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.