After this blog was posted, on September 21, 2023 the Biden Administration approved the recommendation of the Interagency Working Group on the Social Cost of Greenhouse Gases, directing federal government agencies to consider the social cost of greenhouse gases in federal procurement.

On November 11, 2022, shortly after this blog was posted EPA proposed a rule to regulate emissions of methane. While the proposed rule is itself worthy of discussion, readers of this blog may be particularly interested in a key technical feature of the announcement, that EPA has introduced a new approach to estimating the social cost of carbon, quietly proposing to increase the dollar amount from $51 to as much as $190 per metric ton.

Just last week a U.S. appeals court upheld the use of the “social cost of carbon” in policymaking by federal agencies.

Specifically, the St. Louis based 8th U.S. Circuit Court of Appeals in State of Missouri v. Joseph Biden, Jr., dismissed an appeal, ruling that the plaintiffs, attorneys general from 13 states, cannot rely on “generalized grievances” to challenge the metric [the social cost of carbon] absent a specific action taken by a federal agency. That is, “the District Court did not err in concluding the States lack Article III standing and that the claims were not ripe for review, ..”

With that court decision, the social cost of carbon is back.

There is no single widely accepted definition of the social cost of carbon, but most would accept that it is the present value of the future damages from one additional unit of carbon emissions in a particular year.

Stuart Kaplow and Nancy Hudes

Viewed in context, to address climate change, the federal government has developed monetary estimates on the cost to reduce carbon dioxide as part of assessing the costs and benefits of government actions.

And yes the term is hard to get your arms around, not to mention calculate, but in a practical example in 2016 a federal appellate court upheld the Department of Energy’s use of the social cost of carbon in a cost benefit analysis for updated refrigerator efficiency standards. More recently, in April 2022, Democrat members of Congress published a letter to the U.S. Postal Service requesting an updated cost benefit analysis of the UPS’s mail truck fleet replacement to include social cost of carbon evaluations.

Today the federal government is even going another step further in proposing to calculate the “social cost of greenhouse gases” carbon dioxide, methane, and nitrous oxide. When the social cost of GHGs is not part of a government agency’s cost benefit analysis, there is arguably less government leverage for reducing GHGs.

The uncertainty in all of this is more like “The Pit and the Pendulum” than federal government policy. In 2010, President Clinton issued Executive Order 12866 for the first time directing the federal government to calculate the social cost of carbon (while the theory had been discussed as far back as the Reagan Administration in 1981). In 2016 the cost was set by the Obama Administration at $36 per ton. The Trump administration slashed the social cost of carbon to $7 per ton. And then in 2021, President Biden directed the use of the social costs of GHGs, expanding from carbon alone in 2016 and adjusting for inflation which by interim estimate is $51 per ton. 

Of import, last month a group of academics published an article in Nature arguing that the social cost of carbon should be estimated at $185 per ton, in contrast with the current federal government interim estimate of $51 per ton (but that number may not be high enough for the Administration).

Contrast those theoretical dollar estimates with the dollars actually paid in the Regional Greenhouse Gas Initiative, the first mandatory cap and trade program in the U.S., where over the program’s first 14 quarterly auctions, the clearing price for carbon dioxide allowances ranged between $1.86 and $3.35. That is a far cry from the federal government’s interim estimates of $51 per ton.

Critics have charged that the social cost of GHGs is simply too uncertain to be used in government cost benefit analysis or otherwise, and while currently proposed for use in the U.S., it has been abandoned and is no longer utilized for policy appraisals in the EU or UK.

But the social cost of carbon is also being misused including by the state of Maryland where it is being weaponized as a penalty for the owner of a building that does not or cannot meet the net greenhouse gas emission reduction mandates established in law (i.e., a 20% reduction by 2030 and net zero by 2040), when the dollar amount for failure to comply is a “fee that is not less than the social cost of greenhouse gases adopted by the Department [MDE] or the U.S. Environmental Protection Agency.”

We have been working with businesses for more than a decade assisting in calculating their GHGs. With mandatory GHG reporting and reductions, our work is expanding and being accelerated. The addition of consideration of the social cost of carbon is resulting in more obligations and also opportunities for businesses.

The marginal cost of the impacts caused by emitting one extra ton of GHG is something business leaders need to understand. This is no longer some esoteric economic theory limited to aiding policymaking public officials. The social cost of GHGs is back. It is all but certainly here to stay and will impact the cost of doing business in the U.S.