The Social Cost Of Carbon And Its Role In The Federal Rulemaking Process

While cost-benefit analysis has been a part of rulemaking analysis for federal agencies since the early days of the Reagan Administration,1 federal agencies have only recently begun incorporating climate change impacts into their analyses. The preferred measure for incorporating climate change into regulatory cost-benefit analysis is the social cost of carbon (SCC)—the monetized damages associated with an incremental increase in emissions of a particular GHG in a given year, discounted to a present value.2

The determination of a "price" for environmental goods and services that do not have a market value is subject to uncertainties.3 Even for environmental goods whose benefits can all be experienced today, economic analyses often struggle to comprehend and monetize all of the benefits of the relevant ecosystems and the services they provide. For example, a cost benefit analysis seeking to quantify the benefits of wetland ecosystems would need to place a price on water filtration, flood protection, breeding habitat, and carbon sequestration functions served by wetlands and potentially many other ecosystem functions that are not yet fully understood. These challenges become even more pronounced when principles of cost-benefit analysis are applied to climate change, as the timing and magnitude of predicted climate changes and their resulting impacts remains uncertain. As a result of these inherent challenges, there have been numerous attempts to estimate the social cost of carbon that have produced widely varying numbers.4

This article focuses on the SCC values for carbon dioxide (CO2) currently used in federal rulemaking and examines applications of the SCC. To date, it appears that though federal agencies consider the SCC as part of their regulatory cost-benefit assessment, the SCC itself is considered too uncertain to serve as the basis of a definitive cost benefit analysis. However, recent Environmental Protection Agency actions have shown a potential willingness to stretch the SCC to non-CO2 greenhouse gases (GHGs) as a means of providing rough estimates of the benefits of federal rules that reduce GHG emissions, suggesting that its use may become more widespread.

Preliminary Government Attempts to Quantify the Social Cost of Carbon

In the context of contemporary rulemaking with cost-benefit analysis, federal regulations are considered to be economically efficient when the costs of regulatory compliance are less than the benefits to society resulting from the regulation.5 Under a pure cost-benefit analysis, all of the costs and all of the benefits would be assigned a dollar value. In the context of environmental regulation, however, regulators are often faced with imperfect information that makes it difficult to place a dollar value upon the benefits under consideration. For example, regulation of conventional air pollutants may require that federal agencies place monetary values upon benefits such as number of cases of asthma, avoidance of premature death, ecosystem health, and survival of plant or animal species. Though each of these certainly has some sort of a "value," reducing the value to a specific dollar figure is an exercise in abstraction. Recognizing this, many federal regulatory actions to protect public health and environmental quality eschew a full cost-benefit analysis, finding that some benefits are not quantifiable.7

The challenges of benefit quantification are amplified for GHGs where the specific harms averted by reducing GHG emissions are both uncertain and remote in time. For example, increased GHG concentrations may adversely affect agricultural productivity and human health, and may lead to increased property damages from flooding, economic dislocation, and the loss of ecosystem services.8 Because global climate models cannot predict with certainty where, when, and to what extent these impacts will be felt,9 precisely quantifying the benefits of avoiding them is difficult. The SCC attempts to capture these benefits in the cost-benefit equation by adding the SCC to the benefits side. The SCC is intended to serve as a shadow value,10 or the maximum price society would be willing to pay now, to avoid the set of future economic damages projected to arise from an incremental increase in GHGs. This shadow value is anything but clear. The initial attempts of several federal agencies to quantify SCC in recent years, as discussed below, illustrate this.

By Executive Order 12,866, federal agencies must "assess both the costs and the benefits of an intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination...