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Jim Krane, Jones Graduate School of Business at Rice University and Mark Finley, rice university
(THE CONVERSATION) When a power plant runs on coal or natural gas, the greenhouse gases it releases cause damage, but the power company does not pay for the damage.
Instead, the costs manifest themselves in the billions of tax dollars spent each year to deal with the effects of climate change, such as fighting wildfires and protecting communities from flooding, and in the increased insurance costs.
This damage is what economists call a “negative externality.” It is a cost to society, including future generations, that is not covered by the price people pay for fossil fuels and the like activities that emit greenhouse gaseslike farming.
In an attempt to account for some of the damage, federal policymakers use what is called a “social cost of carbon.”
Arm wrestling over the social cost
The social cost of carbon, a dollar figure per tonne of carbon dioxide emitted, is factored into the costs and benefits of the proposed regulations and purchasing decisions, such as whether the Postal Service should buy electric or gas-powered trucks, or where to set emissions standards for coal-fired power plants.
This additional social cost can tip the scales on whether the costs of regulation appear to outweigh its benefits.
The Trump administration has reduced the social cost of between $1 and $7 per metric ton of carbon dioxide – low enough that the administration could justify overriding EPA regulations on power plant emissions and vehicle fuel efficiency.
The Biden administration has temporarily raised it to $51, close to its pre-Trump level, and is preparing to finalize a new social cost that could encourage regulators to push for emissions cuts across the board. from agriculture to transportation to manufacturing.
However, how and where the new cost estimates are deployed is uncertain. Trump-appointed federal judge in Louisiana issued an injunction in February 2022, block Biden’s tentative raise. A federal appeals court on March 16, 2022, again allowing the higher social cost of carbon to be used while the government appeals Louisiana’s decision.
What the social cost means to you
One of the Joe Bidens first steps as president was to reverse the Trump administration’s discount accounting of the “social cost.” The Biden Administration brought it back to Obama-era levels, adjusted for inflationsetting an interim social cost of $51 per metric ton of carbon dioxide that would increase over time.
If it were a carbon tax paid by consumers, it would increase gasoline by about 50 cents a gallon.
But the social cost of carbon has no direct effect on the price of gasoline, electricity, or emissions-intensive goods like steel. Instead, it influences government purchases and investments, and indirectly, private businesses and consumers.
A higher social cost of carbon signals to businesses that the government sees great benefits in reducing greenhouse gas emissions. Considering the damage caused by emissions also helps it justify investments in green technologies.
For example, the US Postal Service asked Congress to approve $11.3 billion for a new fleet of gasoline-powered mail delivery trucks. These vehicles would burn 110 million gallons of gasoline per year. At $51 per ton of carbon emitted, this purchase involves a social cost of $1.1 billion over 20 years. The integration of these costs could encourage the government to consider including electric vehicles in the future postal service park.
Currently, economists calculate the social cost using built-in assessment models which bring together long-term projections of population, economic growth and greenhouse gas emissions. These models use emissions scenarios to estimate future climate change, then calculate the effects on the GDP of the country – and the world – and they can vary widely depending on the assumptions used.
For example, damage estimates for 2100 produced by the three models currently used in the government’s costing process range from $80 to $290 per ton. The Biden administration set the interim social cost at $85 by 2050 to account for a greater impact of climate change over time.
The use of models to produce such estimates has become an integral part of policy-making, but they are also massively uncertain.
Why Trump’s Social Cost Was So Much Lower
The Trump administration’s estimate was lower for two reasons: it only considered climate damage within U.S. borders; and the administration placed a lower value on future costs by setting a discount rate of 7%, more than double the 3% used by Obama and Biden. Economists use different rates to “discount” future benefits relative to the cost we pay today to achieve them. A high climate discount rate means that we place a lower value on the damage that will occur in the future.
Unsurprisingly, discount rates are controversial. New York State uses a 2% discount rate to produce its current social cost of carbon of $125 per tonne. Some analysts argue for a discount rate of 0% because any higher amount places less value on the costs borne by future generations.
the the Louisiana federal judge agreed with that state’s Republican Attorney General’s argument that aggregate damages could not be factored into social costs appropriate to US regulations. However, the appeals court, in , wrote that Louisiana and other states’ claim in the lawsuit was based on “widespread grievance” and that their claim for harm “arises from any future regulation, speculative and unknown which could place an increased burden on them”. rather than the provisional estimates. A similar lawsuit in Missouri was fired.
Some researchers question whether a social cost of carbon should be used.
The UK instead uses ‘cost-effectiveness analysis’ to determine the value of carbon removal. This method uses a goal – net zero emissions – and calculates the cheapest route to get there. Some prominent scholars recommend that the United States adopt the British approach, while others object.
Other options: carbon taxes and emission caps
There are other ways to account for the costs of climate change.
A carbon tax is simpler and more effective, but more difficult to enact because it requires Congress to act. Such a tax would deter people from burning fossil fuels by taxing them for the damage caused by these emissions – the negative externality.
Another form of carbon pricing uses a market allowing companies to trade a decreasing number of emission permits. Phone cap and trade programs are in place today in the European Union, some american statesincluding California and Washingtonand elsewhere.
Taxes and emissions caps would reduce carbon emissions, but they are unpopular with voters and Congress because they raise prices. A social cost of carbon is easier to adopt and change through regulatory review, without legislation. It gives the government the flexibility to deal with the climate through routine policymaking – but can also be changed by subsequent administrations.
This article was updated on March 17, 2022, with an appeals court staying the injunction.
This article is republished from The Conversation under a Creative Commons license. Read the original article here: https://theconversation.com/what-is-the-social-cost-of-carbon-2-energy-experts-explain-after-court-ruling-176255.
