The Social Cost Of Carbon & Why It Matters
By: Lisa DiCaprio
March 03, 2018
The social cost of carbon is a key environmental concept that assigns a monetary value to the economic damages caused by each new ton of greenhouse gases emitted into the atmosphere. This concept, which was supported by President Obama as a way to reduce greenhouse gas emissions, is now being undermined by the Trump administration as part of its overall strategy to eliminate as many restrictions as possible on fossil fuel extraction and consumption.
In 2009, the Obama administration established an Interagency Working Group on the Social Cost of Carbon, comprised of officials from several federal government agencies, to establish uniform estimates of the social cost of carbon that were finalized in 2010. The Obama Administration's EPA website page, The Social Cost of Carbon: Estimating the Benefits of Reducing Greenhouse Gas Emissions, which the Trump administration archived,* explains that this concept is "meant to be a comprehensive estimate of climate change damages and includes changes in net agricultural productivity, human health, property damages form increased flood risk, and changes in energy system costs, such as reduced costs for heating and increased costs for air conditioning."
As Michael Greenstone and Cass R. Sunstein relate in their December 2016 New York Times Op-Ed, Donald Trump Should Know: This Is What Climate Change Costs Us, the social cost of carbon was incorporated in cost-benefit analyses of regulations to limit greenhouse gas emissions, such as "energy-efficiency rules for refrigerators and washing machines, fuel-economy rules for cars and trucks, and the Clean Power Plan, which requires reductions in greenhouse gas emissions from existing power plants." Greenstone and Sunstein describe the social cost of carbon "as the linchpin of national climate policy" that became a requirement in 2008 when "a federal court of appeals ruled that the government essentially had to specify a social cost of carbon: It was not permitted to ignore harm from climate change, the court said, when setting regulatory policy."
The Interagency Working Group set the social cost of carbon at $21 per ton in 2010 and $36 per ton in 2015 with a projected increase to $69 per ton by 2050. As a FAQ prepared by the National Resource Defense Council (NRDC), the Environmental Defense Fund (EDF), and the Institute for Policy Integrity at NYU's School of Law explains, these estimates are based on Integrated Assessment Models (IAMs) that link together a global climate model and a global economic model, but IAMs do not include all damages from climate change: "The models used by the Interagency Working group omit several types of climate impacts; these omissions are often due to a lack of monetary damage estimates for many climate impacts to integrate into these underlying models. Some of the omitted damages are the effects of climate change on fisheries; the effects of increased pest, disease, and fire pressures on agriculture and forests; and the effects of rising sea levels and resource scarcity due to migration."
In his 2014 article, Omitted Damages: What's Missing from the Social Cost of Carbon, Peter Howard provides a detailed analysis of damages that should be included in the social cost of carbon. Moreover, with the acceleration of climate change, the accurate monetization of damages will become increasingly challenging. As Brad Plumer points out in his February 23, 2018 New York Times article, What Land Will be Underwater in 20 Years? Figuring It Out Could Be Lucrative, insurance companies, in particular, are developing new methods of data collection and analysis for predicting financial risks from climate change, such as rising sea levels.
One hundred and fifty proposed and final regulations incorporated the social cost of carbon during the Obama administration, which also highlighted the increasing costs of climate change by publicizing scientific reports on climate change impacts and the benefits from reducing greenhouse gas emissions.
The 2014 National Climate Assessment report describes how climate change is now affecting all regions of the U.S. and all sectors of the U.S. economy: agriculture, transportation, and more. Similarly, the 2015 E.P.A. report, Climate Change in the United States: Benefits of Global Action, which is based on data collected by the E.P.A.'s Climate Change Impacts and Risk Analysis (CIRA) project projected the costs of climate change impacts in over 20 sectors including health, infrastructure, water resources, agriculture and forestry, and ecosystems. As Coral Davenport reported in, E.P.A. Warns of High Cost of Climate Change, the agency concluded that initiatives to limit global greenhouse gas emissions to 2 degrees Celsius could result in a variety of savings, including an estimated overall "$200 billion in savings to the American economy by 2100" and a "40 percent to 59 percent reduction in probability of extreme drought, which would otherwise cost American farmers $2.6 billion to $3.1 billion."
In a September 8, 2016 videotaped interview with New York Times reporters Coral Davenport and Mark Landler, Obama on Climate Change: The Trends are 'Terrifying', President Obama described the "terrifying" trends built into climate change and his initiatives to communicate these trends to the American public. As he stated: "What we know is that if the current projections, the current trend lines on a warming planet continue, it is certainly going to be enormously disruptive worldwide."
Over the past year, these trends have become increasingly terrifying — not only because of recent reports on the acceleration of climate change and its impacts, such as the June 2017 National Climate Assessment Report and the October 2017 report issued by the U.S. General Accounting Office, but also because we now have a president who denies the science of climate change and is promoting fossil fuels over renewable forms of energy.
The Trump administration's intensive efforts to undermine the validity of the social cost of carbon began during the transition period, even before he became President. In December 2016, Trump's transition team sent a 74-point questionnaire to Obama administration Department of Energy (DOE) managers requesting the names of employees involved in developing policies on climate change, including "a list of all Department of Energy employees or contractors who have attended any Interagency Working Group meetings" as well as information about when these meetings were held and e-mails related to the meetings. Soon afterwards, in March 2017, the Trump administration issued an executive order to disband the Interagency Working Group on the Social Cost of Carbon.
Federal agencies are still required by law to use the social cost of carbon in cost-benefit analyses; however, these agencies must now consider the domestic rather than the global impacts of climate change, and the social cost of carbon has been reduced from $36. to only $1 per ton.
Seven Senators are challenging Trump administration policies on the social cost of carbon. In December 2017, Senators Sheldon Whitehouse (D-RI), Michael Bennet (D-CO), Jeff Merkley (D-OR), Ben Cardin (D-MD), Elizabeth Warren (D-MA), Kamala Harris (D-CA), and Dianne Feinstein (D-CA) wrote a letter to the Government Accountability Office (GAO) requesting a review of the Trump administration's reduction of the social cost of carbon to $1 per ton and how it is considering the repeal of government regulations that incorporate this concept, including the Obama Administration's Clean Power Plan that focuses on power plants — the main source of greenhouse emissions in the U.S. Incorporating a $36. per metric ton social cost of carbon in its cost-benefit analysis, the Obama administration concluded that the plan would result in up to $29 billion in benefits by 2030 compared to $8.4 billion in costs.
Several states are charting an independent path from the federal government. In his August 14, 2017 article, States Are Using Social Cost of Carbon in Energy Decisions, Despite Trump's Opposition, Peter Fairley describes how regulators in Minnesota, Colorado, Maine, and Nevada have used the social cost of carbon in evaluating proposals for new power plants. In 2014, for example, the Minnesota Public Utility Commission selected "the 100 megawatt solar project, proposed by Edina, MN-based Geronimo Energy, even though it cost 'half a percent' more to build and run than the gas-fired competition. The state's Public Utility Commission (PUC) cited several countervailing factors favoring Geronimo's project, including the social cost of carbon analysis." In this same year, Minnesota became the first state where its PUC used the social cost of carbon "to compensate rooftop solar panel owners who feed low-carbon power in the grid." Fairley concludes that the social cost of carbon may have more of an impact than cap and trade in reducing greenhouse gas emissions "because social cost of carbon estimates are typically higher than carbon market prices. While states are using a variety of values for a social cost of carbon, most are above $40 per ton — about three times higher than recent carbon prices on the California market."
As I describe in my 2017 article, Renewable Energy Initiatives in New York City, Council Member Costa Constantinides, the chair of the Committee on Environmental Protection, has introduced two bills for renewable energy that incorporate the social cost of carbon in determining cost-effectiveness. Intro 0609-2015A mandates identifying buildings appropriate for geothermal systems and requires taking into account the social cost of carbon in determining the cost-effectiveness of installing a geothermal system. The cost is initially set at $128 per metric ton with increases on an annual basis. The City Council passed this bill, which was signed by Mayor de Blasio in January 2016. Similarly, Intro 0426-2018 requires a feasibility study of the costs of installing solar water heating and thermal energy systems on city-owned buildings, and it mandates the installation of these systems when it is cost effective. This bill was reintroduced in 2018 during the current City Council session. The social cost of carbon in both bills increases over time with the acceleration of climate change and the projected costs of its future impacts.
These efforts illustrate how the social cost of carbon provides an important financial metric for facilitating renewable energy when a cost-benefit analysis and/or competitive bidding process is required, This concept will acquire a new importance as a result of the tariffs imposed by the Trump Administration on solar panels, which may increase the cost of utility-scale solar power projects by 10 percent.
However, whenever possible, either by state legislatures or PUC's, utilities should be mandated to transmit electricity from renewable sources. In New York State, the Public Service Commission's Clean Energy Standard ruling in 2016 requires all utilities in the State to distribute 50% of their electricity from renewable sources by 2030 and utilities that do not meet this mandate will be fined. Environmental organizations, such as the Sierra Club, are advocating for the PSC to increase this percentage at regular intervals until we reach 100% electricity from renewable sources.