A US court just revolutionized climate change policy by affirming the Social Cost of Carbon: What it means and why it matters.
If you are involved in producing, reducing, or managing carbon emissions, then listen-up because this will affect you.
Last week the 7th Circuit Court of Appeals might just have made one of the most critical climate change rulings to date. By affirming the Social Cost of Carbon (SCC), it will encourage other regulators to use carbon costs in setting policies, and may pave a way for a Carbon Tax – an idea much feared by some. But it also offers an opportunity for companies to quantify and communicate the energy value of their technologies, and the dollar value of their environmental and social practices.
In a Chicago courtroom, the justices (all, incidentally, appointed by Republican Administrations) upheld the Department of Energy’s (DoE) metric on the Social Cost of Carbon, under the Energy Policy and Conservation Act (EPCA) of 1975. EPCA was enacted in the wake of the Oil Embargo on petroleum exports to the US by the Organization of Arab Petroleum Exporting Countries in 1973-74. EPCA was enacted to help and protect the US through the use of energy conservation measures.
In 2014, the DoE issued two rules, one set the energy efficiency standards for 49 classes of commercial refrigeration equipment and the second stipulated the test procedures to be used. Several industry groups filed suit challenging the substance of the rules and the decision-making processes used by DoE to make them.
One of the challenges concerned the Social Cost of Carbon (SSC) metric which DoE used in its cost-benefit analysis for setting new standards, an analysis required since 1981 whenever the agency considers new regulation. The SCC represents the economic cost of damages associated with a one metric ton of Carbon in a given year. (The same figure represents the value of damages avoided for a reduction in Carbon). The metrics were generated by an interagency panel comprising experts in science and economics from 15 agencies and first formed in 2009. The current dollar value is US$37* per ton.
What does this mean? If for example tightening certain emissions standards lowers carbon output by say 3 million tons per year, then multiply the number by $37 and you have the total damages avoided ($110million). SCC is designed as a comprehensive estimate of climate change damages and includes among other factors, changes in net agricultural productivity, human health, property damages from increased flood risk, and changes in energy costs (heating and air conditioning). It does not however include all kinds of important damages e.g. extreme disasters are excluded.
For the proposed rules on commercial refrigerators, DoE calculated that the new conservation standards would cost manufacturers between $93.6 and $165 million per year. At the same time the projected total benefits to consumers was estimated at between $4.9 and $11.3 billion, including in green house gas reductions and consumer savings. DoE used the analysis as one criterion to justify the standards. The petitions challenged the figures and the methods but the court repeatedly sided with DoE.
The petitioners argued that in its calculations the DoE arbitrarily considers the benefits accruing to the global environment and to all people around the world, but only considers the costs on a national level. DoE argued that climate change involves a global externality, meaning that carbon released in the US affects the entire world. National energy conservation, the agency argued, has global effects and these are an appropriate consideration for national policy. The court agreed with DoE. In its 68 page ruling, the court denied the petitions for review in their entirety.
The implications of the ruling are enormous.
First the court definitely ruled on the legality of carbon accounting, and the use of quantitative measures of carbon cost-benefits.
We can anticipate more regulators to incorporate SCC when considering and justifying the need for new or revised environmental regulations
The acceptance of a quantitative carbon accounting provides a dollar value that has potential implications for a Carbon Tax. This is a highly controversial topic. Several entities feel that there must be and will be a carbon tax while others are vehemently opposed.
The ruling may be good news for certain businesses. Deriving a dollar figure for carbon will help businesses plan for the long term. Being able to credibly quantify costs and benefits of new technologies and corporate actions has long been an impediment to companies. Consumers and shareholders relate to numbers. Companies will now be able to disclose their environmental and social performance to shareholders and stakeholders and in better and standardized way.
The case was a complex one involving science, economics and policy. There are many lessons in the ruling including for scientists as well as environmental attorneys who use science in their practice. Critical to the case was the conclusion that the agencies had relied on science that met the current professional or industry standard, was peer reviewed and evaluated in an open and transparent manner. The court also considered and accepted the use scientific uncertainty standards, something that can be challenging in courts and a rarity in complex situations especially regarding climate change.
The social cost of carbon once an emerging instrument in putting a price on carbon has just become the center-piece.
*(Several entities argue the figure is too low e.g. a recent Stanford Study calculate SCC at $220 per ton)