EPA Releases Updated Social Cost of Carbon Estimate

By: Bea Meyer

Introduction

The Social Cost of Carbon (SCC) is a metric used to determine the economic value of one ton of greenhouse gas (GHG) emissions. This metric is an important tool for estimating the broad economic impacts of each additional ton of GHG emissions that are released into the atmosphere. The EPA recently released an updated SCC estimate that values GHG emissions at over $190 per ton, significantly higher than the current estimate of $51 per ton.

What is the Social Cost of Carbon

The Social Cost of Carbon is a metric to estimate the monetary impact of GHG emissions. The goal of the metric is to encompass the broad variety of economic and societal impacts caused by GHG emissions and place a dollar value on those impacts. This allows policymakers to consider the monetary value of preventing GHG emissions in solid terms when considering the costs and benefits of proposed rules.

For example, the SCC may be used by policymakers when conducting a cost-benefit analysis for a proposed public transit system. One of the benefits of increased public transit is decreased GHG emissions. By using the SCC, policymakers could calculate the economic benefit of preventing additional emissions in their analysis. This use of the SCC would make more environmentally friendly policies and rules more likely to succeed by increasing their calculated benefit, and prevent actions that increase emissions by increasing their calculated cost.

This metric was created by the Obama administration, and the original estimate was approximately $21 per ton of carbon emissions. The estimate was created for agencies to use in cost-benefit analyses of proposed rules, to allow them to include the wide-ranging, abstract effects of GHG emissions that may not otherwise be considered by policymakers. The initial estimate was updated several times during the Obama administration, but the metric was essentially abandoned by the Trump administration. The SCC was revived under the Biden administration, which released an interim SCC estimate of $51 per ton in 2021. Final estimates have yet to be released by the Biden administration.

How is the Social Cost of Carbon Calculated

The SCC is calculated in a 4-step process. The first step is to predict future emissions, based on factors like population and economic growth. The next step is to model environmental impacts caused by emissions, like ocean level rise and temperature increase. The third step is to determine the economic effects of those environmental impacts, in sectors like agriculture, health, and energy. The final step is to determine the present-day value of those future damages.

This process for calculating the SCC attempts to capture the complex nature of human-caused climate change, but there is an extremely large margin for error. The models used to calculate future impacts are extremely complex, and educated guesses and policy decisions need to be made at every step in the process. This means that the SCC value is an estimate based on a variety of models, rather than a single precise value.

Benefits and Challenges

The SCC can offer a variety of benefits if properly utilized. A high SCC value will likely reduce GHG emissions by increasing the predicted costs of high-emission agency rules and projects, and increasing the predicted benefits of rules and projects that will prevent future emissions. This will drive investment in lower-emission policies and help to significantly reduce the US’s emissions.

One challenge that policymakers face is deciding what factors should be included when calculating the SCC. For example, the current estimate only considers economic impacts within the US, not international impacts of GHG emissions. This likely creates an underestimate, because environmental impacts around the world will impact the entire global economy in ways that the US cannot control.

The current estimate also does not value all human lives equally in terms of economic value. The SCC attempts to put a dollar value on lives that are ended by the impacts of GHG emissions, but the current calculation does not place the same value on lives across the world. Depending on the expected lifetime earnings of individuals in a country, the SCC will place a higher or lower economic value on their life. Because of this choice in how the SCC is calculated, the current estimate values the lives of people from poorer countries less than lives in richer countries. Critics of the SCC metric point to issues like these in how the estimate is calculated to argue that the metric is deeply flawed and is likely a severe underestimation of the actual value of each ton of GHG emissions.

Complaints like this drove the EPA to recalculate the SCC in 2023. In this new estimate, the EPA values each ton of carbon emissions at over $190 per ton. This is nearly 4 times higher than the current estimate from the Biden administration. It also uses a lower discount rate than the current estimate, which places a greater value on future impacts. This estimate has not yet been adopted by the Biden administration, but environmental advocates and recent studies support the higher value.

Future of the Social Cost of Carbon

The EPA’s new SCC estimate could help drive more sustainable policy in the US and significantly contribute to reducing emissions. However, there is still uncertainty. The Biden administration has not adopted the EPA’s new estimate, but it has instructed agencies to use their professional judgment in selecting which estimate to use. The SCC metric may also change significantly with the 2024 election. If an administration takes office that is hostile to the SCC, the metric may be abandoned entirely. If an administration takes office that supports the new EPA estimate, it may embrace the new estimate and expand the use of the metric. This metric could play an important role in the development of sustainable policy in the US, but there is little certainty about whether the SCC will be effective in the long term.