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Biden’s Path Forward on the Social Cost of Carbon

March 3, 2021, 9:01 AM

The Biden administration on Feb. 26 took a significant step toward meeting the goals of its day-one executive order on tackling climate change with a simple numerical update.

The administration determined an interim value for the social cost of carbon (SCC), as well as corresponding values for the social costs of nitrous oxide and methane. These estimates of the damage caused by the emission of a ton of the respective greenhouse gases play a key role in the evaluation of government actions affecting climate change.

The Interagency Working Group on the Social Cost of Greenhouse Gases that conducted this review restored and adjusted for inflation the values in effect at the end of the Obama administration, which measured global impacts and had been upheld in court. It abandoned the Trump administration’s approach of considering what it called “domestic only” impacts, which a court struck down as “arbitrary and capricious,” finding it “riddled with errors,” in part because, despite the label, it ignored many adverse consequences accruing to the U.S.

Biden’s move is significant, raising the SCC by an order of magnitude, from $1-$7 to $51, but there is even more important work still to come. A more thorough review is likely to further increase the value of the SCC, and other moves could strengthen the legal footing for its use in numerous contexts.

The executive order calls on the interagency working group to determine a final SCC by January 2022, in light of developments in the scientific literature. The newly restored SCC value is widely regarded to be a lower bound of the true damage of emissions, in part because quantification techniques have improved since the estimation made under the Obama administration and, therefore, more of the myriad adverse consequences of climate change can now be included in the SCC.

Updating the Discount Rate

But perhaps the largest increase will come from updating the discount rate used to evaluate future consequences.

For example, if the SCC were computed using a discount rate of 2%, which New York now uses in its own SCC calculation, instead of the 3% rate used during the Obama administration, the value would be 2.5 times higher. The 3% rate is prescribed in OMB Circular A-4, a 2003 document that provides cost-benefit-analysis guidance to agencies.

But that rate was set to match the long-term interest rates on government bonds at the time. These interest rates are now far lower, and the Council of Economic Advisers and prominent economists have recommended lowering the corresponding discount rate as well.

Moreover, over the last decade, a robust academic literature has explained why discount rates should be particularly low when the consequences of governmental action will occur in the distant future, as is true for many impacts of climate change.

Presidential Memo and Revisions to OMB Circular

The work of determining an appropriate discount rate for the SCC should proceed alongside a broader inquiry, launched by another day-one action of the Biden administration: the presidential memorandum on modernizing regulatory review. The memo calls for revisions to the Office of Management and Budget’s Circular A-4 “to ensure that the review process promotes policies that reflect new developments in scientific and economic understanding.”

A general update of discount rates should be a top focus of these modernization efforts.

The memo does not specify a deadline for completing the broader update of the OMB’s circular. Nonetheless, it would be highly desirable for this work to be completed at the same time as the SCC update. Otherwise, the processes could result in an inconsistency, in which long-term climate impacts are evaluated using a different discount rate than other long-term impacts. Such an inconsistency, if not properly explained, could be highlighted in court challenges to climate-related actions.

Some institutional creativity will be necessary to accomplish these updates simultaneously, as the interagency working group will be handling SCC tasks while the the director of the OMB will oversee the broader modernization effort.

The executive order also asks the interagency working group to “provide recommendations to the President, by no later than September 1, 2021, regarding areas of decision-making, budgeting, and procurement” where the SCC should be applied.

A Broader Scope for SCC Use

Opponents of climate action, including the Trump administration, have argued that these values are relevant only for regulations, and should not be used for the evaluation of projects, such as pipeline approvals under the National Gas Act, or in environmental impact statements prepared under the National Environmental Policy Act.

Some courts have adopted this narrow view of the SCC’s scope, limiting its use to regulatory contexts, though others have insisted that the SCC be used to evaluate nonregulatory actions as well. A reason for this confusion may be that the narrow title of the Obama administration’s SCC documents was “Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866.”

In its upcoming report, the interagency working group can easily put this issue to rest because the SCC is simply a measure of damages from greenhouse gas emissions. It is equally relevant for estimating regulatory consequences, infrastructure approvals, and government procurement decisions.

The Biden administration eliminated some of the underbrush of bad analysis left over from the Trump administration. In the coming months, efforts to address climate change could be boosted further as the SCC is updated to reflect the best available science, and it is used in all relevant contexts that affect emissions.

This column does not necessarily reflect the opinion of The Bureau of National Affairs,Inc. or its owners.

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Richard L. Revesz is the AnBryce Professor of Law and Dean Emeritus at the New York University School of Law, where he directs the Institute for Policy Integrity.