In a move that aims to continue to bring back evidence-based decision making to the Federal Government, as well as to demonstrate that the US is committed to taking serious action on climate change, the Biden administration has restored the value of the “social cost of greenhouse gases” to Federal policymaking.
The decision, announced on February 26, will restore prices near previous estimates at $51/ton of carbon emissions, $1,500/ton of methane emissions, and $18,000/ton of nitrous oxide emissions. The decision also directs the Interagency Working Group (IWG), which is responsible for calculating the prices and providing recommendations on them over time, to revise the numbers for the new year. This price will be effective across Federal agencies immediately, meaning that all Federal policies, purchases, permits, and other decisions will take into account at least some of the estimated costs of climate change.
Though the US social cost of greenhouse gases (US SGG) will be applied nationally, it is not a national carbon tax as it is not targeting polluters or raising revenues to be applied to greenhouse gas emission reduction programs. The intent of the US SGG more closely resembles a “shadow price” that is used in the private sector to place a monetary value on carbon emissions to assess the risk of future investments and expenditures.
It is another way to put a price on emissions causing climate change, and a way to measure the economic impact they have on society. The US SGG combines a range of estimates of the future damage done by one ton of greenhouse gas emissions, and in practice, should help Federal agencies account for the benefit of reducing greenhouse gas emissions.
This move to address climate change is among many anticipated by President Biden, who promised to take immediate action on the issue within the first 90 days of holding office. So far, this has included cancelling the controversial Keystone XL Pipeline and rejoining the Paris Climate Agreement, which became effective on February 19.
The US first began utilizing a US SGG in 2006 under the Bush administration, however, both the price and methodology across agencies were not consistent. Then in 2009, the Obama administration established the IWG to standardize the process and apply a uniform metric to be used in policymaking across agencies, which resulted in creating a set of baseline values. But in 2017, President Trump dissolved the IWG and, shortly thereafter, the EPA cut the values of the US SGG, bringing, for example, the social cost of carbon emissions down from $45/ton to a figure between $1-$6/ton.
This rollback created an opportunity for unfriendly environmental decisions to occur, as an excerpt from the Washington post explains:
“For example, if the Trump administration had applied the Obama-era calculation to its rollback of federal mileage standards, the costs of that rule would have far outweighed the benefits and would have been much harder to justify. And any federal coal leasing in the Powder River Basin would be unlikely to win approval.”
Since the IWG has not met in years, the newly announced set of prices were taken from Obama-era calculations, adjusted for inflation. Though they provide a benchmark for the interim, the current values are outdated and likely far below what they should be. Therefore, the IWG is tasked to revise the calculations and recommend new values later this year.
The calculation of the US SGG is complex as it is meant to account for factors that touch almost every operation and industry in the country, all the while looking out into the future. Per the latest technical document released from the IWG, the US SGG should include: “the value of all climate change impacts, including (but not limited to) changes in net agricultural productivity, human health effects, property damage from increased flood risk and natural disasters, disruption of energy systems, risk of conflict, environmental migration, and the value of ecosystem services.”
The other core component to calculating the US SGG is the discount rate, which currently sits at 3%. The discount rate is an economic concept that takes into account the time value of money: the cost of something today is understood as a currency value that will be worth less in the future. This discount rate is critical to setting the price appropriately now and in the near-term, and as such, is heavily debated.
Given that the US SGG is a different value than a traditional carbon tax, it is difficult to assess what a final fair value would be. Some current estimates place the eventual values to match those enacted by the State of New York last December, which set prices at $125/ton of carbon emissions, $2,782/ton of methane emissions, and $44,727/ton of nitrous oxide emissions. Globally, research is limited, however other countries like India, China, and Saudia Arabia have applied similar social cost values, with an average of $417/ton of carbon emissions.
Re-committing to a US SGG does not preclude the Administration from also pursuing a national carbon tax or emission trading system (ETS) on polluters. Though there has been renewed chatter about the possibility, the Biden administration has not signaled their desire to pursue a national carbon tax or to expand existing U.S. cap-and-trade market systems at the moment. Nonetheless, the President has demonstrated his commitment to believing in science and using factual data to make policy decisions that impact the safety and security of the nation. And as we look forward in 2021, we should expect the Federal Government to take continued action to address climate change.