Potential Carbon Cost Hike Spurs Fears of Energy Project Delays

The Biden administration’s move toward expanding the “social cost of carbon” measurement to better account for broad climate change impacts has industry groups and corporate attorneys worried it could slow or halt some big energy projects—though it might also boost renewable sources.

A White House panel in February set an interim figure of $51 per ton as the social, health, and economic cost of emissions, reversing a Trump-era move that slashed it to as little as $1 a ton. Final—and many expect, higher—cost figures for carbon dioxide and two other greenhouse gases are expected in January that will influence federal rules, environmental reviews, and permitting.

The potential for a big hike in the climate metric, compounded by the White House’s October proposal to reinstate Obama-era rules for project reviews under the National Environmental Policy Act, could make a wide range of projects impossible to permit, said Elizabeth Titus, a partner at Holland & Hart LLP.

“Companies who want to do work on public lands or in certain states—this will affect whether they think those projects are even feasible,” and force project developers to account for both current and future climate impacts, Titus said.

For example, a higher carbon cost estimate could force backers of a natural gas pipeline to propose more elaborate and expensive measures to mitigate emissions from the project.

Climate-friendly projects, however, could benefit from the changes, given alternatives to wind and solar projects often involve carbon-intensive fossil fuels.

Those revisions are coming as Congress is weighing the biggest federal infrastructure bill in years: a $550 billion bipartisan package that cleared the Senate but is now stalled in the House to make historic investments in public transit, Amtrak, bridges, electric vehicles, the power grid, and water projects.

A ‘Black Box’

Biden, in addition to ordering the Interagency Working Group to restore Obama’s climate metric with revisions, is eyeing separate cost estimates for methane and nitrous oxide. Those greenhouse gases have a much bigger impact in warming the atmosphere than carbon dioxide.

The panel requested comments in the spring but has no plans to accept more input before issuing final numbers—prompting some groups to complain that they won’t get to see the panel’s approach until after it’s final.

Industry groups and corporate attorneys say the panel’s entire process has been a “black box” lacking transparency.

The U.S. Chamber of Commerce, in a 35-page memo on behalf of more than 20 industry associations including the American Chemistry Council, National Mining Association, and American Petroleum Institute, said the interagency panel should subject any carbon cost recommendations to peer review by outside experts, and limit the use of carbon costs to regulatory cost-benefit analysis.

The White House Office of Management and Budget, which co-chairs the panel, said it’s committed to engaging with “diverse stakeholders” to ensure any new climate metrics address not only climate risks but also environmental justice and equity for future generations.

But it’s still unclear how the government will use estimates of societal impacts from emissions in the revamped environmental review and permitting requirements unveiled by the White House Council on Environmental Quality Oct. 6.

CEQ made only a passing reference to the ongoing effort to account for current and future greenhouse gas impacts. Its proposal said only that agencies may find the cost “helpful” when weighing climate-related impacts of projects and alternatives to mitigate emissions.

Social carbon and other emissions costs aren’t paid directly by U.S. companies but regulatory agencies can use them to help weigh costs and benefits of new or strengthened regulations. That can make it easier for agencies to justify more stringent, and possibly more costly, regulations.

Court Challenges Ahead?

Clean energy groups, meanwhile, say wind, solar, and other projects should benefit from a more precise accounting for climate impacts in regulations and decisions, as well as in Biden’s move to revise NEPA rules.

“An appropriate social cost of carbon can help drive more climate-friendly decision-making across the federal policy landscape, including greater use of pollution-free renewable power,” said Greg Wetstone, the American Council on Renewable Energy’s president and CEO.

NEPA doesn’t technically require a cost-benefit analysis of projects under review, but environmental groups have pressed agencies to use the social carbon cost to gauge the climate impacts of projects seeking a permit.

Their use has spread to state public utility commissions in California, Colorado, and other Western states in weighing the impacts of electricity from fossil fuels versus clean energy.

Agencies also are increasingly under pressure from courts to show they have considered climate impacts for projects, particularly when regulators used economic benefits, such as increased royalties from oil or gas leasing, to justify approval.

The Federal Energy Regulatory Commission must now use the carbon cost figure or a similar framework in its analysis of a liquefied natural gas project in Texas, the D.C. Circuit ruled in August.

CEQ’s initial proposal focused mostly on restoring Obama’s approach and plans a second one that will address whether to broaden NEPA reviews of climate impacts. That makes its more modest October proposal much less vulnerable to litigation, said Olivier Jamin, an environmental attorney with Davis Wright Tremaine LLP.

But CEQ “could draw more challenges in court” if agencies try to leverage what’s now only a CEQ proposal and “start being a little more aggressive in considering greenhouse gas emissions and the social cost of carbon in their reviews,” Jamin said.

The Biden administration already has been sued by a dozen states over its interim move that essentially restored Obama’s social carbon cost—though it was updated to $51 per ton using 2020 dollars.

Calculating Risks

A higher carbon cost figure could force project planners to find new emissions-cutting strategies to avoid a “no-build alternative,” said Sam Boxerman, a partner in Sidley Austin LLP’s environmental practice in Washington.

A higher social cost of carbon could also force companies to reassess the degree to which they face climate-related risks, Boxerman said.

The Securities and Exchange Commission is considering strengthening requirements for company disclosures of climate risks. The agency in the spring requested input on which climate metrics companies should have to use to quantify their climate risks and whether their measurements should have to be disclosed to investors and shareholders.

Also unclear is how the interagency group will account for international impacts and the setting of a discount rate, among other decisions. The discount rate—typically several percentage points—is crucial to translate the reduction of future climate damages into present-day values.

Environmental groups oppose using high discount rates, which they say minimizes climate impacts for future generations.

Our Children’s Trust, a public interest law firm advocating for younger generations, said high discount rates “unjustifiably undervalue the benefits of climate action for children living today and coming generations, thereby marginalizing those populations.”

Given the devastating climate impacts to come, the panel should use a 0% discount rate—or even negative rates—to address “intergenerational equity” concerns, the group wrote in June 21 comments to the White House panel. Lowering the discount rate would translate into a higher social carbon cost figure.

The interagency panel already signaled in February that it’s open to the argument, saying its review of more recent data and evidence “strongly suggests” a lower discount rate for assessing such intergenerational impacts.