Environmental Protection Agency


My colleague (and blog contributor) Frank Ackerman has a new article on Grist that explains why the United States can’t afford to settle for the “social cost of carbon” estimate used in the fuel-efficiency and tailpipe emissions standards unveiled April 1.

As we outlined in our recent white paper, “The Social Cost of Carbon” (available on the E3 Network website), the $21-per-ton figure being used by the government as a “central estimate” of the damages caused by carbon dioxide emissions is based on flawed economics and questionable value judgments.

Frank’s article describes how the government came up with that number, and why the SCC is so important: It’s like a “volume dial” that determines how strict environmental standards should be. Even worse, as Congress considers a climate bill, the $21 SCC could be taken as the recommended level for a carbon tax or permit price:

If that happens, there is no way the United States could reach the widely discussed, science-based goal of cutting emissions by 80 percent by 2050, which would require a much higher price on carbon. Given how cost-benefit analyses dominate U.S. policymaking, a $21 SCC could have a devastating impact on environmental legislation.

It’s easy to think of the fuel-efficiency standards as yesterday’s news, and not discuss the SCC again until it comes up in Congress. But in fact, now is the time to do our homework and figure out what the true price of carbon should be – before that, too, is a done deal.

In response to my recent post about the EPA’s little-known social cost of carbon (SCC) value and its importance in setting the stringency of U.S. emission reductions measures, one reader posted this comment:

… It seems to me that the social cost of carbon is whatever it is. The issue is how close EPA gets their estimate to the true value…

Perhaps, but the EPA’s current efforts at calculating the SCC – with its strong bias towards the lower end of estimations from the climate economics literature – is unlikely to arrive at that putative “true value.”

Here’s another way to calculate the SCC: We could ask ourselves, in general terms, what payment would we accept in exchange for our permission to allow greenhouse gas emissions to continue to grow, and to accept a drastically changed climate and all the social and economic damages that would come with it?

Before you answer, here’s something to consider: If we allow emissions to continue, we know that the climatic changes will be profound and the damages serious, but we don’t really know how profound and how serious.

This is what climate scientists and economists call the “problem of uncertainty.” We have a good idea of what the most likely damages will be, and even a good idea about their lower bound (best case). But the upper bound (worst case) is almost impossible to imagine, let alone quantify, with any confidence. In other words, it’s a big gamble: What would you accept in exchange for my assurance that the damages probably will be difficult but not devastating?

If your answer is some variation on “not for all the money in the world!” then for you (and for me) the SCC is infinite.

The SCC answers the question: What’s the damage done by one more ton of CO2 emitted into the atmosphere? Or, what benefit would make it worth it to you to allow the damage caused by that one additional ton? An infinite SCC tells us that future damages are so great that any additional emissions are simply unacceptable.

For anyone out there who likes to think graphically: The idea presented here is that part of the SCC curve is vertical. For a somewhat technical discussion of these issues see my critique of the now-defunct British method of calculating the SCC.

My colleague Frank Ackerman, head of the Climate Economics Group here at SEI-U.S., has an excellent guest post today on TripleCrisis about how important it is that the EPA not under-price carbon. (Check out my posting from yesterday on the same topic: The lower their chosen price on carbon, the less pollution control seems justified.)

Here’s an excerpt of his argument:

Every $1 per ton of CO2 is about a penny per gallon of gasoline, so $5 per ton would be a trivial price incentive of 5 cents a gallon. At $50 per ton, or 50 cents a gallon, you’d start to notice. An increase of $500 per ton, or $5 per gallon, would put us in the realm of gas prices in many European countries where people buy smaller cars and use public transportation a lot more than we do.

$500, though, isn’t in the running. In the September proposal, EPA offered a range of values from $5 to $56. It sounds to me like the high end was included to mollify critics, while the low end is what EPA’s economists prefer.

Read the full post here. To learn more about the “social cost of carbon,” what’s wrong with the EPA’s approach, and how it’s likely to shape EPA motor vehicle regulations, read Frank’s critique of proposed EPA regulation here.

Just about every climate policy has something to do with the price of carbon dioxide emissions. A carbon tax is just a price the emitter pays for each ton of carbon dioxide released into the atmosphere. Under cap-and-trade or cap-and-dividend allowance systems, a limit is placed on carbon emissions, and a market forms to buy and sell the right to emit; this market sets a price on carbon. Similarly, the EPA’s regulation of greenhouse gases under the Clean Air Act rests on a type of carbon price known as the social cost of carbon (SCC).

It sounds obscure and technical, I know, but with climate legislation stalled in Congress, the EPA regulatory actions could be the only U.S. climate policy that we see for a long time. So it’s worth a little of our time and brain cells to figure out just what the SCC means and why we should care.

The dollar figure put on the SCC will determine just how much regulation actually takes place. The EPA will look, in traditional cost-benefit-analysis style, at the cost of complying with a regulation in comparison to the SCC. If complying with the regulation costs more per ton than the SCC, the EPA won’t require it. If it costs less, it will. A high SCC means lots of regulations to reduce carbon dioxide emissions (think: higher fuel-efficiency requirements on cars, tighter emissions requirements for power plants). A low SCC means little or no regulation.

The EPA’s method of calculating the SCC is troubling and, perhaps, the subject of another blog posting. Suffice it to say, the figure is fairly arbitrary, based on a bunch of value judgments that need a lot closer examination by a wider public. The first EPA regulations that will depend on the SCC are part of a “rulemaking” regarding cars and light trucks – a process that has been more or less invisible to the general public. Once an SCC becomes part of an established regulation, it will become that much easier for the value set to be propagated to further regulations, citing precedent.

The EPA has the power to greatly reduce greenhouse gas emissions, and I’m hoping that they’ll use this power for good by setting a high SCC. Unfortunately, their proposed rulemaking does not support this hope – its SCC is small, and the justification given for this value is weak.

If you’re interested in the more technical details, check out Frank Ackerman of SEI-U.S.’s critique of the EPA rulemaking.