New report raises social cost of carbon estimates, surpassing previous estimates by more than 250%.

On December 2, 2023, the US Environmental Protection Agency (EPA) released a final report that substantially increases estimates of the social cost of greenhouse gases (GHG), including carbon dioxide, methane, and nitrous oxide (collectively, SC-GHG). The report describes SC-GHG as “the monetary value of the net harm to society from emitting one metric ton of that GHG into the atmosphere in a given year.”[1] The new estimates are intended to serve as a tool for decision-makers, aiding in the cost-benefit analysis of actions that would reduce or increase GHG emissions. Indeed, federal agencies are expected to use the estimates in future rule-makings and in the environmental review of forthcoming projects.

The Social Cost of GHG: A Brief History

Federal agencies began to develop estimates of the social cost of carbon dioxide (SCC) following the US Court of Appeals for the Ninth Circuit’s 2008 decision in Center for Biological Diversity v. National Highway Traffic Safety Administration.[2] In 2009, the Obama administration formed the Interagency Working Group on the Social Cost of Carbon (IWG) to provide federal agencies with tools for quantifying the benefits of reducing carbon dioxide emissions.[3] The following year, the IWG set initial SCC estimates at $26 per metric ton using a 3% central discount rate for 2020, and later increased this estimate to $42.[4] In 2016, the IWG issued calculations for the social cost of methane and nitrous oxide.[5] The Trump administration disbanded the IWG, withdrew the IWG estimates, and directed federal agencies to use earlier guidance that focused more narrowly on domestic impacts.[6] This resulted in economic impact estimates between $1 and $7 per metric ton of carbon dioxide, using discount rates between 3% and 7%.[7]

In 2021, the Biden administration re-established an IWG, which set interim estimates for SCC at $51 per metric ton for 2020, using a 3% central discount rate.[8] The interim estimates were adjusted for inflation, but otherwise were identical to the IWG’s previous estimates under the Obama administration.[9] The current IWG’s work on its final SC-GHG estimates is ongoing.[10] Meanwhile, EPA issued its final report with its own updated SC-GHG estimates.

EPA’s Updated Estimates

EPA’s final report features SCC estimates at $190 per metric ton for 2020, using a 2% central discount rate. This represents an approximately 273% increase from IWG’s 2021 estimates (which used a 3% central discount rate), and an increase of considerably more than 2000% from the metrics used by the Trump administration. EPA arrived at these estimates after implementing methodological updates recommended by a 2017 report from the National Academies of Sciences, Engineering, and Medicine (National Academies). According to EPA, the report follows the National Academies’ recommended “modular approach,” involving four modules: “socioeconomics and emissions, climate, damages, and discounting.”[11] Notably, the current report uses lower discount rates than those used in Obama and Trump administration estimates. The use of a lower discount rate places a higher value on future damages, and suggests that society should be willing to pay more now to prevent those damages. EPA’s updated SC-GHG estimates for 2023 are summarized in the table below.[12]

How the SC-GHG Estimates Will Be Used

The higher SC-GHG estimates may pave the way for more aggressive regulation of GHGs. For instance, the new estimates could be used to justify tighter, more expensive restrictions on GHG emissions in future EPA rulemaking, such as its proposed Power Plant GHG Rule or EPA’s proposed multi-pollutant emissions standards for passenger vehicles. The new estimates may also be used by other federal agencies that have previously used SC-GHG estimates in rulemaking, including the Department of Energy, the Department of Transportation, and the National Highway Transportation Safety Administration.[13]

In addition, federal agencies may use the new SC-GHG estimates in the evaluation of GHG impacts for forthcoming projects subject to environmental review under the National Environmental Policy Act (NEPA).[14] Prior to the latest SC-GHG estimate increase, various federal agencies had already begun to use SC-GHG estimates in NEPA review.^[15] As of January 2023, Interim Guidance from the White House Council on Environmental Quality recommends that federal agencies use SC-GHG estimates in NEPA review.^[16] Accordingly, project proponents may see federal agencies employ the heightened SC-GHG estimates when evaluating climate-related project impacts.

Some stakeholders may also use the SC-GHG estimates to argue that prices in carbon markets should be adjusted to align more closely with the estimates.  However, other stakeholders may argue that pricing in a market should be a function of supply and demand, and that achieving a specific pricing level (for whatever reason) is inefficient and will distort the market.

Finally, regulators’ widespread adoption of revised SC-GHG estimates could incentivize increased investment in a spectrum of low-carbon technologies, ranging from renewable energy sources such as wind, solar, and green hydrogen to carbon mitigation approaches like carbon capture and storage and carbon capture utilization and storage.

Endnotes

[1] US Environmental Protection Agency (EPA) “Report on the Social Cost of Greenhouse Gases Estimates Incorporating Recent Scientific Advances” (2023) (Final 2023 Report), https://www.epa.gov/system/files/documents/2023-12/epa_scghg_2023_report_final.pdf.

[2] 538 F.3d 1172 (9th Cir. 2008).

[3] EPA, Final 2023 Report, at 6.

[4] US Interagency Working Group on Social Cost of Carbon (IWG), “Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866,” (Feb. 2010), https://www.epa.gov/sites/default/files/2016-12/documents/scc_tsd_2010.pdf; and IWG “Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866” (Aug. 2016) (IWG 2016 Report), https://www.epa.gov/sites/default/files/2016-12/documents/sc_co2_tsd_august_2016.pdf.  (Note: the IWG and EPA reports on SC-GHG estimates have consistently used a range of three discount rates. The “central” discount rate refers to the discount rate in between a report’s low and high discount rates.)

[5] IWG, “Addendum to Technical Support Document on Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866: Application of the Methodology to Estimate the Social Cost of Methane and the Social Cost of Nitrous Oxide,” (Aug. 2016), https://www.epa.gov/sites/default/files/2016-12/documents/addendum_to_sc-ghg_tsd_august_2016.pdf.

[6] Executive Order 13783, Executive Office of the President, (Mar. 2017), https://www.federalregister.gov/documents/2017/03/31/2017-06576/promoting-energy-independence-and-economic-growth.

[7] See EPA, “Regulatory Impact Analysis for the Proposed Emission Guidelines for Greenhouse Gas Emissions from Existing Electric Utility Generating Units; Revisions to Emission Guideline Implementing Regulations; Revisions to New Source Review Program,” (2018), https://www.epa.gov/sites/default/files/2018-08/documents/utilities_ria_proposed_ace_2018-08.pdf.

[8] IWG, “Technical Support Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim Estimates under Executive Order 13990,” (Feb. 2021), https://www.whitehouse.gov/wp-content/uploads/2021/02/TechnicalSupportDocument_SocialCostofCarbonMethaneNitrousOxide.pdf.

[9] Ibid, at 4.

[10] EPA, Final 2023 Report, at 1.

[11] Ibid.

[12] EPA, Final 2023 Report, at 4.

[13] US Government Accountability Office (GAO), “Regulatory Impact Analysis Development of Social Cost of Carbon Estimates, Appendix I: Regulatory Actions, by Agency and Type of Social Cost of Carbon Estimates Used, 2008-2014,” (Jul. 2014), https://www.gao.gov/assets/gao-14-663.pdf.

[14] See EPA, Final 2024 Report, at 5.

[15] See e.g., US Department of the Interior, Bureau of Land Management, “Environmental Assessment DOI-BLM-ID-B10-2014-0036-EA Little Willow Creek Protective Oil and Gas Leasing,” (Feb. 2015), https://eplanning.blm.gov/public_projects/nepa/39064/55133/59825/DOI-BLM-ID-B010-2014-0036-EA_UPDATED_02272015.pdf.

[16] The White House, “Biden-Harris Administration Releases New Guidance to Disclose Climate Impacts in Environmental Reviews,” (Jan. 2023), https://www.whitehouse.gov/ceq/news-updates/2023/01/06/biden-harris-administration-releases-new-guidance-to-disclose-climate-impacts-in-environmental-reviews/.