The US government’s price on carbon doesn’t value the future much

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The “social cost of carbon” is a concept virtually unknown outside of academia and federal agencies. But this shadow metric—which estimates the dollar cost of putting one more ton of carbon dioxide into the atmosphere—touches virtually everything the government does. It informs decisions about everything from vehicle fuel mileage standards to buildings to oil leases to the climate itself.

Right now, though, its value in the United States is in limbo, as a recent report from the Government Accountability Office (pdf) lays out. Calculating an accurate social cost of carbon (SCC) is one of the more important, if least-watched, political battles over climate change.

Until recently, the SCC had been set by a group of scientists and economists working across the federal government. An interagency working group, established in 2009, estimated the net economic damages of climate impacts, from agriculture and human health to property damage and energy costs. Their figures put the social cost of carbon between $50 and $75 per ton in 2020, with a catastrophic “high-impact” scenario figure at $150 per ton.

That changed in March 2017, when the Trump administration issued an executive order (pdf; p 4) dissolving the working group and rejecting its conclusions as “as no longer representative of governmental policy.” The SCC was slashed by a factor of seven. Today, the government uses a $7 cost per ton in most cases, down from $50 per ton during the Obama administration. Similar reductions were made for SCC projections through 2050.

Since 2008, a United States federal court has ruled agencies must consider SCC when writing regulations that affect emissions. Not doing so could render federal rule-making “arbitrary and capricious,” a disqualifying verdict in courts. Reducing its value makes it easier to justify federal decisions that increase emissions and run counter to climate change mitigation goals.

How did the White House justify such a dramatic reduction to social cost of carbon estimates? First, it limited damage assessments to the United States, rather than consider the global impacts of greenhouse gases emitted into our collective atmosphere.

The second change increased a number called the discount rate, a small figure with a big effect. The discount rate is way to reflect the fact that people generally value the future less than the present: Any future benefit (or cost) is reduced by a certain percentage each year from the present day. For example, if emissions from an oil field lead to $25 billion in damages in 2050, those future damages will be valued at $3 billion under a 7% discount rate. Under a 1% discount rate, the damages would be $19 billion.

As of 2017, the Trump administration’s new discount rate for SCC is between 3% to 7%—up from 2.5% to 5% during the Obama administration. When setting funding priorities and regulatory policy for government agencies, the Office of Management and Budget has been instructed to use the maximum rate of 7%.

That leaves the US without many peers, says Peter Howard, an economics director at New York University School of Law’s think tank for government decision-making, Policy Integrity. “Few economists think that [discount rate] is appropriate,” said Howard. “Seven percent is an extreme outlier.”

Most jurisdictions use far higher estimates for SCC, too. Many of the 11 US states using SCC in policy, including California, Minnesota, and New York, still use the previous federal standards (pdf; p 41). Germany has estimated the SCC at about $220 per ton, rising to as much as $885 per ton in high-impact scenarios.

In 2017, the National Academies of Science set a deadline of 2022 to use “the best available science” to set a social cost of carbon. Government agencies are now awaiting new regulations based on that guidance. But with no research underway, no federal working groups, and no agency tasked with issuing them, the GAO report says it will be hard to apply the “best available science” to any new standard. That effectively leaves it up the discretion of the occupant of the White House.