The ‘Social Cost of Carbon’ Is the Most Historic Climate Change Decision Yet

The Daily Beast; August 30, 2016

One of the most significant court cases about climate change was decided this month by a federal appeals court in Chicago. Given that it was steeped in the enervating context of refrigerator regulations, you may have missed it. But amid the stultifying discussions of compressors and insulation foam was a crucial advance in our nation’s belated attempts to forestall global climate catastrophe.

It all comes down to a new phrase: the Social Cost of Carbon.

Here’s why it’s important. By law, government agencies—in this case, the Department of Energy—are often required to show that the benefits of a proposed regulation exceed the costs. Sometimes this is straightforward: If it costs industry $100 million to prevent pollution that will do only $10 million in damage, the government (usually) can’t force them to do it. 

Sometimes it’s downright Solomonic. If that pollution regulation can save a single life, is that worth $100 million in industry costs? You might say yes, but usually, the government says no. In fact, we “price lives” all the time—by requiring some safety protections but not others, by building roads the way we do, and in a thousand other ways.

But what about climate change? The costs of a particular regulation—in this case, covering refrigerators—are sometimes easy to assess. But how do you capture the “benefits” of preventing cataclysmic climate change?

Beginning in 2010, a group of economists and scientists set about answering that question. They tried to calculate the likely future costs of shifting climate zones, agricultural disruptions, more extreme events like Superstorm Sandy, more outbreaks of disease, and the many other effects of climate change.

The result is the Social Cost of Carbon (SCC), which, long story short, was calculated to be $36 per ton. That figure, while admittedly an approximation, is the best estimate that the government has put forward so far.

That’s why the Department of Energy used it in its refrigeration regulations—and that’s why some industry groups sued, alleging that the SCC is no better than a guess.

In Zero Zone v. Department of Energy, two conservative judges on the Seventh Circuit Court of Appeals disagreed, upholding the use of the SCC and the regulations based on it.

“They did not equivocate,” said Daniel Esty, professor at Yale Law School and the Yale School of Forestry and Environmental Studies, and, from 2011-2014, commissioner of the Connecticut Department of Energy and Environmental Protection.

When he worked at the Environmental Protection Agency under President George H.W. Bush, Esty was part of the team that implemented similar economic analyses in the context of regulating acid rain. Since then, he’s worked on incentive-based ways to address environmental problems—like the “Cap and Trade” approach to climate change. His name is frequently bandied about as a possible director of the EPA in a Hillary Clinton administration.

“Putting a price on pollution in general, and carbon in particular, is the best strategy for motivating change in behaviors that cause harm,” Esty told The Daily Beast. “It’s been hard to figure out the right price… but the judges in this case made clear that this was a serious and thoughtful exercise… It wasn’t an eyeball guess.”

Indeed, while most industry groups have opposed the idea of an SCC, Esty said that having the SCC ratified by a federal appeals court (review by the Supreme Court is possible, but unlikely) will help companies who have already made commitments to sustainability.

“There are a number of companies, after last year’s Paris Agreements, who are beginning to think about how to prepare for a world—not yet in place in the U.S. but in place in Europe—where there is a price on carbon,” he said. “Many large companies are thinking about what internal price for carbon they should use. The Social Cost of Carbon can be a rallying point for them, for investment planning and decisions on energy projects… the [$36 per ton] price can be taken up by companies in their internal analyses.”

On the other hand, some environmental scientists have argued that the $36 per ton price is far too conservative.

For example, a study published last year by two Stanford University scientists arrived at a price of $220 per ton. One of them, Frances Moore, told The Daily Beast that “the current models used in the government’s SCC essentially assume that climate change will not affect economic growth,” she said. “They assume climate change will have effects in some specific sectors, but the effect is not big enough to substantially alter the trajectory of economic development.”

This, Moore said, is a flawed assumption.

“There are some econometric studies that … find the effects of climate change on economic growth in poor countries could be large. Our paper simply incorporates these statistical findings into the model.” Moreover, Moore told The Daily Beast, “because impacts to economic growth compound over time, even small impacts to the growth rate have very large implications for total climate damages. This is why our value of $220 per ton is so much larger than the U.S. government’s value.”

Esty replied, “Getting started with some kind of price is much better than no price. As the science gets better, we’ll have more clarity about what the harms are, and the costs of harms will be more clear. But having some price is critical and that’s what this case really does.”

From this point on, government agencies can rely upon the existing SCC, pointing to the Zero Zone case as a significant ratification of the SCC in principle, and this figure in practice. Ironically, its next challenge may come from the left rather than the right: Moore told The Daily Beast that the National Academy of Sciences is reviewing the government’s methodology and may well recommend a higher figure.

But in the meantime, this obscure case could well mark a turning point in the way the government includes climate change-related damages in its rulemaking.

“When companies undertake activities and have harm that they’re not paying for—because they’re sending them up a smokestack or down an effluent pipeline—there is going to be an assessment of those costs that are thrown onto society,” Esty said. “It’s only one step beyond that to make companies pay for harm they are causing. That’s where we’re headed over the next decade.”

“The world,” he said, “is turning.”

Source: Cross-posted from The Daily Beast