The Social Cost of Carbon’s Next Frontier, or Dead End?

Last week U.S. Colorado District Court Judge R. Brooke Jackson ruled against issuance of a coal lease exploration permit, under National Environmental Policy Act (NEPA) requirements that federal agencies take a “hard look” at environmental impacts. The judge concluded that the responsible federal permitting agencies failed this test because they did not consider the social cost of carbon (SCC) in the final environmental impact statement (FEIS). Media coverage has heralded the ruling as having potentially major implications for other projects such as the Keystone Pipeline, and as implying that “these agencies can’t bury their heads in the sand when confronting the very real impacts of climate change.”

Do these comments reflect reasonable expectations? Or are they a false start when it comes to the future role of the social cost of carbon in influencing public and private sector decision-making? Probably a bit of both. But if I have to choose, I would have to go with “false start” unless plaintiffs in this case and others can successfully translate the SCC from a mandated but heretofore immaterial federal agency rule-making assumption to a variable that actually influences permitting and other decision-making outcomes. I question whether this one trial-level court decision can set the stage for such a transition.

In this piece I’ll briefly review what we mean by the social cost of carbon, what Judge Jackson ruled, and how the SCC might fare in the legal arena.

The Social Cost of Carbon

Economists and environmentalists have tried for years to quantify the damage done by the release of an incremental ton of carbon dioxide (or other greenhouse gases) into the atmosphere. The SCC concept became a real number for federal rule-making purposes in 2010 when an inter-agency task force arrived at an SCC value of $21/ton for use in NEPA proceedings. The $21/ton value was first used in updating federal fuel efficiency (CAFÉ) standards. Last year the inter-agency task force updated its SCC figure to $35/ton (based on “improved modeling”). The updated figure was used in establishing new standby efficiency standards for microwave ovens. The Office of Management and Budget has issued guidance requiring the standardized use of the SCC in federal rule making proceedings where GHG emissions need to be quantified as part of a cost-benefit analysis. We explore the history and literature pertaining to the social cost of carbon in our online SCC Brain, publicly available here, and in previous blog posts such as While Assessing Carbon Pricing, We’re Missing the Big Questions and What’s Missing From the OMB’s New Social Cost of Carbon?

Despite this seemingly detailed administrative history and agency re-examination, the underlying SCC analysis and the specific SCC values have not been tested in contested proceedings or court cases. The numbers and analysis are potentially fragile. Some economists argue that the $35/ton figure dramatically overstates the damages of a single ton of CO2 emissions; others argue it radically understates the true risks of climate change. It’s a dramatically wide continuum of respected opinion. It is certainly true that the $35/ton figure relies on simplistic modeling assumptions. Moreover, the number falls dramatically if one considers just U.S. climate change damages, and it is extremely sensitive to the underlying discount rate (on which reasonable people can disagree). It is easy to see, based on these and other factors, how opponents of the SCC will challenge the concept – and the specific federal inter-agency figure — as too uncertain or arbitrary.

The Ruling

Judge Jackson’s ruling pertains to the Sunset Roadless Area in western Colorado. Two companies, Ark Land Company and Mountain Coal Company, proposed coal-mining exploration activities, expanding activities already underway on nearby lands. Several federal agencies including the U.S. Forest Service, the Bureau of Land Management, and the Department of the Interior, approved the proposed permit expansion. The judge concluded that although several aspects of the agencies’ decision to approve the exploration permit were reasonable, the decision to ignore the social cost of carbon in evaluating environmental impacts was arbitrary and capricious. Key aspects of Judge Jackson’s ruling include:

• Although the final EIS did not mention the social cost of carbon, the draft EIS had, in fact, used the SCC (citing GHG emissions from the mine and combustion of the mined coal). The agencies decided to drop discussion of the SCC from the final EIS due at least in part to a comment from one BLM economist regarding the SCC’s “controversial” nature.

• Despite the administrative decision to drop the SCC cost discussion from the final EIS, the agencies still relied upon the project’s estimated $1 billion in economic benefits. Judge Jackson concluded that deleting reference to the project’s potential costs as reflected by the SCC, while keeping reference to the project’s economic benefits, constituted a “misleading” economic analysis prohibited by NEPA. As long as an accepted protocol does exist for quantifying a project’s environmental costs, Judge Jackson concluded, that protocol can’t simply be ignored if the economic benefits of the project are being presented, in this case in support of the lease permitting decision.

It’s important to clarify, too, what Judge Jackson did not conclude. He did not find that reliance on the SCC would have changed either the conclusions of the permitting process or the results of the project’s cost-benefit analysis. NEPA, after all, does not require a particular analytical approach. But it does require a fair and informed process, and the judge concluded that NEPA’s procedural requirements demand that the responsible agencies look at environmental costs if they are looking at economic benefits, especially if an accepted metric exists by which those costs can be valued.

Next Steps and Implications for the SCC

How will this case — and other potential permitting cases — play out with respect to use of the SCC? It seems to me that the road could lead in several directions, all of which pose challenges for SCC advocates.

1. Permitting agencies could decline to provide an economic justification for a permit. As Judge Jackson noted, NEPA does not specifically require a cost-benefit analysis. His decision lays out a potential roadmap for permitting agencies to take this approach in the future. Will federal agencies simply not bring up the SCC (or other specific cost and benefit figures) even in the future? The decision implies that this might be acceptable. Will plaintiffs be able to push for inclusion of an economic analysis, thus making the SCC more potentially relevant, even if federal permitting agencies have not initiated such an analysis?
2. Permitting agencies could incorporate the SCC, but conclude that the current SCC value of $35/ton doesn’t tip the overall cost-benefit against a project. Plaintiffs might argue for a higher SCC valuation on risk grounds, noting that a “risk neutral” approach to the SCC (the intent of the $35/ton figure) makes little sense in the face of the risks posed by climate change. This would require an in-depth knowledge of the SCC. How likely is it that a court would hold an agency decision to be arbitrary and capricious, simply because a plaintiff believes the SCC number should be higher?
3. Private sector defendants could pursue an aggressive attack on the SCC value of $35/ton. They might argue for a lower valuation on the basis of looking only at U.S. damages, or argue for a higher discount rate that reduces the SCC. Because the specific SCC valuation adopted for federal rule-making is analytically fragile, plaintiffs would need an in-depth understanding of the SCC literature and policy to effectively defend the $35/ton value or to make the counter-argument for a higher SCC. In the end, both sides still face the arbitrary and capricious hurdle, which Judge Jackson noted is a high barrier, especially in areas of technical expertise.
4. Defendants could offer to mitigate the climate change damages associated with a project by purchasing carbon offsets from domestic or international carbon markets. Carbon offsets can be purchased today for very low cost; this route could offer defendants and permitting agencies an easy way forward in approving a permit. Plaintiffs would need to show that purchasing carbon offsets is not a reasonable alternative to using the SCC. They might be able to make this case due to widespread availability in the market of low-quality offsets, but challenging the entire concept of offsets might backfire and have negative consequences on the policy front.

Thus, it is by no means assured that the SCC will become a relevant variable in permitting processes or project decision-making, or that it will affect the outcomes of such processes. But Judge Jackson’s ruling does offer plaintiffs a window to use the SCC to their advantage, if they can articulate it well enough.