This single number could reshape our climate future

The social cost of carbon is the “single most important number that nobody has ever heard of.” In the U.S., it’s about to get much higher.

In the flurry of actions that President Joe Biden has taken to respond to climate change—rejoining the Paris Agreement, canceling the Keystone XL pipeline, pausing oil and gas leases, directing the government to purchase only zero-emissions vehicles—one move has gotten less attention but may be critical for the future of life on Earth. It concerns a number most people have never heard of.

On January 20, his first day in office, Biden ordered an immediate review and revision of the “social cost of carbon,” a wonky economics metric that represents how much each additional ton of carbon dioxide emitted to the atmosphere costs society. First calculated by the Obama Administration, the number was slashed under former President Donald Trump. That made it easier for his Environmental Protection Agency to justify rolling back major climate regulations, including Obama-era fuel economy standards and the Clean Power Plan.

Experts say that revising the value assigned to the social cost of carbon to once again be in line with science will allow the Biden Administration to craft stricter greenhouse gas regulations across myriad sectors of the economy and ultimately help meet its climate policy goals.

“The executive order is a really exciting step in the right direction,” says Tamma Carleton, an environmental economist at the University of California, Santa Barbara. “It’s exciting that it will be established and updated to reflect best available science.”

The cost of doing nothing

Tackling climate change will cost money, but so will failing to do so. Humanity’s greenhouse gas emissions are causing temperatures and sea levels to rise and fueling more extreme weather, all of which are destroying property, decreasing crop yields, reducing labor productivity, and killing people. The monetized damages associated with each additional ton of carbon dioxide (or any other greenhouse gas) is its “social cost.”

Setting this number allows policymakers to determine the dollars-and-cents benefit of preventing that gas from entering the atmosphere, a crucial step in drafting regulations. If Congress were ever to pass a tax on carbon emissions—a measure favored by many economists—the social cost of carbon also could inform decisions around the appropriate level for the tax.

The social cost of carbon is “the single most important number that nobody has ever heard of,” says Gernot Wagner, a climate economist at New York University. “It's one of the most important questions in public policy that will define life on this planet.”

Following a landmark Supreme Court decision in 2007 that permitted the EPA to regulate greenhouse gases under the Clean Air Act, former President Barack Obama convened a government working group to calculate the social cost of carbon. Using “integrated assessment models” that link climate simulations with economic ones, the working group came up with an initial range of estimates in 2010, which were updated and revised over time. By the end of the Obama Administration, the central value for the social cost of carbon sat at $52 per ton when measured in 2020 dollars.

Soon after Trump took office, his administration disbanded the working group and started making changes to the social-cost-of-carbon calculation that experts say were inconsistent with climate science and economics.

First, the Trump Administration revised the social cost of carbon to consider only the U.S. damages arising from U.S. carbon emissions instead of global damages. This, Carleton explains, is a flawed approach, because climate change is intrinsically a global problem, and both U.S. emissions and actions to reduce them affect the world—which in turn affects the U.S. After the U.S. announced its carbon reduction goals under the Paris Agreement, for example, many other countries followed suit. Researchers have calculated that every ton of carbon dioxide the U.S. pledged to avoid emitting resulted in close to seven tons of pledges by other countries.

If we only use domestic estimates,” Carleton says, “we lose out on all those emissions reductions from other countries,” which results in more climate damage everywhere, including in the U.S.

The Trump Administration also made controversial changes to the “discount rate” used to calculate the social cost of carbon. The discount rate accounts for the fact that damages in the future have less value to society than damages in the present. A higher discount rate means that society values future damages less.

Obama’s working group used a discount rate of three percent; the Trump Administration used both three and seven percent in its recalculation. Many economists consider the higher discount rate inappropriate for problems such as climate change that have major intergenerational impacts.

As a result of these changes, the Trump Administration was able to whittle down the social cost of carbon to just $1 to $7 per ton. Suddenly, regulatory rollbacks that could not have been justified before from a cost-benefit perspective made sense on paper.

“Basically they did away with the social cost of carbon,” Wagner said.

A crucial recalculation

Now Biden plans to restore a higher value to the social cost of carbon. The president’s recent executive order calls for establishing a new working group that will publish an interim value within 30 days and a final one by January 2022.

The executive order indicates that the Biden Administration intends to return to a global social cost of carbon and use a value that “reflect[s] the interests of future generations,” signaling its intention to return to a lower discount rate. Carleton says that both changes are “scientifically defensible, valid updates that can happen right away.” In a recent white paper, she recommended lowering the discount rate to two percent based on changes in global capital markets. That, along with shifting from domestic-only back to global damages, would raise the social cost of carbon to $125 per ton.

In the coming months Biden’s working group may choose to update the Obama-era models to reflect new scientific information on the pace of global warming and the financial losses it causes. There has been an “explosion of data-driven research measuring the impacts of climate change across different sectors,” Carleton says.

To Wagner, the most important thing the Biden Administration can do will be “getting science back into this process...having it be a solid, scientific, economics-based process.”

An arrow in the quiver

The appropriate value for the social cost of carbon is not a purely scientific issue, however, and it’s no silver bullet for solving the climate crisis.

Some of the most significant impacts of climate change, such as biodiversity losses and ocean acidification, are extremely difficult to monetize, and the figures used in cost-benefit calculations are little more than an “expert guess,” Carleton says. Other questions embedded within the social cost of carbon—such as how to put a dollar value on human life and what level of risk society should be willing to assume when it comes to climate impacts—remain highly controversial, and more philosophical and political than scientific and economic.

It’s for these reasons that Karl Hausker, a senior climate fellow at the World Resources Institute, calls the social cost of carbon “a flawed touchstone for climate policy.”

“It’s a good thing to preserve [for] doing some kind of cost-benefit analysis on rulemaking,” Hausker says. But when it comes to setting our overall level of ambition in the climate policy arena, Hausker, and many others, argue that we should instead use a “risk management” approach.

“If you frame it as a risk management problem in terms of, ‘Let’s not exceed a certain temperature,’ then you back calculate how many tons of carbon are out there already and you walk back to emissions targets,” he says. “That’s a very different framing than trying to find the ‘optimal level’ of climate damage” based on a cost-benefit analysis.

Paul Kelleher, a professor at the University of Wisconsin–Madison who studies philosophical issues in climate policy, says that the social cost of carbon is “one arrow in the larger climate policy quiver.” But the “central starting point for climate policy discussions,” he says, should be how to avoid unlikely but catastrophic climate scenarios, which haven’t been emphasized in social-cost-of-carbon calculations.

Despite its limitations, an updated social cost of carbon will be a critical tool for the Biden Administration as it seeks to put in place regulations and policies that steer the U.S. toward a carbon-free economy by 2050. And just like re-joining the Paris Agreement, the effect of revising the social cost of carbon upward could ripple beyond U.S. borders and help to ratchet up ambition on climate matters worldwide.

“The social cost of carbon in the United States has already influenced other countries,” Carleton says, noting that Canada, Germany, and Mexico have all referred to the U.S. as a model when developing their own social costs of carbon. I'm confident that if we put in the time and energy to update that number and bring it closer to the frontier of science and economics, that other countries will do the same.”

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