• The Social Cost of Carbon — A Crucially Important Number Few Have Heard of and its Potential Impact on Environmental Regulations
  • January 3, 2018
  • There is a number few have heard of underlying many environmental regulations that are directly related to climate change — the Social Cost of Carbon (SCC). As noted in a recent article in The Economist, climate economists refer to the SCC as “the most important number you’ve never heard of.” Essentially, the SCC attempts to capture in a single number how much “damage” a one-ton release of CO2 today will have in the future, expressed in today’s dollars. Of course, estimating the amount of potential “damage” concurrently gives an estimate of the potential “benefit” to be accrued if the one-ton of CO2 is not released. Given the physics of how CO2 operates in the atmosphere, that benefit is not, for the most part, experienced by those who would “pay the cost” to mitigate the release of that one ton of CO2 — namely the U.S. population alive when that one ton of CO2 is not released. Instead, the benefit is spread both temporally and spatially — to future generations and to the rest of the global population. Currently, the SCC is estimated to be between $36-$47/ton in present dollars, depending on the discount rate used in the calculation.

    There are two principal considerations that go into in how the SCC is calculated — the effects of the release of CO2 into the atmosphere and the economic costs of those effects. As can be expected, there are many complex assumptions that go into these considerations, one of which is the proper discount rate to apply to convert estimated future costs into present-day dollars. Another of the applied assumptions is to consider global effects of the release of CO2, instead of only limiting consideration to effects in the United States.

    So, why is it important to understand the SCC? For three reasons: First, federal agencies are required to undertake a Benefit-Cost Analysis (BCA) to assess the economic impact of proposed regulations. Since the 2008 Ninth Circuit decision in Ctr. For Biological Diversity v. Nat’l Highway Traffic Safety Admin., federal agencies have been required to consider the SCC in the BCA undertaken for relevant new regulations. How the SCC is calculated is contentious, however, and leads to the second reason why it is important to understand the SCC and its impact on climate-change-related regulations.

    On October 10, 2017, Environmental Protection Agency (EPA) Administrator Scott Pruitt issued a Notice of Proposed Rulemaking, proposing to repeal the Clean Power Plan (CPP), an Obama Administration rule that sought to reduce CO2emissions from power plants. As part of the overall repeal of the CPP, the EPA quietly proposed a change in how the SCC would be calculated in the future, by employing the high-end discount rate of 7 percent instead of the previously applied rate of 3 percent. This change was justified on the grounds that the economic costs of releasing CO2 should be calculated domestically, not globally.

    Taken together, this little-noticed change in the SCC calculation accomplishes two goals. First, it calls into question the value of current climate change-related regulations. What previously was economically justifiable, suddenly is not. Second, it eliminates the justification for further regulations. These goals are accomplished because raising the applied discount rate to 7 percent reduces the SCC from approximately $47/ton to around $6/ton — a reduction of over 85 percent. In other words, climate change-related regulations provide little value.

    Finally, the third reason why it is important to understand the SCC is that this number, however imperfectly calculated, reflects who the U.S. considers should bear the cost of the CO2 this nation releases. The cost of carbon release is not free, as will be attested to by an insurance industry bearing ever larger payouts due to the increasing effects of climate change. By reducing the calculated SCC, the U.S. is stating that those costs should be borne by future generations and societies outside our borders.