What is the Social Cost of Carbon?

On Monday the Office of Management and Budget released updated estimates for the social cost of carbon (SCC) and announced a forthcoming public comment period. The SCC was created under the administration of George W. Bush after a court found the administration’s fuel economy standard invalid because it did not adequately address the issue of damages associated with carbon dioxide (CO2).  The SCC could have important impacts on the efficiency and fuel mix of our energy system through various rulemakings to the extent that it limits the amount of allowable CO2 emissions.  The Obama administration launched an interagency working group and updated the SCC in 2010 and again in 2013 to reflect improvements in the underlying models that had all been updated between 2010 and 2013.  Earlier this year, the new higher values for the SCC became apparent when released as part of a microwave efficiency standards regulation.  To some, the unremarkable nature of the announcement (only mentioned in a White House blog post and the 2013 economic report) and lack of structured public vetting of the update process was cause for alarm and signaled a possible intention by the Obama administration to raise the SCC in an effort to clamp down on carbon dioxide emissions.  To understand the controversy, it is important to first understand what the origins and definition of the social cost of carbon are. There is both a literal and value-based answer to this question. 

Starting with the easiest part first, according to the U.S. Environmental Protection Agency the SCC is “an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, conventionally one metric ton, in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e. the benefit of a CO2 reduction).” In its simplest terms, the SCC is a figure that tries to place a value on the damage done or damage avoided by emitting a discrete amount of carbon dioxide. 

U.S. law requires the government to regulate greenhouse gas emissions, including CO2.  The government must also assess the social benefit and social cost of those regulations.  Under Executive Order 12866 agencies are required “to assess both the costs and the benefits of the intended regulation” and when a cost or benefit is difficult to quantify make a “reasoned determination that the benefits of the intended regulation justify its costs.” The EPA has used the SCC to estimate the benefits or costs associated with a variety of rulemakings including greenhouse gas and fuel economy standards, emissions standards for hazardous pollutants in number of applications, mercury air toxin standards, and proposed carbon dioxide standards for future power plants. 

It turns out that the process to determine that cost is more complicated than assessing the social cost of or benefit of other regulation – like the health benefits of air pollution regulation for example. The two primary reasons for this are related to the timing and nature of the impacts.  Carbon dioxide stays in the atmosphere for a century and the impacts of climate change are widespread and complex.  Rather than calculate the health impacts of local air pollutants in the given year of emissions, agencies need to estimate the impact of emissions in the atmosphere over a long period of time, recognizing the complicated potential impacts. 

The SCC is the government’s best effort at such a calculation.  Again, according to the EPA SCC Fact Sheet: “The SCC is meant to be a comprehensive estimate of climate change damages and includes, among other things, changes in net agricultural productivity, human health, and property damages from increased flood risk.”  The SCC as currently calculated, however, does not include “all of the important physical, ecological, and economic impacts of climate change recognized in the climate change literature because of a lack of precise information on the nature of damages and because the science incorporated into these models naturally lags behind the most recent research.”  In laymen’s terms, the SCC is imperfect because climate science and climate economics are imperfect.

The SCC is controversial for a number of reasons.  First, the announcement by the Obama administration of higher values for SCC via a microwave efficiency standard was controversial because those wary of government regulation of carbon dioxide felt that the updates and the process used to update the SCC were less than transparent.   In response to these concerns, the Obama administration has taken steps to explain its process and make future updates more accessible to interested participants and public comments as the updates released by the OMB suggest.  It should be noted that the interagency work that led to the updated SCC figures are a guidance and not a rulemaking and that any SCC figure used in a previous rulemaking has gone through the normal public review process associated with that rulemaking and will continue to do so.

Second, estimating the SCC is no small task.  It is fraught with contentious issues on both sides of the debate.  Proponents of stronger action to combat climate change argue that the SCC is too low because it underestimates impacts that are not included in the climate models and uses the wrong discount rates.  Conversely, critics claim that the SCC estimates are too high due to the use of overly aggressive discount rates.  The interagency working group has published technical support documents that walk through a number of the academic arguments and supporting work underpinning these disagreements (including the ever contentious issue of discount rates).  Despite all the work being done, it is like many other regulatory exercises, a unsatisfyingly inconclusive process where people must make the best informed decisions given available information, constantly adjusting and updating the analysis as information and models improve or change (as they always do).

Finally, and perhaps most importantly, climate change itself is a controversial issue.  No public policy tool that has sought to limit carbon dioxide at any increment has escaped this central controversy.  Whether it’s a cap and trade system, carbon tax, clean energy standard, low carbon fuel standard or the SCC, these regulatory tools, imperfect tools in and of themselves, are further subjugated to a debate about their efficacy that is exacerbated by the fundamental disagreement about how society should approach the issue of climate change.

It’s important to remember that no matter the regulatory vehicle, the social cost of carbon is an open debate with our society that’s not likely to go away anytime soon.  Over the next year we will hear a great deal more about this issue as we continue to debate the ways in which society is seeking to regulate emissions.  So, what is the social cost of carbon?

Sarah O. Ladislaw is co-director of the Energy and National Security Program and senior fellow at the Center for Strategic and International Studies in Washington, D.C. 

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Sarah Ladislaw

Sarah Ladislaw

Former Senior Associate (Non-resident), Energy Security and Climate Change Program