The Social Cost of Carbon Returns

The Biden Administration has elevated concerns about climate change to the center of its decision-making, signaling that the emission of greenhouse gases must be severely curtailed. President Biden, beginning on his first day in office, rejoined the Paris Agreement and issued executive orders stating, among other things, that federal agencies must “immediately commence work to confront the climate crisis.” He has appointed officials to decision-making positions who have expressed their opposition to the use of fossil fuels. For an economy that currently relies heavily on fossil fuels to create low-cost energy, a “war on carbon” could cause unnecessary disruptions.

According to EPA’s Draft Inventory of US Greenhouse Gas Emission and Sinks, 1990 – 2019, the total gross U.S. greenhouse gas emissions in 2019 were 6,577.2 million metric tons of carbon dioxide equivalent. This represented a 2.0 percent increase since 1990 but a 1.7 percent decrease from 2018. The decrease from 2018 is largely due to a decrease in CO2 emissions from fossil fuel combustion, reflecting the continued shift from coal to less carbon intensive natural gas and renewables. Emissions have decreased 12.9 percent since 2005 levels.

Despite these decreases and downward trends, President Biden on January 20, 2021 issued Executive Order 13990. In it, he explained that the “social cost of carbon” is an estimate of the monetized damages associated with incremental increases in greenhouse gas emissions which represents “changes in net agricultural productivity, human health, property damage from increased flood risk, and the value of ecosystem services.” He established the Interagency Working Group on the Social Cost of Greenhouse Gases and ordered that the IWG publish an interim SCC within 30 days.

The IWG met the deadline, issuing an interim SSC in February 2021. The IWG’s SSC was generally a reinstatement of the SSC it had developed prior to being disbanded in January 2017 by President Trump. According to the IWG, the SSC is $51 per metric ton (at a three percent discount rate) which increases to $85 per metric ton in 2050. Thus, there is a cost of $51 for every metric ton of CO2 emitted in 2020. Stated another way, preventing the emission of a ton of CO2 yields $51 in societal value or benefit.

The use of an inflated SSC tends to skew a cost-benefit analysis. For example, in the Regulatory Impact Analysis for the Clean Power Plan, issued by the Obama Administration in 2015, it was estimated that the climate benefits were $2.8 billion by 2020 (at a three percent discount rate) and, when those estimated climate benefits were added to the air quality health co-benefits, the benefits vastly outweighed the estimated compliance costs. The EPA then used that analysis to justify, in part, the issuance of the rule. The addition of costs associated with the emission of carbon will likely always generate a conclusion that the societal benefits of a proposed rule outweigh its compliance costs.

More of the type of cost benefit analysis used in the Clean Power Plan is forthcoming from EPA and other agencies. EO 13990 mandates that “agencies shall use [the interim SSC] when monetizing the value of changes in greenhouse gas emissions resulting from regulations and other relevant agency actions until final values are published.” Thus, the SSC will be used in a host of regulatory determinations over the next four years to justify agency actions. Likely, the SSC will be used to hinder, delay, or deny projects involving fossil fuels. It has been difficult enough over the years to obtain permits for natural gas pipelines, liquified natural gas facilities, and other facilities emitting greenhouse gases or at least contributing to the emission of such gases. Now, with the renewed application of a higher SSC, authorizations for such projects face an even more difficult path to a final permit.

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