The Social Cost of Carbon

A requirement for cost/benefit analyses of federal rules has created — without any real public input — a very important number in deciding what to do about greenhouse gases.
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A requirement for cost/benefit analyses of federal rules has created — without any real public input — a very important number in deciding what to do about greenhouse gases.

While federal climate legislation ground to a halt in July, the U.S. government began regulating carbon dioxide through the Environmental Protection Agency's mandate to uphold the Clean Air Act. CO2, a so-called greenhouse gas, was declared an "air pollutant," which therefore fell within the EPA's regulatory reach.

Whether this has any meaningful impact turns on a little-known data point called the "social cost of carbon." It is, says economist Frank Ackerman, "the most important number you've never heard of."

The social cost of carbon, or SCC, is the value in today's dollars of the stream of damages caused by adding one metric ton of CO2 into the atmosphere; a ton is the amount a typical family car will emit every 10 weeks. The SCC figure adopted last February by an interagency working group is $21. The value has already been applied to standards for fuel efficiency and tailpipe emissions. It will be figured into any carbon mitigation strategy, whether cap and trade, cap and dividend or carbon tax.

Why is this particular number so important? It establishes "how much you should be willing to spend to get rid of a ton of CO2,"said to Robert O. Mendelsohn, the Edwin Weyerhaeuser Davis Professor of Forest Policy at the Yale School of Forestry and Environmental Studies. A high SCC tells regulators and decision makers that removing one ton of CO2 from the atmosphere has significant value. A low SCC justifies doing nothing — or at most very little.

Here's the catch: that $21 — roughly 18 cents per gallon of gas — has slipped into our regulatory apparatus unannounced and without public debate.

"A decision was made through the interagency task force with almost no one knowing that it was happening," says Ackerman, who works with the Stockholm Environmental Institute and is based at Tufts University. "There's no office that claims credit, no website that explains anything about it. This crucial number, which turns out to be the fulcrum for climate policy, was decided in secret by a task force with no names attached to it."

The working group determining the SCC did see participation by executive branch entities including the Council of Economic Advisers, the Office of Management and Budget, the Council on Environmental Quality, National Economic Council, Office of Energy and Climate Change, and Office of Science and Technology Policy. Agencies that actively participated included the Environmental Protection Agency and the departments of Agriculture, Commerce, Energy, Transportation and Treasury — but no outside organizations.

Jonathan Masur, a professor at the University of Chicago Law School, co-authored a legal study on climate regulation and cost-benefit analyses when he stumbled upon the fact that "the government is in effect regulating carbon" through the SCC. He says that in presenting the paper, "very few audiences have heard of the social cost of carbon report, even in the academic community."

He says "the sensible thing to do would be to have a national discussion on how to price carbon," but he wonders if the Obama administration deems this discussion "politically impossible or politically dangerous." Inherent in the SCC number are moral and diplomatic judgments as well as scientific and economic uncertainties, he says. Therefore, it reflects "some very political decisions that are probably best made in a political way by political actors. But these were made very quietly in a room among agency heads and economists." There was a time for public comment, reported six EPA economists, but it came during discussions about rules for fuel economy and emissions related to the Clean Air Act, and not during a specifically designated climate process.

Slipping past the radar was not the intent, according to Michael Greenstone, an environmental economist at the Massachusetts Institute of Technology and part of the interagency process. As he told the EPA last November, "The process was initiated in 2009 and completed in February 2010. It aimed to develop a defensible, transparent and economically rigorous way to value reductions in carbon dioxide emissions that result from actions across the federal government.

"Specifically, the goal was to develop a range of SCC values in a way that used a defensible set of input assumptions, was grounded in the existing literature and allowed key uncertainties and model differences to transparently and consistently inform the range of SCC estimates used in the rule-making process."

An indication of the political anxiety surrounding the process, Masur says, was that of several figures considered, the group chose the middle one. "They had to pick one, and that seems like a compromise," he says. "There's no reason to believe that the middle number represents the best estimate."

In Ackerman's view, not only is the $21 middle-ground number not appropriate, the figures considered were based on models that drew on "dated economics based on shoddy analyses that ridiculously lowball the damages of climate change." For example, some odd assumptions were figured in, including that modest temperature rise will lower mortality and that developed nations can adapt to warmer temperatures at minimal cost.

Ackerman says the models chosen to look at were arbitrary: "Some used research from the 1990s, before as much was known about climate change. It's a closed world of fairly conservative economic modeling which doesn't square with growing concern about climate change." He notes that the United Kingdom uses a similar measure, the "shadow price of carbon," which is incorporated into regulatory and planning processes. It is about four times the $21 used here.

Another problem, Ackerman says, is the discount rate — a tool that allows economists to track costs over time. A high discount rate implies that what happens years from now should have less bearing on decisions made today. The interagency group analyzed rates between 2.5 percent and 5 percent, and settled on 3 percent.

The choice of discount rate makes a philosophical statement, Ackerman says. "It expresses how much we're focusing on future generations," he says. "With a lower discount rate, you're taking the future more seriously. A higher discount rate puts our comfort today above that of future generations. Do people in the future have a right to a livable earth? If so, you should have a discount rate of virtually zero."

Another problem is that the $21 figure does not account for the possibility of catastrophic climate change, what happens if we tip the tipping point. In climate modeling, this is called the "fat tail," reflecting what it looks like on a chart: the probability of a large temperature rise — say, 6 degrees centigrade — slopes downward on the right side of the graph but very slowly, hovering well above zero. The estimates used did not address sudden climate disruption; the "fat tail" was simply lopped off. As a result, the data was skewed toward modest or minimal climate effects.

If worst-case outcomes were considered, the SCC would be significantly higher. And wouldn't that reflect what many people would choose: to devote more resources to avoid a dire scenario, rather than pretend that dire scenario isn't within the realm of possibility?

What happens is that a subjective decision gets made — such as hacking off that inconvenient tail — and that choice flows through the process, affecting every calculation, with significant implications for climate policy. For example, one model used by the group asserts that optimal global average temperature is well above what it is today, which is not the mainstream view.

In our conversation, for example, Mendelsohn said that with a 1.5-degree temperature rise, "the good things will offset the bad things so that the net effect is small. For example, forests would like a small increase of CO2, temperature and precipitation. That's a happy story for plants-a world they would vote for." (Whether they would vote for the much greater rise expected is a different matter.)

The current SCC figure is a placeholder. However, Masur says, this is all we've got to bring into international negotiations. "Anything the U.S. does should be in the service of broad international agreement," he says. The agencies that worked on the SCC weren't addressing this, he says, as they don't have expertise in this area.

The other problem, Masur says, is that Congress may regard its adoption as an endorsement. And this fallback number gives the impression that we don't need to do much about our rate of CO2 emissions. Which is not at all what climate science is telling us.

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