Improve the Social Cost of Carbon, Do Not Replace It

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Despite some scholars’ criticisms, the social cost of carbon is a useful tool for crafting U.S. climate policy.

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Every ton of planet-warming carbon dioxide emitted from a smokestack or a tailpipe contributes to climate change, imposing costs on us all. But how much cost exactly?

Currently, the federal government puts that cost at $51 per ton using a metric called the social cost of carbon, or SCC for short. Federal agencies use this metric when they analyze the consequences of actions that cause greenhouse gas emissions to rise or fall. In fact, agencies are required to analyze the SCC by executive orders that have been in effect for 40 years, under administrations led by both Republican and Democratic leadership.

Moreover, weighing the costs and benefits of a proposed regulation is an obligation recognized by the U.S. Supreme Court. It was a federal appellate court specifically insisting that agencies must quantify climate costs and benefits that led the Obama Administration to develop a method “to quantify avoided climate change damages” from reducing carbon emissions. The Administration’s resulting SCC estimates have since been upheld in court and praised as scientifically sound by independent experts.

Recently, the Biden Administration called for a review and possible updating of the SCC to ensure that it reflects the latest science. But some observers, including two prominent economists, Nicholas Stern of the London School of Economics and Political Science and Joseph E. Stiglitz of Columbia University, argue that the SCC is too flawed for use in policymaking. Stern and Stiglitz contend that the SCC’s discount rates—the rate at which society is willing to trade off current for future consumption—are too high, fail to reflect climatic tipping points and “unknown unknowns,” and assume away market imperfections and inequality.

Although the Biden Administration has pointed to these and other technical issues as components of the SCC that need attention and improvement, Stern and Stiglitz think these issues justify casting the metric aside altogether.

Stern, the lead author of the Stern Review on the Economics of Climate Change, has played a significant role in global climate policy. Stiglitz won the Nobel Prize for his research on the role that information—including incomplete information—plays in economic decisions.

Rather than rely on the SCC to estimate the damage caused by each unit of carbon dioxide emissions, Stern and Stiglitz propose abandoning a damage-based estimate altogether and taking a fundamentally different approach: estimating how much society must spend to avoid emitting each ton of the carbon dioxide to ensure that global temperature increases do not exceed two degrees Celsius.

We think Stern and Stiglitz’s estimate is worth developing to indicate whether the SCC is compatible with reaching a two degrees Celsius goal, but not to supplant the SCC. Replacing the SCC as they suggest would create problems for U.S. climate policy.

To begin, their estimate, known as a marginal abatement cost, is incompatible with the legal requirement that federal agencies must assess the costs and benefits of their regulatory measures. Because it does not assess the emissions-related damages imposed or avoided by a proposed regulation, it cannot support an agency’s crucial determination of whether a regulatory measure gives rise to positive net benefits for society as a whole.

Instead, Stern and Stiglitz assume a target with a scientific basis but not a legal one––at least not one based on current law. Although keeping global warming to two degrees Celsius is surely a worthy goal, the U.S. Congress has not adopted this standard into law yet.

Without a binding statutory emissions target, regulatory agencies must rely on the standard requirement that their regulations should yield more benefits to society than costs––an analysis aligned with the need for an estimate of the SCC. By jettisoning the SCC and failing to compare carbon emission costs to benefits, as Stern and Stiglitz suggest, agencies might neglect that key question and invite legal challenges.

One of the arguments that Stern and Stiglitz raise against the SCC is that it yields a value that is too low, compared to their marginal abatement cost value of about $100 per ton. But this criticism appears misplaced. The update ordered by the Biden Administration, slated for completion in January 2022, will include a reexamination of the SCC’s range of discount rates and is widely expected to result in a value that exceeds $100 per ton––simply because the current  SCC discount rate is often considered too high. Notably, in 2020 New York State adopted an SCC of $125, based on considerable evidence that discount rates are lower than experts believed when the SCC was first developed.

None of this is to deny that Stern and Stiglitz’s criticisms of the SCC should be taken seriously. But the Biden Administration seems to be doing just that by calling for an intensive review to incorporate recommendations from the National Academy of Science and recent scientific and economic research.

Indeed, recent research suggests that a two degrees Celsius target may be too conservative, and thus using cost-benefit analysis could justify bolder climate action. This prospect should not be surprising, given that an updated SCC promises a damage-based cost of carbon higher than Stern and Stiglitz’s $100 marginal abatement cost estimate—as evidenced by New York’s recent evaluation.

The Biden Administration is charting a prudent path, one that involves improving, rather than abandoning, a viable and legally necessary foundation for climate policy.

Justin Gundlach

Justin Gundlach is a Senior Attorney at the Institute for Policy Integrity at New York University School of Law.

Peter Howard

Peter Howard is the Economics Director of the Institute for Policy Integrity at New York University School of Law.