Is the Social Cost of Carbon (SCC) metric a good tool for use in making government decisions related to climate change and fossil fuel development? The EPA uses it in economically justifying its rules on reducing carbon emissions from vehicles and power plants. A federal judge recently rejected a proposed coal mine expansion in Colorado because the federal agencies failed to consider the SCC.  But can the expected damages from climate disruption be captured adequately in SCC and cost-benefit analyses? What are the alternatives?

[See also: What to do about the “Social Cost of Carbon” metric? — Part 2]

In blocking a permit for a proposed coal mine expansion in Colorado on June 27, U.S. District Court Judge R. Brooke Jackson said that federal regulators failed to consider the “social cost of carbon” (SCC) protocol in the Environmental Impact Statement developed in considering the permit (Federal coal mining permit blocked for failing to consider climate change impacts).

The SCC is an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, conventionally one metric ton, in a given year (see here and here for technical papers on how the federal agencies develop the SCC metric). This dollar figure also represents the value of damages avoided for a small emission reduction (i.e. the benefit of a CO2 reduction).

In his ruling, Judge Jackson said the government wasn’t explicitly required to use the SCC, or any specific amount, in estimating the impacts of the climate change that would result from burning the coal expected to be produced from the expanded mining operation. But, he said, in comparing the costs and benefits of the project the government is required to use something besides zero in estimating the benefits that would result from avoiding the carbon emissions, and justify its method. Judge Jackson said:

The agencies … acknowledged that there might be impacts from GHGs in the form of methane emitted from mine operations and from carbon dioxide resulting from combustion of the coal produced. … Beyond quantifying the amount of emissions relative to state and national emissions (FSLeasing-0046874) and giving general discussion to the impacts of global climate change (FSLeasing-0046880), they did not discuss the impacts caused by these emissions. Instead, they offered a categorical explanation that such an analysis is impossible. …

But a tool is and was available: the social cost of carbon protocol. Interagency Working Group on Social Cost of Carbon, Technical Support Document (Feb. 2010); see FSLeasing- 0041245 at 0041403, 0041404. The protocol—which is designed to quantify a project’s contribution to costs associated with global climate change—was created with the input of several departments, public comments, and technical models. FSLeasing-0041245 at 0041403, 0041404-06. The protocol is provisional and was expressly designed to assist agencies in cost-benefit analyses associated with rulemakings, but the EPA has expressed support for its use in other contexts. See Sarah E. Light, NEPA’s Footprint: Information Disclosure as a Quasi- Carbon Tax on Agencies, 87 Tul. L. Rev. 511, 545-46 & n.160 (Feb. 2013) (noting the EPA recommendation to the State Department to “explore . . . means to characterize the impact of the GHG emissions, including an estimate of the ‘social cost of carbon’ associated with potential increases of GHG emissions” in connection with the State Department’s review of the Keystone XL pipeline). …

The agencies expressly relied on the anticipated economic benefits of the Lease Modifications in justifying their approval. See FSLeasing-0069890 at 0069898) (explaining that the no-action alternative was not chosen because “it does not achieve social and economic objectives in the area. Estimates suggest nearly a billion dollars in lost revenues, royalties, payroll and local payment for goods and services would be foregone by implementing this Alternative”). …

In effect the agency prepared half of a cost-benefit analysis, incorrectly claimed that it was impossible to quantify the costs, and then relied on the anticipated benefits to approve the project. …

[T]here is a wide range of estimates about the social cost of GHG emissions. But neither the BLM’s economist nor anyone else in the record appears to suggest the cost is as low as $0 per unit. Yet by deciding not to quantify the costs at all, the agencies effectively zeroed out the cost in its quantitative analysis.

I find that the FEIS’s proffered explanation for omitting the protocol was arbitrary and capricious in violation of NEPA. …

President Obama, like other presidents dating back to Ronald Reagan in the 1980s, requires that significant rules proposed by federal agencies under various laws include an economic cost-benefit analysis. In addition, Obama requires that proposed climate rules be analyzed and justified in terms of a Social Cost of Carbon metric.

The SCC metric is currently in use in government decisionmaking. The Environmental Protection Agency uses the SCC to estimate the climate benefits of its rulemakings on carbon emissions from vehicles and power plants. EPA says:

EPA has used the SCC to analyze the carbon dioxide impacts of various rulemakings since the interagency group first published SCC estimates in 2010 (PDF, 51 pp, 847 KB). Some of these rulemakings have directly targeted carbon dioxide emissions, such as the car and truck standards, whereas others have set standards for conventional or toxic pollutants that indirectly affect carbon dioxide emissions, such as the final rulemaking to control mercury and other air toxic pollutants (PDF, 510 pp, 8.3 MB) from power plants. The rulemakings directly targeting carbon dioxide emissions have projected notable climate-related benefits for society. For example, the projected net present value of carbon dioxide mitigation benefits over the next forty years from three vehicle rulemakings was estimated to range from $78 billion to $1.2 trillion ($2010), depending on which of the four SCC estimates were used (i.e., the average SCC at 5, 3, and 2.5 percent and the 95th percentile SCC at 3 percent). These three rulemakings are:

The Joint EPA/Department of Transportation Rulemaking to establish Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards (2012-2016) (PDF, 474 pp, 5.89 MB)

Joint EPA/Department of Transportation Rulemaking to establish Medium- and Heavy-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards (PDF, 553 pp, 9.12 MB)

Joint EPA/Department of Transportation Rulemaking to establish Light-Duty Vehicle Greenhouse Gas Emission Standards and Corporate Average Fuel Economy Standards (2017-2025) (PDF, 555 pp, 8.83 MB)

For more information see the SCC Fact Sheet (PDF, 4 pp, 80 KB).

The Interagency Working Group on Social Cost of Carbon, with participation by six federal department and agencies and six offices in the Executive Office of the President, issued a technical update in May 2013 with new estimates of the SCC.

EPA used this work in its economic justification for the agency’s proposed rule on limiting carbon dioxide emissions from existing power plants, currently out for public review and comment (see EPA, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units). Section X.G. (“What are the benefits of the proposed goals?”) of the summary of the proposed rule includes this:

For this rulemaking, we were only able to quantify the climate benefits from reduced emissions of CO2 and the health co-benefits associated with reduced exposure to PM 2.5 and ozone. In summary, we estimate the total combined climate benefits and health co-benefits for Option 1 to be $33 billion to $54 billion in 2020 and $55 billion to $89 billion in 2030 assuming a regional compliance approach (2011 dollars at a 3-percent discount rate [model average]). If states comply using a state-specific compliance approach, these climate and health co-benefits estimates are estimated to be $35 to $57 billion in 2020 and $57 to $93 billion in 2030 (2011 dollars at a 3-percent discount rate [model average]). …

The EPA has used the social cost of carbon (SCC) estimates presented in the 2013 Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (2013 SCC TSD) to analyze CO2 climate impacts of this rulemaking. (331) …

So, what might be the implications have been of adding an SCC analysis for the outcome of a decision by federal agencies on whether to approve the Arch Coal mining expansion in Colorado? Would it have made a difference?

Is the SCC metric appropriate for making other decisions on permits for various fossil fuel development projects? How about for coal leasing on federal land, in particular in the Powder River Basin in Wyoming? For oil and gas leasing on federal lands? For deepwater drilling for oil in the Gulf of Mexico? In the Arctic Ocean? How about for a decision on permitting the Keystone XL tar sands pipeline? What about export terminals for coal and liquefied natural gas? Should opponents of the projects include SCC-based arguments in their challenges — as was done successfully in the recent Colorado coal mine case?

The problem is that, for one thing, the Social Cost of Carbon metric as currently employed is deeply flawed and almost certainly substantially underestimates the climate change impacts of fossil fuel burning, and the benefits of avoiding carbon emissions. EPA acknowledges this:

The SCC is meant to be a comprehensive estimate of climate change damages and includes, but is not limited to, changes in net agricultural productivity, human health, and property damages from increased flood risk. However, given current modeling and data limitations, it does not include all important damages. As noted by the IPCC Fourth Assessment Report, it is “very likely that [SCC] underestimates” the damages.

EPA also notes:

Current integrated assessment models do not assign value to all of the important physical, ecological, and economic impacts of climate change recognized in the climate change literature for various reasons, including the inherent difficulties in valuing non-market impacts and the fact that the science incorporated into these models understandably lags behind the most recent research. Nonetheless, these estimates and the discussion of their limitations represent the best available information about the social benefits of CO2 emission reductions to inform the benefit-cost analysis.

EPA is required to use the SCC in its rulemaking because of constraints imposed by Obama on the process. But the Integrated Assessment Models used in estimating the SCC have very significant limitations in incorporating and monetizing many of the likely harmful consequences of anthropogenic climate change. And beyond that, the whole idea of using cost-benefit analysis to analyze climate policy options, with their long-term implications, is fundamentally questionable.

Many people no doubt think of “cost-benefit analysis” as meaning something like “common sense,” i.e., in non-technical terms. But cost-benefit analysis, applied as a technical methodology, can promote bad decisions when used in situations where benefits may be hard to quantify precisely, or to monetize and place a market value on. This could include a wide range of issues involving human health and safety and environmental protection.

Frank Ackerman and Lisa Heinzerling’s incisive book, Priceless: On Knowing the Price of Everything and the Value of Nothing, lays out the case against the cost-benefit analysis approach to protecting health, safety, and the environment. The Center for Progressive Reform published a valuable white paper presenting a strong critique of using cost-benefit analysis in developing environmental, health, and safety regulations (Reinvigorating Protection of Health, Safety, and the Environment: The Choices Facing Cass Sunstein, Center for Progressive Reform, White Paper #901, January 2009).

The second part of this post will consider what’s been left out of the Social Cost of Carbon metric, and look at alternative approaches for making climate change-related decisions.

Earlier posts:

Deep Decarbonization: Truly facing the climate challenge

Koomey: Moving beyond benefit-cost analysis of climate change