When US federal agencies make policies on greenhouse gas emissions, they’re required to consider a cost-benefit analysis: How much will this regulation on, say, vehicle mileage standards cost, versus the value of its benefit to society?
The benefit figure, which may seem abstract, is known as the “social cost of carbon” (SCC for short), and it’s essentially an estimate of how much damage—to human health, crops, ecosystems, infrastructure, and beyond—each additional ton of carbon dioxide emitted today will cause in the future. It’s the single most important number in US climate policy, but it has never been particuarly accurate. Newly inaugurated US president Joe Biden hopes to change that, and economists are lining up with suggestions.
Under Barack Obama, the SCC was $50 per ton of CO2; under Donald Trump, it was slashed to just $7, so low it effectively signaled that climate action wasn’t worth the money. During his second week in office, Biden ordered an interagency working group of climate economists to get together and calculate a more realistic and effective figure. That report is due for release as soon as Feb. 20, and is expected to include a new number, plus guidelines for keeping it updated as better science about future climate impacts rolls in.
The new number could be at least $125, high enough to tip the calculus of climate policy in favor of aggressive action. It also offers a target for private companies looking to set their own internal carbon price to guide investments, which at least 850 companies globally, including fossil fuel producers like Shell and Exxon, already do, according to the Carbon Disclosure Project.
Calculating the social cost of greenhouse gas emissions
The Obama and Trump administration approaches shared a key flaw, explains Gernot Wagner, an economist at New York University who lead-authored a Feb. 19 article in the journal Nature about fixing the SCC. Both administrations effectively ripped off future generations by selecting too high a number for the “discount rate,” which Fintech Zoom’s Michael Coren explained well last year:
The discount rate is way to reflect the fact that people generally value the future less than the present: Any future benefit (or cost) is reduced by a certain percentage each year from the present day. For example, if emissions from an oil field lead to $25 billion in damages in 2050, those future damages will be valued at $3 billion under a 7% discount rate. Under a 1% discount rate, the damages would be $19 billion.
Trump’s discount rate went up to 7%; Obama used 3%. A better figure, more in line with actual current interest rates, would be close to 1%, Wagner writes. Other important steps for the Biden administration, Wagner said, should include:
- Reversing Trump’s decision that the SCC should reflect damages only within the US, since the harm from domestic emissions is global.
- Updating US damage estimates in general, since climate scientists have made strides on impact projections since Obama’s time, and include estimates for damages that have previously been ignored, like ocean acidification.
- Trying for the first time try to put a value on impacts that are hard to quantify economically, like changes in migration patterns, and those that are hard to predict because they’ve never happened before, like a sudden collapse of major Arctic ice sheets.
- Taking into account the fact that climate impacts fall more heavily on low-income and minority groups, a step that was previously blocked by accountants in the Office of Management and Budget.
“It’s an enormous undertaking, but it’s solidly grounded in science and economics,” Wagner says. “But there are judgment calls along the way.” For that reason, he says, official conversations about the SCC should include philosophers and ethicists as much as they include economists and scientists.
One group Wagner isn’t keen to hear from: fossil fuel company trade groups, 11 of which wrote to the Biden administration this week asking to be included in the SCC debate. ”Thanks for your offer, but no thanks,” he says. “I don’t see how their participation can possibly improve the process.”