Industry Market Trends

The Social Cost of Carbon Just Went Up. Did You Miss It?

Jun 19, 2013

ID-10072129The Obama administration has chosen to raise the estimated cost of carbon emissions, but in a way that baffled friends and foes alike. "Buried in a little-noticed rule on microwave ovens" issued on May 31, reported Bloomberg, "is a change in the U.S. government's accounting for carbon emissions that could have wide-ranging implications for everything from power plants to the Keystone XL pipeline."

Or, as the Huffington Post noted, President Barack Obama made good on the promise he made in January that if Congress didn't act on climate change, his administration would -- but he did so "in quiet fashion."

SCC: The Social Cost of Carbon.

What some call the "social cost of carbon" is supposed to represent the cost of global warming, such as flood damage or lower harvest yields. As of 2015, the cost will officially be calculated at $38 a metric ton, instead of the current $23.80.

As Bloomberg explained, this is the official figure the government uses to reckon costs and benefits of proposed regulations. In other words, "government actions that lead to cuts in emissions -- anything from new mileage standards to clean-energy loans -- will appear more valuable in its cost-benefit analyses."

Oddly, for such a momentous change, it was buried in an obscure report you wouldn't have heard of had it not been for the carbon cost adjustment. "This is a very strange way to make policy about something this important," Frank Ackerman, an economist at Tufts University who published a book about the economics of global warming, told Bloomberg, adding that the Obama administration "hasn't always leveled with us about what is happening behind closed doors." Jeff Holmstead, a lawyer at Bracewell & Giuliani LLP representing coal-dependent power producers and other industry groups, called it "bizarre."

Hello, Mr. Blue Sky.

Such estimates are a fact of life. Federal agencies must "assess both the costs and the benefits of the intended regulation" when proposing regulations, according to Raz Godelnik, co-founder of Eco-Libris and an adjunct faculty at the University of Delaware's Business School, among other places, teaching courses in green business and sustainable design. This analysis includes the social cost of carbon, Godelnik explains, which "is intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change."

And of course, like with everything government does, there's a heavy dollop of politics involved in cooking up the number.

InsideClimate News said the dollar figure "attempts to measure today, in dollars, the harm that will happen years, decades, or even centuries in the future, as the globe heats, the seas rise, and the bill for each additional year of pollution comes due."

Estimating to the Future -- And Beyond!

So it's not exactly a cut-and-dried number. We're not talking the cost of a gallon of gas; we're talking the estimated cost of a metric ton of carbon emissions "decades or even centuries in the future," based on current computer models, compiled by people who all have vested political interests in that figure and absolutely no way of objectively verifying it or ever having to accept responsibility for it.

Bloomberg cites Laurie Johnson, chief economist for climate at the Natural Resources Defense Council, saying that she estimates the carbon cost could be as much as $266 a ton. A paper published in a special edition of the online journal Economics says the "true social cost might be $900 a ton in 2010, rising to $1,500 per ton in 2050," and others look askance at the whole enterprise and wonder how anybody can estimate anything with so many variables over such a long time.

The political advantage to a certain partisan interest of having a higher number is seen in the current debate over the Keystone pipeline. A higher carbon cost allows opponents of the pipeline to depict the environmental costs of the pipeline as being much worse than before. Coincidentally, the administration's political allies are opposed to the Keystone project.

As Godelnik says, "using the new social carbon cost gives us costs that are much more substantial compared to the benefits TransCanada presents from the Keystone Project of $172 billion to America's GDP by 2035."

The SCC Could Reach "Astronomical" Levels.

And as InsideClimate News put it, "Many leading economists say the future costs of today's carbon emissions could indeed reach astronomical levels, depending on how social costs are estimated and which worst-case damages are cranked into the models."

In other words, the Obama administration has just decided to make it officially more costly for any fossil fuel-based project today, using wildly diverging estimates of what carbon damage might possibly be decades or centuries in the future.

They've also given themselves cover for increasing regulations and restrictions on the fossil fuel industry. Hot Air writes, "This is going to be a very useful mechanism for Obama's Environmental Protection Agency, Department of Energy, and et cetera in justifying the economic costs" of rules and regulations. In other words, if government regulations are estimated to cost x-dollars, that can be justified if the social costs of carbon are shown to be higher than the cost of regulation.

"How Much Is the Black Rhino Worth?"

The process of determining the cost is imprecise to say the least. "Some of these damages appear likely but hard to calibrate, like the extent of sea level rise," writes The New York Times' Matthew Wald. "Others are less certain and thus stated as probabilities, like the increase in the number of Katrina-level hurricanes or sustained droughts, or changes that radically cut crop yields. Others are simply hard to put a dollar value on, like the extinction of species."

Wald tacitly notes the ambitious nature of the quest: "Supporters of the idea acknowledge the tremendous difficulties of trying to translate slippery estimates into a single mathematical factor." In other words, given such nebulous, variable criteria to price, it's reasonable to expect the dollar figure to be arrived at as the final amount to have been significantly massaged by vested interests -- which currently are on the side of higher stated costs.

Can you put a precise dollar figure on the cost of the extinction of a species, as well as give a confident prediction which one(s) will go extinct over the next few decades to centuries? Beluga sturgeon? Tigers? Giant pandas?

Wald notes that the NRDC's Johnson did concede that "The models are extremely limited in how they capture dangerous tipping points, and catastrophic outcomes." Climate models have also grossly overestimated temperature increases over the past forty years as well, so maybe we want to all slow down a little bit before implementing actual public policy on numbers that will in all likelihood in hindsight appear to have been far-fetched.