October 20, 2013

Understanding the Social Cost of Carbon

From: Montana Energy Review

By Jennifer Owen


In May, the federal Office of Information and Regulatory Affairs quietly released a memo on its website, blandly titled “Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866.” Within days of the release of that memo, Congress exploded, demanding explanations and calling for hearings, while energy companies launched aggressive lobbying efforts to derail the update.

Why all the fuss?

In 2010, the Obama Administration implemented an addition to the federal rulemaking process. By Executive Order, all agencies were directed to include a number known as the “social cost of carbon” (SCC). The SCC is designed to estimate the impact of carbon dioxide emissions on human health and the environment. Specifically, according to the May 2013 technical memo, the metric “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.”

While this may sound like a lot of bureaucratic babble, the real-world impact of the SCC metric is a more favorable analysis of any federal regulation of carbon emissions, everything from direct attempts to reduce carbon emissions at power plants to indirect rulemakings that target appliance energy efficiency and vehicle fuel economy.

All new proposals for federal rulemakings must include a cost-benefit analysis as a part of the overall assessment of the impact of a new regulation. When those rules take into account the social impact of carbon emissions as a “cost,” then any subsequent reduction of those emissions would result in a “benefit” that could tip the scales in favor of more regulation. The higher the social cost of carbon, the greater the benefit from reducing those emissions.

“That’s an effort to quantify a set of indirect costs in such a way that policies, rules, and regulations can be evaluated explicitly according to costs and benefits,” said Scott Rickard, an economist at Montana State University-Billings. “They are guessing, using the best science. Science can only inform policy.”

The technical memo published by the White House earlier this year raised the SCC by roughly 60 percent, stating that the cost of carbon emissions in 2020 has increased from $26/metric ton of carbon dioxide to $43/metric ton. That SCC analysis will now be included in all future federal rulemakings that would have an impact on carbon emissions.

The increase in the SCC was adopted directly by an interagency working group, without public notice or comment. Administration officials suggested that public comment on the SCC metric would be received in the context of specific federal regulatory proposals. For example, the Department of Energy (DOE) released on June 17, 2013 a new final rule for microwave oven energy efficiency standards, incorporating the revised SCC. That rule estimates the consumer energy savings – due to more efficient microwaves – between $1.5 billion and $3.4 billion. The SCC-related benefits, using the 2013 updated metric, are estimated between $288 million and $3.6 billion. Costs are estimated at around $1.4 billion.

After Congress and industry groups expressed procedural concerns, the Department of Energy agreed to accept public comment directly on the SCC, in the context of a formal petition from the Landmark Legal Foundation to withdraw the microwave rule. The 30-day comment period closed on September 16, 2013. The Government Accountability Office also announced in August that it will undertake a review of how the Administration developed the SCC.

In July, the Energy Subcommittee of the U.S. House Oversight Committee held a hearing to explore the Administration’s motivations for modifying the SCC metric. During the hearing, Howard Shelanski, Administrator of the White House Office of Information and Regulatory Affairs, characterized the move as largely technical, updating the metric to reflect changes in carbon models developed over the last three years, but defended the SCC as an essential component of federal rulemaking.

“If there is going to be harm to our environment and to our economy from carbon emissions, many costs will go up – the cost of food, the cost of health care, investment that is needed to protect against sea level rise. There are all manner of energy costs – the need for increased energy usage for cooling, all manner of costs may go up for society. That is why it is extremely important to have some kind of measure of what the social cost, by which I mean the costs to society, are of a ton of CO2 emissions,” said Shelanski during the July 18 hearing.

Industry groups and Congress appear to disagree. The U.S. House quickly passed an amendment banning the use of the SCC in federal rulemakings, while the Senate is considering an amendment that would direct the Administration to undertake a formal rulemaking, with public comment, on the changes to the SCC.

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