January-February 2021
Putting a high value on climate action indicates that the costs of the steps taken to cut carbon emissions are worth something in lives saved, better health, preservation of coasts and forests, agricultural productivity and property.
Michael Greenstone, a University of Chicago economist who served as chief economist for Obama’s Council of Economic Advisers, was a co-author of a working paper last month that put the social cost of carbon at $125 per ton or more. And Nobel laureate Joseph Stiglitz and Lord Nicholas Stern, author of a groundbreaking 2006 U.K. study on the economic cost of climate change, published a paper released Monday that warned a return to the Obama-era number would be a fundamentally flawed approach. “It is clear that climate change involves the management of risks of enormous magnitude and multiple dimensions, which could destroy lives and livelihoods across the world, displace billions, and lead to widespread, prolonged, and severe conflict,” they wrote. The carbon prices arrived at using the Obama-era approach are too low to support the policy measures needed to limit warming to 1.5 to 2 degrees Celsius (2.7 to 3.6 degrees Fahrenheit) and so avoid that future, wrote Stiglitz and Stern.
The Social Cost of Carbon, Risk, Distribution, Market Failures: An Alternative Approach by Nicholas Stern & Joseph E. Stiglitz DOI 10.3386/w28472, February 2021 here
Designing policy for climate change requires analyses which integrate the interrelationship between the economy and environment, including: the immense risks and impacts on distribution across and within generations; the many failures, limitations or absences of key markets; and the limitations on government, both in offsetting these failures and distributional impacts. Much of the standard economic modelling, including Integrated Assessment Models, does not embody key aspects of these essentials. We identify fundamental flaws in both the descriptive and normative methodologies commonly used to assess climate policy, showing systematic biases, with costs of climate action overestimated and benefits underestimated. We provide an alternative methodology by which the social cost of carbon may be calculated, one which embraces the essential elements we have identified. here
By Marianne Lavelle, Inside Climate News, February 19, 2021
Methane flare. Credit: Spencer Platt/Getty Images
The Trump administration didn’t put much value on lowering carbon emissions. In fact, it calculated that the benefits of action on climate change added up to as little as $1 per ton of carbon dioxide, and it set policy accordingly. Almost any steps to reduce greenhouse gases seemed too costly, given the paltry potential gain for society.
President Joe Biden’s White House is moving forward on a crucial first step toward building back U.S. climate policy and is expected to direct federal agencies to use a figure closer to $52 per ton as their guidance for the so-called “social cost of carbon” number on a temporary basis. That figure, applied during the Obama administration, is likely to serve as a baseline while the Biden administration works on developing its own metric amid calls by climate-focused economists for a value that is at least twice as high.
Michael Greenstone, a University of Chicago economist who served as chief economist for Obama’s Council of Economic Advisers, was a co-author of a working paper last month that put the social cost of carbon at $125 per ton or more. And Nobel laureate Joseph Stiglitz and Lord Nicholas Stern, author of a groundbreaking 2006 U.K. study on the economic cost of climate change, published a paper released Monday that warned a return to the Obama-era number would be a fundamentally flawed approach. “It is clear that climate change involves the management of risks of enormous magnitude and multiple dimensions, which could destroy lives and livelihoods across the world, displace billions, and lead to widespread, prolonged, and severe conflict,” they wrote. The carbon prices arrived at using the Obama-era approach are too low to support the policy measures needed to limit warming to 1.5 to 2 degrees Celsius (2.7 to 3.6 degrees Fahrenheit) and so avoid that future, wrote Stiglitz and Stern.
Putting a high value on climate action indicates that the costs of the steps taken to cut carbon emissions are worth something in lives saved, better health, preservation of coasts and forests, agricultural productivity and property.
Biden, who has set the ambitious goal of a 100 percent clean energy economy with net-zero emissions by 2050, is expected to come out with an interim social cost of carbon number on Friday. Earlier on Friday, Biden formalized the U.S. re-entry to the Paris climate accord in a virtual meeting with G-7 leaders.
Biden had called for a new social cost of carbon number in the climate crisis executive order he signed on Inauguration Day. In the order, Biden re-established an Interagency Working Group on the social cost of carbon which had been disbanded by Trump, and directed it to publish, within 30 days, an interim value for the metric that could be used by federal agencies until a more thorough analysis yielded a final number no later than January 2022.
Balancing Costs and Benefits
It might seem strange to place a dollar value on something like a healthier planet, but for decades, the federal government has routinely engaged in such analysis in making environmental and health policy. The process involves the same sort of economic modeling and risk-analysis techniques used, for example, when insurance companies set their rates. The government is legally required to weigh the costs and benefits of new regulations, in a process where the input from stakeholders almost invariably involves detailed accounting of the potential costs to regulated industries. And the cost-benefit calculus would be lopsided if the government did not also put a dollar value on seemingly priceless benefits, such as the lives saved through government action.
That’s exactly what a federal appeals court ruled that the Bush administration failed to do in 2008, when it established fuel economy standards that took into account the costs to car companies and consumers but not the benefits of reduced greenhouse gas emissions. When President Barack Obama took office the following year, it sought to address the concerns raised by the court by establishing an Interagency Working Group on the issue, which eventually arrived at a social cost of carbon value of $52 per ton.
The metric was part of the cost-benefit analysis for all of the Obama administration’s climate actions to curb greenhouse gas emissions, including its power plant rules and vehicle fuel economy standards. And when the Trump administration set out to dismantle those rules, it justified its actions with a new calculation for the social cost of carbon—$1 to $7 per ton.
To arrive at such a low range, the Trump administration’s economists applied a hefty “discount rate” to the value, a process used in economics to account for the concept that a dollar saved in the future will not buy as much as a dollar spent today.
Although most economists agree that some discounting of future benefits is a sound approach, they say the discount rate should be low at a time of low inflation and low interest rates. Tamma Carlton, an economist at the University of California, Santa Barbara and a co-author, with Greenstone, of last month’s working paper on the social cost of carbon, said that one key change they made in arriving at their $125 per ton figure was applying a lower discount rate than was used during the Obama years, when inflation and interest rates were higher.
There are also strong moral arguments against the Trump approach of greatly discounting future climate benefits, which Trump administration economists achieved by using stock market returns as their key metric.
“We’re talking about long-run intergenerational decisions here,” said Carlton. “And there are many reasons to think that the sort of short-run behavior of the stock market does not reflect the decisions we want to think about when we’re thinking about many generations into the future, and how we discount the future for our children and our children’s children.”
The Foundation of Everything
The Trump administration also low-balled its social cost of carbon figure by counting only the projected impacts of climate change in the United States, not around the globe. Biden made clear in his executive order that he intends to end that practice and calculate the benefits of cutting carbon emissions based on the worldwide impact of limiting global temperature rise—an approach he sees as an essential part of his re-engagement with the international community.
“It is essential that agencies capture the full costs of greenhouse gas emissions as accurately as possible, including by taking global damages into account,” Biden said in his executive order. “Doing so facilitates sound decision-making, recognizes the breadth of climate impacts, and supports the international leadership of the United States on climate issues.”
It was not clear whether the social cost of carbon was to be part of Biden’s discussions with G-7 leaders Friday morning, during the first meeting of the world’s largest free market economies since April 2020. The group had a full agenda, including addressing cooperation on the Covid-19 crisis and the U.S. commitment to rejoin the Paris agreement.
Although the concept might be too arcane to make it into the summit talks, what the Biden administration chooses as its social cost of carbon will be the foundation for everything else it does on climate change. “It’s the single most important economic metric for guiding climate policy decisions,” said Richard Newell, president and CEO of the think tank Resources for the Future, who co-chaired a National Academies of Science panel that in 2017 urged the government to update its approach to the valuation process. The Biden administration is now taking up the academy’s recommendations that the Trump team ignored, including that the government should establish a regular process of reviewing and updating the social cost of carbon based on the latest science on climate change and economics.
Newell said he also expects that the Biden administration will apply the social cost of carbon across government decision-making more broadly than just the regulatory process. For example, Biden noted in his executive order that he wanted his Interagency Working Group to consider the application of the social cost of carbon to areas such as government procurement. Biden has already made clear that he wants to use the federal government’s purchasing power to boost demand for electric vehicles as part of his climate plan; applying a higher social cost of carbon to such decisions would help justify purchases, even if EVs cost more than conventional vehicles in the short-term.
Business groups made clear that they recognize the importance of the Biden administration’s decision on the social cost of carbon. The U.S. Chamber of Commerce, the American Petroleum Institute, and 10 other business groups sent a letter to the White House early this week calling for “ample channels and opportunities for public and stakeholder input.”
Of course, that input will include a push from forces within industry and on the right who supported the Trump administration’s approach. The Institute for Energy Research, a nonprofit with funders that include right-wing foundations, posted a scathing essay last month by its senior economist, David Kreutzer, calling the social cost of carbon “unknown and virtually unknowable,” and based on arbitrary inputs. “Whether or not dead people vote in significant numbers may be an open question, but dead policies are flourishing in DC right now,” Kreutzer wrote.
Against that backdrop, the establishment business groups appear to be taking a moderate stance, and signaling a desire to cooperate with Biden.
“Along with reentering the Paris Agreement, assessing the social cost of greenhouse gas emissions is an important step for climate policymaking,” said Stephen Comstock, vice president of corporate policy for the American Petroleum Institute, in an email sent before the Biden interim decision was announced. “We look forward to engaging the interagency working group and providing input as they develop their recommendations to help shape a lower-carbon future.”
Of course, the Biden administration has committed to putting the United States not just on a path to a lower-carbon future, but one with zero net carbon emissions. And according to economists, that will require a social cost of carbon much higher than the Obama-era value the Biden White House has adopted for the time being. Using that old analysis, wrote Stiglitz and Stern, would amount to accepting a hike in global temperatures of 3.5 to 4 degrees Celsius (6.3 to 7.2 degrees Fahrenheit) in decision-making. “Almost surely,” they wrote, “the U.S. would be committing itself not to achieve the Paris goals.”
An earlier version of this article incorrectly stated that the Biden administration notice about raising carbon’s social cost had already been published in the Federal Register.
Marianne Lavelle
Reporter, Washington, D.C.
Marianne Lavelle is a reporter for InsideClimate News. She has covered environment, science, law, and business in Washington, D.C. for more than two decades. She has won the Polk Award, the Investigative Editors and Reporters Award, and numerous other honors. Lavelle spent four years as online energy news editor and writer at National Geographic. She spearheaded a project on climate lobbying for the nonprofit journalism organization, the Center for Public Integrity. She also has worked at U.S. News and World Report magazine and The National Law Journal. While there, she led the award-winning 1992 investigation, “Unequal Protection,” on the disparity in environmental law enforcement against polluters in minority and white communities. Lavelle received her master’s degree from Columbia University Graduate School of Journalism, and is a graduate of Villanova University.
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Here’s What Biden’s Change to the Social Cost of Carbon Means
By Margaret Badore, February 19, 2021
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David McNew / Getty Images News
On Jan. 19, 2021, the Biden Administration announced an update to the social cost of carbon.1 Although the term may be unfamiliar to some, others call it “climate change’s most important number.”
The Council on Environmental Quality announced in the Federal Register that federal agencies should return to the 2016 guidance that was established under President Obama for at least the next year.1
What is the Social Cost of Carbon?
We know that if we continue to produce planet-heating carbon emissions, catastrophic climate change will result in trillions of dollars in damages globally. Those costs include things like direct damage and crop loss from extreme weather, but also lost productivity and avoidable deaths. These are the “external costs” of pollution, costs that otherwise remain hidden.
The social cost of carbon is a way to evaluate these external costs, and puts a dollar value on every ton of carbon pollution that’s emitted into the atmosphere. It’s a way for governments to figure how much polluting today will eventually cost them in the future.
Unlike a carbon tax, which increases the cost of polluting and is paid by fossil fuel users, the social cost of carbon isn’t actually paid by anyone. Rather, it’s a tool that can be used to help understand the cost of inaction, if the price is set correctly.
A higher social cost of carbon favors policies that help solve climate change. A lower social cost of carbon makes it easier to approve policies that result in more greenhouse gas pollution.
The calculations are pretty complex, and we won’t get into them here, but the key takeaway is that a higher price makes it much easier to get ambitious environmental protections.
How the Social Cost of Carbon Came to Be
The Obama Administration was the first to require that the social cost of carbon be factored into any new federal policy, as part of the cost benefit analysis. At the time, they set the social cost of carbon at about $50 per ton.2 This made it easier for government agencies like the EPA to make the case for polices that reduce pollution, even if those policies are associated with other upfront costs.
The Trump Administration didn’t actually get rid of the social cost of carbon as part of its efforts to roll back environmental regulations. Rather, it recalculated the cost, lowering it to under $1 per ton.3 Functionally, that allowed federal agencies to operate as if polluting today will not cost us anything in the future.
On his first day in office, President Biden signed an executive order to recalculate the social cost of carbon along with a number of other climate-related measures. Prominent economists and environmental watchdog groups have made the case for a much higher social cost of carbon, closer to $125 dollars per ton.4 A temporary number was released today, and a fuller accounting is due next year.
January 2021 – Biden Administration
The guideline released today moves the price back up to around $50 per ton temporarily, until the Council on Environmental Quality can come up with a new methodology to produce a final number. That’s a disappointment to anyone who might have hoped that the Biden administration would come up with a higher interim figure, but it’s a vastly higher number than what the government would be operating with if the number had been left at the levels set by the Trump Administration.
The bottom line is that the social cost of carbon has been added back to the toolbox of measures that the United States is using to address climate change, and that could have an impact on nearly any rule the federal government might make. However, to make the changes we truly need to address the climate crisis, we’ll need many more tools, and a lot more ambition.
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The “social cost of carbon” – the dollar value the U.S. government ascribes to the damage stemming from one ton of carbon dioxide released into the atmosphere – informs decisions ranging from whether to permit a new oil well to what sort of mileage goals U.S. autos should meet. The Trump administration has minimized this accounting tool and estimates global warming damages amount to between $1 and $7 for every ton of CO2 produced. The new administration is likely to put the price tag much higher.
Under the Obama administration formula, the cost would have reached $52 a ton last year. But University of California, Santa Barbara Economics Professor Tamma Carleton and University of Chicago Professor Michael Greenstone write a more accurate price at this point would be $125 a ton, and new analysis is needed to determine if it should be considerably higher. Unlike under Obama, the current administration does not take into account climate impacts overseas. And it uses a much higher “discount rate” – the rate of return used to figure out what future cash flows are worth today.
Greenstone, who helped develop Obama’s social cost of carbon while serving as the White House Council of Economic Advisers’ chief economist, said in an interview that advances in climate science and economics mean the incoming administration needs to reassess the price of climate inaction. Adopting a more realistic price also means acknowledging the benefits of other countries cutting their greenhouse gas emissions.
“Every time a ton of carbon gets abated in Moscow, or Mumbai, or Beijing, that is raining down benefits on the United States,” he said.
-Juliet Eilperin
