By Sheldon Zakreski
The Social Cost of Carbon (SCC), which places a dollar figure on the long-term damage done by a metric ton of carbon dioxide emissions (mtCO2) in a given year, is a phrase many folks have never heard of, yet it greatly affects both our economy and the environment. As of early 2017, the SCC has been used to justify regulations that have more than $ 1 trillion in benefits, according to Yale University economist William Nordhaus. The SCC is an important tool in federal policy because proposed environmental regulations must demonstrate that the benefits outweigh the costs.
The U.S. Environmental Protection Agency (EPA) came out with updated SCC figures this past October that are a marked departure from the past. Reducing the previous 2020 SCC estimate of $45 per mtCO2 to roughly $3.50 per mtCO2. The effect of such a change is that it will become more difficult to propose policies that substantially lower emissions. For example, under the prior SCC figure, the Clean Power Plan (CPP) would have generated $20 billion in benefits, but the benefit estimate under the updated figure is a significantly diminished $1.6 billion. Therefore, if the Trump Administration’s efforts to repeal the CPP are blocked by the courts, the lower SCC figure could be used to justify substantially weaker emissions reductions than those originally envisioned in the Plan.
Beyond the obvious change in administrations, the two primary factors driving the SCC figure are the scope of the damage assessment, and the discount rate. The EPA under President Obama factored in global damages from CO2 emissions, whereas the most recent update only considers damages within U.S. borders. The rationale for including global damages is that climate change is a global problem, and that this inclusion signals to the world that the U.S. is considering the global impact of emissions originating within its borders. This is a critical message, as it gives the U.S. leverage to push for other countries to commit to greenhouse gas reductions as their emissions cause damage to the U.S.
The second factor explaining the significant drop in the SCC is the discount rate. As a measure intended to factor in the cost of damages years out from emissions occurring today, the SCC must incorporate a discount rate. The higher the discount rate the lower the value of the future benefits from reducing emissions today. The $45 in 2020 SCC figure is based on a 3 percent discount rate, while the October 2017 update uses a discount rate of 7 percent, which basically means Trump’s EPA assumes future damages from greenhouse gas emissions will be relatively inconsequential economically speaking.
The SCC is often cited as an important benchmark for carbon reduction policies, but as states fill the void left at the federal level, the following considerations might serve as a useful guide for how the SCC may, or may not, inform state carbon policies.
Image credit: Flickr/Bureau of Land Management
Sheldon Zakreski is the Director of Asset Management for The Climate Trust