The Biden Administration’s Approach To The Social Cost Of Carbon – Environment

As part of his comprehensive climate change agenda, President
Biden convened a task force to assess the social cost of greenhouse
gases. At the end of February, the task force published an interim
report estimating the “cost” of carbon at approximately
$52 per ton, a figure aligned with the Obama Administration’s
estimates, but significantly increased from the negligible cost of
carbon tagged by the Trump Administration.¹ As discussed
in this client alert, this report is significant because it
suggests that the Biden Administration will use that social cost of
carbon figure in the cost-benefit analysis supporting what is
expected to be a robust regulatory regime.

Federal agencies often have significant latitude in issuing
regulations under the statutes they administer. To guide the
exercise of their discretion, for four decades, the White House has
required agencies to analyze proposed regulations to ensure their
projected benefits exceed their estimated costs. But doing so
requires making assumptions, not only about monetary costs and
benefits but also about the many nonmonetary benefits such as
improved public health that, while sometimes difficult to quantify,
are meant to accrue from federal regulation.

Cost-benefit analysis is particularly difficult in environmental
policy, where complex science meets a changing world, and where
risk assessments play a central role in policy decisions. For
climate change, the task of cost-benefit analysis becomes even more
difficult. How can a policymaker quantify the social benefits of
burning one less gallon of gas, given the ubiquitous effects of
climate change? Equally challenging is the task of estimating the
cost of impacts from greenhouse gas emissions on a per-ton
basis.

To support cost-benefit analysis in the realm of climate change
policy, the “social cost of carbon” (or “SCC”)
represents a holistic calculation of the costs of carbon dioxide
and other greenhouse gas emissions on a rate-per-ton basis. Both
the Obama and Trump administrations used a social cost of carbon
analysis to support their regulatory goals, though they reached
very different values for the social cost of carbon. The Biden
Administration is poised to give the social cost of carbon an even
more prominent role in its regulatory agenda.

The Basics of Cost-Benefit Analysis in Federal Regulations

Federal agencies have long been required to perform cost-benefit
analyses of any “significant regulatory actions” they
take. In 1981, President Reagan issued Executive Order 12291,
directing agencies that “regulatory action shall not be
undertaken unless the potential benefits to society from the
regulation outweigh the potential costs to society.” To
support that mandate, the order required every agency to submit its
proposed regulations, along with a draft cost-benefit analysis, to
the Office of Information and Regulatory Affairs, an office within
the White House’s Office of Management and Budget (OMB). In
1993, President Clinton replaced the Reagan-era order with
Executive Order 12866, which, although tweaked by each new
president since then, still provides the basic framework for
federal regulatory cost-benefit analyses today.

The process quantifies both benefits and costs of a regulatory
action in dollars, even though many benefits (and some costs) are
not inherently financial, such as avoided deaths or improved water
quality for recreation. To capture these kinds of benefits,
regulators have developed concepts such as “quality-adjusted
life years saved,” which they then convert into dollars using
estimates of their equivalent monetary value. These methods allow
easy comparison among alternatives but require some degree of
judgment in setting a monetary value for nonmonetary benefits.

Cost-benefit analysis also uses a discount rate for costs and
benefits experienced in the future, which are less valuable than
costs and benefits today-the further in the future such benefits
will be experienced, the less valuable they are. Using a higher or
lower discount rate can significantly affect the analysis of a
regulation whose main benefits or costs are felt far in the
future.

Cost-Benefit Analysis in the Environmental Context

Cost-benefit analysis poses particular challenges for
environmental policymaking for a number of reasons:

• First, the benefits and costs of a
  regulation intended to protect the environment are almost never
  experienced by the same person. The public health benefits of
  reducing pollution might accrue to everyone living in a certain
  area, but the cost of reducing the pollution might be borne only by
  a handful of companies.




• Second, because the science involved
  in projecting regulatory benefits is complex and involves some
  uncertainty, it can be hard to know with certainty what a
  particular environmental regulation will cause or prevent. This is
  especially difficult because the public health and other research
  undergirding these analyses is not static.




• Finally, many of the benefits of
  environmental regulation, such as lives saved or health
  improvements, are hard to reduce to a dollar figure, while the
  costs, such as factory equipment to comply with a regulation, are
  typically much more concrete. The tension between monetary cost and
  nonmonetary benefits is reflected in environmental statutes such as
  the Clean Water Act, which is built around concepts such as the
  “best available technology economically achievable” that
  require the Environmental Protection Agency (EPA) to balance a
  technology’s societal benefits with its monetary cost when
  prescribing certain standards.

Footnote

1 Interagency Working Group on the Social Cost of
Greenhouse Gases, Technical Support Document: Social Cost of Carbon,
Methane, and Nitrous Oxide Interim Estimates under Executive Order
13990 (February 2021) (“Interim
Report”).

To view the full article click here.

Originally Published by WilmerHale, March 2021

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.