For an obscure, even arcane concept, the “social cost of carbon” has been getting a lot of press lately. And for good reason.
The U.S. EPA describes the social cost of carbon, or SC-CO2 for short, as “a measure, in dollars, of the long-term damage done by a ton of carbon dioxide emissions in a given year.”1 The measure is intended to capture all of the costs caused by climate change and tie those costs back to the effect that a single ton of CO2 emissions has on that process.
Setting the SC-CO2 is intended to allow decision-makers to easily incorporate costs that were previously ignored as part of any cost-benefit analysis being done in connection with a decision. It has been called “the most important single economic concept in the economics of climate change….”2 And the Colorado Public Utilities Commission ruled last week that Public Service Company of Colorado must consider the SC-CO2 when planning its electricity generation, which could have far reaching implications for renewable energy in Colorado. But before we get to that, a little background on the use of SC-CO2 in regulatory action might be helpful.
Colorado’s decision on SC-CO2 follows a landmark decision of the New York Public Service Commission in August, 2016, that not only put a price on SC-CO2 but also used that price in mandating long-term contracts to support at-risk nuclear power generation. In adopting the Clean Energy Standard, New York’s utility regulators implemented statewide energy goals of achieving 50% renewables and a 40% reduction in greenhouse gas emissions in the state by the year 2030.3 Effective April 1, 2017, all load-serving entities in New York are buying zero-emission attributes from these upstate nuclear generators at the rate of $17.51 per megawatt hour. That will cost New York ratepayers billions of dollars over the next 12 years but avoid the early closure of three nuclear power plants.
Federal regulators began incorporating the SC-CO2 into their regulatory analysis beginning in President George W. Bush’s administration, following a Circuit Court ruling4 that agencies could and must quantify the cost of carbon emissions in their rulemaking as part of their obligations under President Ronald Reagan’s 1981 Executive Order that required all agencies to assess the full costs and benefits of their intended regulations. But there was no single measure of the SC-CO2 and agency approaches to measuring the cost varied. In 2009, President Barack Obama formed an interagency working group on the social cost of carbon and tasked it with creating a single methodology for determining the SC-CO2 and setting the dollar figure for the SC-CO2, which was most recently set at $36 per ton. In August, 2016, the US Court of Appeals for the 7th Circuit confirmed the propriety of using the SC-CO2 in rulemaking.5
Of course, the importance of SC-CO2 and the need to use it in setting policy depends entirely on one’s view of the basic concepts behind climate change, namely, is it happening, are humans influencing it, and what can and should the United States do about it. Clearly President Trump’s administration views the answers to these questions very differently than the last administration, and many have expected, therefore, that President Donald Trump’s administration would seek to discontinue or de-emphasize the use of the SC-CO2 in federal rulemaking. This appears to have begun with President Trump’s March 28, 2017, “Executive Order on Promoting Energy Independence and Economic Growth” which, among other steps, disbanded the interagency working group on the social cost of carbon and instructed agencies to ignore its prior work and instead refer to OMB Circular A-4 of September 17, 2003 (Regulatory Analysis). This means that federal agencies will no longer use a standard SC-CO2 figure (the $36/ ton recent figure) and will instead be required to determine the social SC-CO2 independently, which will presumably lead to lower figures being used by agencies headed by appointees of President Trump.
So while Washington, D.C., appears to be backing away from policies geared toward combating climate change, the states, led by New York and California, have been stepping up their efforts. California has clearly led this effort with its Cap-and-Trade and Low Carbon Fuel Standard programs, and has joined with Oregon, Washington, British Columbia and Alaska to coordinate policy efforts on environmental issues. New York and eight other eastern states have created a similar cap-and-trade program called the Regional Greenhouse Gas Initiative. Hawaii has set a goal of generating 100% of its energy from renewable resources by 2045.6 In Washington state, four bills have been introduced in the last five months that would implement some kind of carbon tax.7 And the recent decision of the Colorado Public Utilities Commission indicates Colorado regulators are willing to step in as well by requiring resource planning to consider the SC-CO2 at a value beginning at $43 per ton in 2022, increasing to $69 per ton in 2050, and increasing from there at a rate equal to the general rate of inflation.8
This process of regulatory action shifting back and forth from states to the federal government is nothing new in the United States, particularly in relation to environmental regulations, and we’ll continue to keep an eye on these developments.