Caitlin Maguire
Imagine if you could transform greenhouse gases into money. The Social Cost of Greenhouse Gases (“SC-GHG”) does just that, but unfortunately, you cannot spend it.
The SC-GHG is a metric created by the Interagency Working Group on the Social Cost of Greenhouse Gases (“IWG”).[1] The metric provides a monetary estimate that represents both the societal costs associated with emitting one additional metric ton of greenhouse gases and the societal benefits associated with a one-ton reduction in greenhouse gas emissions in a given year.[2] The SC-GHG is not a new metric, it has been incorporated into federal agencies’ cost-benefit analyses when regulating certain industries like transportation and energy since 2009.[3] However, there have been a few developments in its use since President Biden took office.
On President Biden’s first day in office he issued Executive Order 13990.[4] Section 5 of this order reestablished the IWG and directed the IWG to publish interim and then final estimates of the “monetized damages associated with incremental increases in greenhouse gas emissions,” specifically the emissions of carbon, nitrous oxide, and methane.[5] The IWG released the interim estimate values for the social cost of carbon, nitrous oxide, and methane in February 2021[6] but has not yet released finalized values. Based on its determination that they “represent[ed] the most appropriate estimate of the SC-GHG until the revised estimates have been developed,” the IWG’s 2021 interim estimates consisted of the social cost of carbon value calculated in 2013 and the social cost of nitrous oxide and methane calculated in 2016, adjusted for inflation.[7]
The IWG grapples with the uncertainty of quantifying factors like human health by using integrated assessment models.[8] These models project “future population, economic, and GHG emissions growth, as well as equilibrium climate sensitivity,”[9] and then calculate the global future economic harm based on those projections and translate the harm into a present-day price through discount rates.[10] The purpose of the discount rate is to determine the present-day value of future benefits and costs; higher discount rates result in a lower present-day value for future costs and benefits, while lower discount rates give more present-day value to future costs and benefits.[11] Ultimately, the discount rate has a huge influence on the value of the SC-GHG estimates and on how future impacts are evaluated.[12] For example, the IWG’s interim estimate of the social cost of emitting one metric ton of carbon is $51 using the preferred 3% discount rate or $14 using a 5% rate.[13]
So how do the values play out in a cost-benefit analysis? Well, for activities that increase GHG emissions, the social cost value is multiplied by the number of increased tons of the respective GHG that are expected to be emitted, and the product is considered as a cost.[14] For activities that decrease emissions, the difference in tons of reduced emissions is multiplied by the social cost value, and the product is considered as a benefit.[15] The process essentially takes emission levels and translates it into a universally understood language—money.
On September 21, 2023, President Biden issued a directive that, among other things, now requires federal agencies “to consider the SC-GHG in environmental reviews conducted pursuant to the National Environmental Policy Act (“NEPA”) as appropriate.”[16] The directive is consistent with the Council on Environmental Quality’s interim guidance[17] issued in January 2023, which recommends that federal agencies quantify the anticipated GHG emissions of proposed actions and reasonable alternative actions when conducting a NEPA analysis.[18]
While there’s no requirement that agencies conduct a cost-benefit analysis in NEPA analyses, and agencies are actually advised against doing so “when there are important qualitative considerations,”[19] the directive and the interim guidance seem to endorse the elements of a cost-benefit analysis without requiring “the decision maker to select the alternative with the lowest net GHG emissions or climate costs or the greatest net climate benefits.”[20]
The SC-GHG should be a tool that simplifies the NEPA review process, increases transparency, and reflects the impacts of action alternatives. However, there are a few reasons why the cost of using the interim SC-GHG estimates in NEPA analyses may outweigh its benefits. First, since these figures represent a global quantification of harm, they may distort decision-makers’ judgments as to local social costs like environmental justice impacts. Second, the intergenerational accuracy of the interim estimates is questionable because the values are highly sensitive to the discount rates, which are based on data from twenty years ago[21] and are generally thought to be too high,[22] thereby creating estimates that reflect an inaccurate present value of future harm. Finally, even calculated with an accurate discount rate, the estimates still may have a degree of uncertainty because the models are based on assumptions about how future societies will respond to climate impacts.[23]
Because IWG’s interim estimates merely reinstated IWG’s 2013 and 2016 estimates without APA notice and comment procedures,[24] the IWG’s 2021 interim SC-GHG estimates have already been challenged separately by two groups of states but survived the challenges on procedural technicalities.[25] One of these challenges to the interim estimates escaped further review on October 10, 2023, when the Supreme Court of the United States denied the states’ petition for certiorari.[26]
The IWG should be releasing the final values soon, and it is likely that there will be a significant increase in the figures.[27] The EPA’s SC-GHG draft estimates,[28] introduced in September 2022, offer a glimpse at what the IWG’s final values may look like.[29] The EPA’s draft estimates use a discount rate of 2% and nearly quadruple some of the IWG’s interim estimates.[30]
While we wait for the IWG’s final SC-GHG values to be released, one thing is certain as of October 10, 2023—the interim use of the SC-GHG is here to stay, at least for now.
[1] The IWG was first established during the Obama Administration but disbanded early in the Trump Administration. See Exec. Order No. 13783, 82 Fed. Reg. 16093, 16095-96 (Mar. 28, 2017). Upon taking office, President Biden reestablished the IWG through Section 5 of Executive Order 13990. See Exec. Order No. 13990, 86 Fed. Reg. 7037 (Jan. 20, 2021).
[2] Kate C. Shouse, Cong. Rsch. Serv., IF 11844, Social Cost of Greenhouse Gases: Issues for Congress 1 (2021).
[3] See Interagency Working Grp. On Soc. Cost of Greenhouse Gases, Technical Support Document: Social Cost Of Carbon, Methane, and Nitrous Oxide Interim Estimates Under Executive Order 13990 2 (2021)
[hereinafter Interagency Working](explaining this practice began after the U.S. Ninth Circuit Court of Appeals’ ruling in Ctr. for Biological Diversity v. Nat’l Highway Traffic Safety Admin., 538 F.3d 1172, 1200 (9th Cir. 2008) where the court remanded a fuel economy rule to the United States Department of Transportation for failing to monetize CO2 emission reductions).
[4] See Exec. Order No. 13990, 86 Fed. Reg. 7037 (Jan. 20, 2021).
[5] Id.
[6] See Interagency Working, supra note 3, at 4 (explaining that the cost of emitting one ton of carbon, nitrous oxide, and methane is calculated individually for each gas, and collectively, these values are known as SC-GHG).
[7] Id. at 3.
[8] Id. at 2.
[9] Id.; see also id. at 9 (“In principle, [the SC-GHG] includes the value of all climate change impacts, including (but not limited to) changes in net agricultural productivity, human health effects, property damage from increased flood risk natural disasters, disruption of energy systems, risk of conflict, environmental migration, and the value of ecosystem services.”).
[10] Paul Voosen, Trump downplayed the costs of carbon pollution. That’s about to change, Science (Jan. 22, 2021), https://www.science.org/content/article/trump-downplayed-costs-carbon-pollution-s-about-change.
[11] Shouse, supra note 2, at 1.
[12] See, e.g., id. (“Given the long time horizons analyzed, SC-GHC estimates are highly sensitive to the discount rate.”); Interagency Working, supra note 3, at 27 (“[T]he assumed discount rate plays a critical role in the ultimate estimate of the SC-GHG.”).
[13] Interagency Working, supra note 3, at 5.
[14] Kevin Rennert & Cora Kingdon, Social Cost of Carbon 101: A review of the social cost of carbon, from a basic definition to the history of its use in policy analysis, Resources for the Future, https://www.rff.org/publications/explainers/social-cost-carbon-101/ (last updated Feb. 3, 2022).
[15] Id.
[16] Fact Sheet: Biden-Harris Administration Announces New Actions to Reduce Greenhouse Gas Emissions and Combat the Climate Crisis, (Sept. 21, 2023), https://www.whitehouse.gov/briefing-room/statements-releases/2023/09/21/fact-sheet-biden-harris-administration-announces-new-actions-to-reduce-greenhouse-gas-emissions-and-combat-the-climate-crisis/ (“Under NEPA, before agencies take major federal actions, such as permits, approvals, financial assistance, and resource planning, they must identify, disclose, and consider in their decision making the reasonably foreseeable effects of those proposals.”).
[17] The Council on Environmental Quality has not yet released the final guidance on the consideration of GHGs.
[18] National Environmental Policy Act Guidance on Consideration of Greenhouse Gas Emissions and Climate Change, 88 Fed. Reg. 1196 (proposed Jan. 9, 2023).
[19] See 40 C.F.R. 1502.22 (2023).
[20] National Environmental Policy Act Guidance on Consideration of Greenhouse Gas Emissions and Climate Change, 88 Fed. Reg. 1196 (proposed Jan. 9, 2023).
[21] Peter Howard & Jason A. Schwartz, Valuing the Future: Legal and Economic Considerations for Updating Discount Rates, 39 Yale J. on Reg. 595, 603 (2022) (citing Council of Econ. Advisers, Discounting for Public Policy: Theory and Recent Evidence on the Merits of Updating the Discount Rate, Obama White House 3 (Jan. 2017) (explaining that the discount concept is based on the consumption rate of interest, and “[t]he tax-free rate of return on low-risk securities is a common proxy for this kind of discount rate; the federal government’s current 3% estimate is based on U.S. Treasury note yields from 1973 to 2003”).
[22] See Interagency Working, supra note 3, at 4 (“[N]ew data and evidence strongly suggests that the discount rate regarded as appropriate for intergenerational analysis is lower.”).
[23] Id. at 2.
[24] Id.
[25] See Louisiana v. Biden, 64 F.4th 674, 682–84 (5th Cir. 2023) (holding that the group of states lacked article III standing to challenge E.O. 13990 and the interim estimates because the states did not challenge a specific agency action based on the estimates, and the interim estimates by themselves have no direct effect on the states’ laws or policies); Missouri v. Biden, 52 F.4th 362, 371 (8th Cir. 2022) (same).
[26] Missouri v. Biden, Docket No. 22–1248 (2023).
[27] See Interagency Working, supra note 3, at 4 (recognizing that the interim estimates “likely underestimate societal damages from GHG emissions”).
[28] Foley Hoag LLP, The Social Cost of Greenhouse Gas Emissions is About to Get Much More Expensive, JD Supra, https://www.jdsupra.com/legalnews/the-social-cost-of-greenhouse-gas-8565547/ (Nov. 30, 2022) (noting that while the EPA does not have authority to establish the federal SC-GHG values, the “EPA is a member agency of the entity that does—the IWG”).
[29] EPA, Supplementary Material for the Regulatory Impact Analysis for the Supplemental Proposed Rulemaking, “Standards of Performance For New, Reconstructed, and Modified Sources and Emissions Guidelines for Existing Sources: Oil and Natural Gas Sector Climate Review” EPA External Review Draft of Report on the Social Cost of Greenhouse Gases: Estimates Incorporating Recent Scientific Advances, at 81 (Sept. 2022), https://www.epa.gov/system/files/documents/2022-12/Supplemental-proposal-ria-oil-and-gas-nsps-eg-climate-review-updated.pdf.
[30] Id. at 81 (For example, the EPA’s estimated social cost of carbon is $190 under a 2% discount rate, a significant change from IWG’s $51 under a 3% rate).