The wildly divergent numbers arise in significant part because the agency is now calculating the cost of carbon only within the United States, rather than around the globe — a key change that could be of major consequence.
The “social cost of carbon” is a very influential figure that helps policymakers weigh the value of moves aimed at stopping climate change. If the social cost of carbon is lower, that shrinks the estimated benefits of such moves, making it more likely that policymakers will find those benefits not worth the costs.
“The most important single economic concept in the economics of climate change is the social cost of carbon (SCC). At present, regulations with more than $1 trillion of benefits have been written for the United States that use the SCC in their economic analysis,” Yale University economist William Nordhaus wrote in a 2016 study.
Similar analyses could show up in other Trump administration regulatory decisions, experts said.
Critics say that in its “Regulatory Impact Analysis,” the Trump administration is manipulating the math to justify predetermined conclusions. The EPA analysis is “a radical departure from established science and economics,” charged attorney David Doniger of the Natural Resources Defense Council.
“My read is that the political decision to repeal the Clean Power Plan was made and then they did whatever was necessary to make the numbers work,” added Michael Greenstone, a professor of economics at the University of Chicago who worked on climate policy during the Obama years.
These critics were responding to a prior leaked draft that summarized the longer impact analysis, but the new version seemed largely consistent with it.
But the EPA defended the approach Tuesday, arguing that it was the Obama administration that had done the math in a questionable way.
“The facts are that the Obama administration’s estimates and analysis of costs and benefits was, in multiple areas, highly uncertain and/or controversial,” an agency spokesman, who spoke on the condition of anonymity said by email.
“The previous administration compared domestic costs against its estimate of global climate benefits,” the spokesman continued. “The proposed repeal also presents a scenario looking specifically at domestic climate impacts. EPA is tasked with protecting the environment and human health of this nation, and our alternative analysis reflects that. This administration also returns to long-standing OMB practice by using appropriate discount rates to compare apples to apples when estimating the current value of future scenarios.”
The new EPA document is a proposal, rather than a final analysis. And it presents a variety of scenarios and assumptions, broadly explaining the uncertainties involved in such complex calculations and citing the need for “transparency” in its analysis. Still, critics say the way the analyses are built involves a considerable departure.
The EPA’s changes — which could become central to ongoing litigation over how the agency addresses climate change — reflect a long, complicated debate over how the government justifies regulatory decisions, particularly with respect to climate change.
In 2009, the Obama administration created the Interagency Working Group on the Social Cost of Carbon, a panel designed to assess the economic damages from climate change. The body proceeded to use a complex brew of economic and scientific analyses to figure out the toll, in dollar terms, of a ton of carbon dioxide emitted to the atmosphere.
That estimate — which varies based on a variety of assumptions, but was recently put at $45 dollars (adjusted for inflation) in 2020 in one central scenario — then fed into regulatory analyses that helped Barack Obama’s EPA conclude that the benefits of the Clean Power Plan would greatly exceed its costs.
But the EPA’s approach has long been the target of conservative critics, and shortly after Trump’s election, the new administration moved to reverse it. In a March executive order, Trump disbanded the working group and said that its reports and findings “shall be withdrawn as no longer representative of governmental policy.”
Now, the EPA appears to have begun to unveil a different way of calculating the social cost of carbon and other aspects of its cost-benefit calculations related to pollution — one that could have sweeping implications.
Where Obama’s EPA said that it considered the cost of a ton of carbon dioxide emissions across the entire globe, Pruitt’s EPA said that it will “[shift] the focus to the domestic (rather than global) social cost of carbon.” Damages within the United States from climate change will naturally be smaller — making it harder to justify cutting greenhouse gas emissions.
But critics say this approach ignores the fact that climate change is a global problem and that emissions from other countries hurt us, just as our emissions hurt them. “The new proposal claims to count only the domestic U.S. impacts of carbon pollution, even though this pollution causes worldwide harm,” charged the Environmental Defense Fund in a recent rebuttal to the EPA’s analysis.
The National Academy of Sciences, in its latest report evaluating the social cost of carbon methodology, found that the calculation isn’t as simple as stopping at U.S. borders. “Climate change in other regions of the world could affect the United States through such pathways as global migration, economic destabilization, and political destabilization,” the body noted.
“The Academy finding was that you can’t just do some simple percentage of global damages to get at an estimate of the U.S. damages; you have to take into account how damages incurred outside the U.S. feed back into the U.S.,” said Rutgers climate scientist Robert Kopp, one of the members of the committee who drafted the report.
Discounting the future?
The EPA also appears to have changed how it is thinking about a key factor called the “discount rate,” which is central in calculating the social cost of carbon. The discount rate is “meant to represent the opportunity cost” of spending society’s dollars on fighting climate change, “rather than what those resources would have otherwise been invested in,” said economist Richard Newell, who co-chaired the National Academy’s report and is president of Resources for the Future.
The standard Obama era practice had been to apply a 2.5, 3, and 5 percent annual discount rate in the climate change context. But Pruitt’s EPA has instead considered, for the social cost of carbon, 3 percent and 7 percent. (It did later consider 2.5 percent in an appendix to the new document.)
Using 7 percent in particular — a rate meant to reflect a return on investment, say in the stock market — has long been advocated by allies of the administration’s environmental and regulatory policies, such as the conservative Heritage Foundation.
“The EPA/[Interagency Working Group] settled on 3 percent as the best choice, but its omission of 7 percent was glaring to those who follow this regulatory issue,” wrote the foundation’s David Kreutzer, who served on the EPA’s transition team, last year.
The 7 percent rate yields a considerably lower social cost of carbon. But “there’s good reasons to think that such a high discount rate is inappropriate for use in estimating the social cost of carbon,” Newell said. He explained that when it comes to the impacts of climate change, those generally affect individual consumers where a rate of 3 percent is more appropriate.
“This is a case where we have specific information which points to the use of a consumption rate of interest, and in that case, the use of the 7 percent rate is simply conceptually inappropriate,” Newell said.
Air pollution damages?
The EPA also has introduced new parameters for assessing the value of cutting air pollution. Emissions of fine particulate matter from fossil fuel burning can be deadly, but the EPA considers two scenarios in which the risk of death “falls to zero” at certain low concentrations of fine particulates in the air.
“These analyses are designed to increase transparency rather than imply a specific lower bound on the size of the health co-benefits,” the agency said.
In one of them, the agency assumes there’s no more risk below the levels currently required by the National Ambient Air Quality Standards, which is 12 micrograms per cubic meter of fine particles, technically known as PM2.5.
But critics say it’s not justifiable to exclude the dangers of particles at low concentrations.
“If you’re an area that is at 11, and the Clean Power Plan will push you to 9, under that assumption it says there are no health benefits,” said Jonathan Buonocore, an environmental health researcher at Harvard. “There’s no evidence this is true. Time and time again … we keep finding health benefits when air quality gets better, even in areas that are in attainment with the rules.”
So in sum, the EPA is changing its analysis in multiple ways — and this new analytical framework could now be applied in other decisions made by the federal government, experts said.
“Now that they have constructed it, it seems naive to assume that they will put it in a closet,” Greenstone said. “My best guess is that it will be used to revisit other environmental rules and that the last several decades of environmental gains are at risk, with the payoff coming in lower costs for polluters.”