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Trump administration drops social cost of carbon from $51 to $1

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Essential Energy Insights - September 17, 2020

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Trump administration drops social cost of carbon from $51 to $1

The U.S. Environmental Protection Agency has adjusted the social cost of a ton of carbon from around $51 to $1 in its proposal to repeal the Clean Power Plan, a significant reversal of a policy developed by the Obama administration and widely adopted by governments both local and foreign.

Some policy experts and environmental groups say the new value ignores the cost of greenhouse gases that will be imposed on future generations and significantly narrows the scope of the damages assessed by the metric. But other cost-benefit experts have been critical of the value that was generated by the Obama administration, arguing that too much uncertainty exists to settle on the $51 value and an undue amount of focus was placed on the global benefits of reducing carbon.

The social cost of carbon measures the impact of one ton of carbon emitted into the atmosphere and puts a dollar amount on the harm those emissions could cause to future generations. Federal agencies use estimates of the social cost of carbon to assess the climate impact of rulemaking.

When adjusted to 2017 dollars, the estimate placed the social cost of carbon at around $51/ton for 2020. That value has been adopted by some states, companies and foreign governments as the go-to number for assessing the damages of carbon and other greenhouse gas emissions. Canada, for instance, has embraced the U.S. value and has signed an agreement with Mexico that will see the two countries harmonize their assessments of damage caused by carbon.

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The repeal of the Clean Power Plan has brought to light the Trump administration's changes to social cost of carbon estimates, which federal agencies use to assess climate impacts.

That officials are now seeking to rewind the existing social cost of carbon is no surprise, given that President Donald Trump issued an executive order in March directing agencies to stop using the Obama administration's estimate and disbanding an interagency working group charged with reviewing the issue. The new policy on the social cost of carbon made its debut in a Sept. 27 regulatory impact analysis for the Bureau of Land Management's delay of the 2016 methane waste prevention rule for the oil and gas industry.

Jason Schwartz, legal director for the New York University School of Law's Institute for Policy Integrity, said the Trump administration has "decimated" the social cost of carbon. The new analysis makes several key changes that Schwartz said are out of step with the thinking of economists.

The new value has been narrowed to only consider the domestic impacts of carbon, while the Obama administration's version also took into account the global impacts, Schwartz noted. And in contrast to the Obama administration, which assumed a 3% discount rate, the new value assumes a 7% discount rate that Schwartz said "virtually no economist surveyed or written in the literature supports using."

Economists use the discount rate to measure the value of money over time, the Cost of Carbon Pollution project explains on its website. The social cost of carbon decreases as the discount rate increases because "a higher discount rate implies that people care less about future generations than they do about the present," according to the project, which is a joint initiative of environmental groups such as the Environmental Defense Fund, the Natural Resources Defense Council and Schwartz' Institute for Policy Integrity.

But despite Schwartz's assertions, the conservative Heritage Foundation has argued for a 7% discount rate, Senior Research Fellow David Kreutzer said in a June 2016 report. Suggesting that the climate change discount rate should reflect the best rate of return that reasonably can be expected in capital markets, Kreutzer said the U.S. stock markets have generated a 7% rate of a return and therefore the same value is appropriate for the social cost of carbon.

During the George W. Bush administration, the White House Office of Management and Budget, or OMB, in 2003 recommended that agencies consider both a 3% and a 7% discount rate for regulatory analysis. But the Obama administration subsequently revised that determination and his interagency working group undertook a new review of the social cost of carbon, examining closely a 3% and 5% discount rate before ultimately choosing the 3% rate.

Trump has now told his agencies to revert back to the 2003 recommendation and the EPA accordingly is using the 7% rate in its cost-benefit analysis for the Clean Power Plan repeal. That puts the new social cost of carbon at $1 for 2020, but even at a 3% rate, Trump's new estimate would be just $7/ton for 2020 due to other changes made to the metric.

"After a few years out, basically we're not counting any effects on any future generations of Americans," Schwartz said.

Responding to the president's executive order, Susan Dudley, director of the George Washington University Regulatory Studies Center, noted in an opinion piece published in Forbes in March that some of the Obama administration's economic inputs were "clearly biased." Dudley served under Bush as administrator of the Office of Information and Regulatory Affairs, an office within the White House's OMB that examines federal regulations before public release.

Dudley said the Obama administration's inputs were out of step with OMB guidance and had "skewed" the value higher than more traditional assumptions and inputs would have yielded. The use of the 3% discount rate "was not grounded in empirical observations of social preferences, but rather in a prescriptive notion of how policymakers in the Obama administration thought Americans ought to feel about the future," Dudley explained.

'Artificially disconnected'

Dudley also took issue with the Obama administration's focus on the global impacts of carbon.

"A global [social cost of carbon] might have merit if used to support a global system of constraining carbon emissions, but it is simply not plausible to claim that any unilateral U.S. action could achieve the global benefits that are implied by the [social cost of carbon] used to justify Obama administration rules," Dudley wrote.

Schwartz explained that the values found in the Clean Power Plan repeal's regulatory impact analysis come from three models that have removed the global damages caused by carbon. In one instance, the EPA acknowledged that accurately calculating just the domestic damages is impossible, Schwartz said. So the agency instead assumed that domestic damages will be 10% of the global number, consistent with an estimate found in the interagency working group's 2010 report. But that report also acknowledged the uncertainty of predicting a domestic social cost of carbon given the lack of region- or country-specific estimates available at the time.

For the other models in the repeal regulatory impact analysis, Schwartz said he is suspect of the agency's assertion that the domestic values can be derived from the analysis shown.

"They're basically trying to isolate the effects on the U.S. based on miles of coastline, or percent of [gross domestic product], or some value of that," Schwartz said, adding that doing so ignores that the world operates as a global economy and that carbon does not respect borders. "It really tries to treat the U.S. as artificially disconnected from the world, which just isn't reflective of reality," Schwartz said.

Ditching the social cost of carbon now means the U.S. is telling other countries that it no longer cares about the larger impacts on the world, which could have larger international ramifications, Schwartz warned.

"We absolutely want Europe and China and India to be thinking about effects on us when they enact their policy," Schwartz said. "But if we don't think about effects on them, they're not going to think about effects on us."

Back to the drawing board?

While Dudley sees flaws with the Obama administration's social cost of carbon, she urged the Trump administration to consider reconvening the working group it had just eliminated rather than leaving the task of coming up with the next value to outside groups. Such groups already have stepped up since Trump's announcement, including the nonpartisan Washington, D.C.-based think tank Resources for the Future, which launched an initiative in June to update the social cost of carbon in line with new research.

While the Trump administration fixed $1 as an interim figure, Schwartz expects that value to play a large part in any litigation that results from the EPA's proposal to repeal the Clean Power Plan.

The courts under Trump already have pushed back against efforts to ignore the impacts of greenhouse gases, as evidenced in recent cases involving federal coal leasing, and in an August federal appeals court decision, the Federal Energy Regulatory Commission was asked to explain why the social cost of carbon is, or is not, applicable to its decision-making. While the Obama administration's social cost of carbon has not been specifically upheld by the U.S. Supreme Court, Schwartz said the U.S. Court of Appeals for the 7th Circuit has found it to be reasonable.

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