Biden administration puts a price on carbon

On Friday, the Biden administration announced it had fulfilled the requirements of one of the executive orders issued on the very first day of his presidency: determining what’s called the “social cost of carbon.” This figure tries to capture the cumulative economic value achieved by investing in limiting carbon emissions now. As such, carbon’s social cost plays a key role in informing the cost/benefit analysis of any government policy or regulation that influences carbon emissions.

The government is required to attach a value to the social cost of carbon, which typically requires the consideration of extensive economic and climate research. But the Trump administration had ended the process of updating the value after having chosen an artificially low one. Given a 30-day deadline to come up with a new one, the Biden administration has chosen to adjust the last pre-Trump value for inflation and use that until it can do a more detailed analysis of how the research landscape has changed over the last four years.

The net result is a dramatically higher price on carbon that will enable far more aggressive regulatory action for at least the next four years.

Counting costs

The social cost of carbon is difficult to calculate. According to the document that details the new figures, the social cost of carbon should include “the value of all climate change impacts, including (but not limited to) changes in net agricultural productivity, human health effects, property damage from increased flood risk and natural disasters, disruption of energy systems, risk of conflict, environmental migration, and the value of ecosystem services.” Obviously, understanding all of these factors requires a lot of research on climate change, human health, the ecosystem’s response, agriculture, and economics, among other considerations.

The US government only got into the process of calculating carbon’s social cost because it had to. In 2008, a court blocked the adoption of fuel-economy rules because they assigned no value to lower carbon emissions. (The new document cites the court as ruling, “While the record shows that there is a range of values, the value of carbon emissions reduction is certainly not zero.”) Since that decision, the government developed and updated this price several times, the most recent being at the end of the Obama administration in 2016.

Two things happened in 2017 that changed the landscape. The first is that the US National Academies of Science issued an expert report that described a process by which the government could ensure that it kept its social cost of carbon updated in line with developing research. The second is that the Trump administration disbanded the group that was tasked with keeping the value up to date and settled on a new, extremely low social cost of carbon.

The administration did so in part by limiting the costs to considering only impacts within the US as opposed to the entire planet—even though the rest of that planet trades with us, receives foreign aid, sends us refugees, and so on.

Costs at a discount

The people who put together the new document clearly want to follow the advice in the National Academies report, and they plan to do so. But it’s also clear that there’s no way that can be done within the Biden Executive Order’s 30-day time limit. And the administration chose 30 days because so many of the regulations it intends to revise—some already thrown out by courts while others are the subject of lawsuits—will need a value for a social cost of carbon.

So, what the new document does is go back to the last reasonable value derived in 2016, updates it for inflation, and use that. The estimates include the social cost not only of carbon dioxide emissions, but for two other greenhouse gases as well: methane and nitrous oxide.

To understand the values there, you have to understand something called the discount rate. This rate is meant to adjust for the fact that the cost of something in the present comes in the form of a currency value that will be worth less in the future. Plus, people have a tendency to value money they have in the present more than money saved in the future. While it’s clear that a lower discount rate means present emissions cost more, there’s significant controversy over exactly what the discount rate should be. This document from the London School of Economics explains it all in more detail, and it indicates that, five years ago, the average economist felt that a discount rate of about 2 percent was appropriate for climate.

The new document calculates the social cost of carbon at three different discount rates, for 5 percent, 3 percent, and 2.5 percent—all of them higher (and thus cheaper) than the 2 percent rate suggested by the survey of economists. But even the 5 percent value produces a social cost of carbon of $14 per metric ton of emissions, which is roughly triple the value that the Trump administration had used. At the high end, the 2.5 percent figure is $76, or over 10 times what the Trump administration determined.

Real-world impacts

To get a sense of what this means, we can take burning enough coal to produce a megawatt-hour of power, which the Energy Information Agency indicates will produce about a metric ton of carbon dioxide emissions. For domestic energy users, the typical price of that electricity would be about $128.00. Under the middle-of-the-road 3 percent discount figure, the social cost of carbon from those emissions would add $51.00 to that price, an increase of 40 percent.

Even given that moderate value, the social cost of carbon means that most reasonable steps to limit coal use will pass any economic tests you can throw at them. Notably, this doesn’t include all the health costs from the other emissions associated with burning coal, and so it is an underestimate of the full societal burden. The use of coal is simply exporting far too many future costs on society; its current use is only economical because we pretend those costs don’t exist.

The costs also go up over time, as calculated at 5-year intervals. This is because the intervening time will see further emissions locked in, meaning each further metric ton of emissions in the future will take us further away from a desirable climate. So, the 3 percent discount rate sees the social cost of carbon hit $85 by 2050.

Methane and nitrous oxide are far more potent greenhouse gases, and their current social costs are astronomical in comparison. At the same 3 percent discount rate, a metric ton of methane emissions has a social cost of $1,500; nitrous oxide hits $18,000.

Limit methane!

Again, this means that nearly any regulation meant to limit methane leaks—like the one issued by Obama and then rescinded by Trump—would easily pass an economic test. This may also have a heavy influence on the Biden administration’s plan to re-evaluate the price paid for drilling for gas on federal lands, which is expected to include the environmental costs of the fuel extracted.

None of this means that society will suddenly start to pay the social costs of fossil fuels in their electric bills, as emissions regulations do just that: limit emissions. Instead, regulations generally leave it to private industry to find economic ways of ensuring those limits are met. In many cases, however, the regulations themselves have to be justified via a cost-benefit analysis, and those often end up the subject of court action. These values for the social cost of carbon, in addition to being more realistic, will likely make it harder to challenge Biden’s impending regulatory moves on economic grounds.