scientifically reliable and substantive overarching methodological issues need to be addressed. For example, there are methodological inconsistencies related to whether net global greenhouse gas changes are factored into calculations and estimates. However, if these technical issues can be solved, Dr. Rose stated that the practical impact on the power sector could be significant. Two notable impacts that he highlighted are the ability to set energy demand standards (such as vehicle, lighting, and appliance efficiency) and the ability to set a primary energy supply (an electricity-generating commercially traded fuel stock, which at some point may be derived from renewable energy, instead of oil).[7]

Recommendations for tackling the costs of climate change

Armed with an understanding of the mechanics for how the social cost of carbon is estimated and the technical problems therein, Rachel Cleetus pivoted the discussion to emphasize that the latest science demonstrates the impacts of climate change has already cost the U.S. a billion dollars. Dr. Cleetus urgently called for the U.S. to make policy choices now, in order to determine how the consequences of climate change will unfold. In her call for action, Dr. Cleetus highlighted both the beneficial uses and drawbacks of relying on the social cost of carbon as a metric for policy making. While she acknowledged that the social cost of carbon is a "valuable metric to help determine [the] stringency of federal regulations," Dr. Cleetus also said the metric fails to account for the "cumulative legacy" of pollution on communities of color and low-income communities.[8]

Dr. Cleetus outlined nine recommendations based on the idea that the social cost of carbon should be but one tool amongst many, in a robust toolbox. Three of those recommendations stood out., as follows: First, the recommendations outlined in the National Academy of Sciences study should be continuously updated in order to maintain accurate estimates of the social cost of carbon. Second, Dr. Cleetus advocated more research be performed on the impacts of climate change felt by low-income communities, communities of color, and developing countries. The environmental impact of federal agency decisions on low-income communities and communities of color, is a major focus of the new administration’s environmental justice agenda. Finally, she highlighted the need for interdisciplinary research, between scientists, economists, and policy makers, to gather a more complete picture of the state of our climate.

Conclusion

The panelists shared their opinions on various considerations in using the social cost of carbon as a measure of the benefits in reducing carbon emissions. Care must be taken in the use of such an analytical tool for policy-making purposes. In the prior administration, the social cost of carbon was set between $1 to $7 per ton of carbon released, thus effectively communicating a negligible benefit to reducing greenhouse gas emissions.[9] This cost range imputed for the social cost of carbon was in contrast to the Obama administration’s estimate of $51 per ton released. As noted by the webinar participants, the social cost of carbon can be a useful policy tool if used properly, which includes establishing accurate metrics for measuring benefits and adjusting as appropriate.

Thus, the Biden administration’s January 2021 executive order immediately reinstated the Interagency Working Group on the Social Cost of Carbon, tasking the Group to immediately establish a realistic interim SCC. [10] In February 2021, the interim cost of carbon was set to match the Obama administration’s determination, at $51 per ton released.[11] Experts expect that once additional data are collected and analyzed the SCC will further increase.

With a cost of carbon in the $50-plus range per ton released, the Biden administration is expected to more readily be able to pursue the ambitious carbon reduction goals to which it has committed the United States.

[1] https://www.federalregister.gov/documents/2021/01/25/2021-01765/protecting-public-health-and-the-environment-and-restoring-science-to-tackle-the-climate-crisis

[2] Id.

[3] Id.

[4] https://www.eli.org/events/environmental-law-finance-series-social-cost-carbon

[5] Wolverton, Ann. Environmental Law & Finance Series: The Social Cost of Carbon. The Environmental Law Institute. 17 June 2021.

[6] Newell, Richard. Environmental Law & Finance Series: The Social Cost of Carbon. The Environmental Law Institute. 17 June 2021.

[7] Rose, Steven. Environmental Law & Finance Series: The Social Cost of Carbon. The Environmental Law Institute. 17 June 2021.

[8] Cleetus, Rachel. Environmental Law & Finance Series: The Social Cost of Carbon. The Environmental Law Institute. 17 June 2021.

[9] https://www.c2es.org/2021/03/the-social-cost-of-carbon-going-nowhere-but-up/.

[10] https://www.whitehouse.gov/briefing-room/presidential-actions/2021/01/20/executive-order-protecting-public-health-and-environment-and-restoring-science-to-tackle-climate-crisis/.

[11] https://www.whitehouse.gov/wp-content/uploads/2021/02/TechnicalSupportDocument_SocialCostofCarbonMethaneNitrousOxide.pdf?source=email.