EPA Updated the Social Cost of Greenhouse Gases. Now What?
Before important federal regulations can be finalized, they usually have to go through cost-benefit analysis. In other words, the issuing agency often needs to show that the benefits of the regulation (like increased vehicle safety) justify the costs (like higher car prices). For climate and energy regulations, one prominent factor that stands out on the “benefits” side of the equation is the value of avoiding the climate damages caused by greenhouse gases.
To translate those damages into a dollar figure that can be compared to other monetized effects, agencies usually rely on a suite of metrics called the social cost of greenhouse gases or SC-GHG — explained in a recent Policy Integrity report — which assigns a monetary value to the damage done by one ton of greenhouse gases released into the air. It’s vital that this number is as comprehensive and robust as possible so that the government can, for example, set emissions standards at the efficient level and make appropriate decisions about when to issue drilling permits.
Last December, EPA moved closer to this goal when it comprehensively updated its social cost of greenhouse gases for the first time in over a decade. The agency derived these estimates using the best available science and economics, and the estimates represent a significant step forward in our ability to properly value climate effects. As of now, these updated values are the most robust, scientifically-supported, and comprehensive climate-damage estimates currently available. But robust values are only impactful if they are actually used to make smarter, more informed policy decisions.
Thankfully, EPA has already done this in its new emissions rules for power plants and passenger cars, finalized earlier this year. Outside of EPA, however, the popularity of these new values is less certain.
Usage in the Federal Government
When it comes to climate issues, four of the most important federal agencies outside of EPA include: the Federal Energy Regulatory Commission (FERC), which approves the infrastructure that carries electricity and fossil fuels; the Department of Transportation (DOT), which issues fuel economy standards for vehicles; the Department of Interior, which issues permits for fossil-fuel extraction on public lands; and the Department of Energy (DOE), which approves certain energy-related activities, like the export of fossil fuels, and sets efficiency standards for appliances. The latter three of these agencies all routinely use a version of the SC-GHG when analyzing the costs and benefits of their rules; FERC, unfortunately, does not.
Of those three, two have systematically adopted EPA’s updated metrics. Specifically, DOT now requests that applicants to its grant programs monetize the climate impacts of their grant proposals using the updated SC-GHG values, and it used EPA’s values when analyzing its latest fuel economy standards. DOE, for its part, has started to use the new metrics in its energy conservation standards for consumer appliances, such as water heaters and refrigerators. If other agencies — and the rest of the federal government — want to continue to make rational, evidence-based decisions on climate issues, they would be wise to follow in DOT, DOE, and EPA’s footsteps.
Usage in the States
While federal environmental regulations tend to get more press coverage, state governments are also responsible for major, consequential decisions in energy and environmental policy. For example, decisions about the usage and funding of most energy infrastructure contained within a state, such as power plants and local transmission lines, are primarily regulated by state utility commissions. Given the importance of these decisions in shaping the energy system and addressing climate change, it’s crucial that states use the most accurate SC-GHG estimates.
Some states — such as New York, Virginia, Minnesota, and Vermont — use a version of the SC-GHG in certain decisions. Virginia, for instance, requires its electric utility regulator to use an SC-GHG to assess the impacts of building fossil-fuel-fired generators. Most states, however, either use outdated estimates or none at all. Minnesota, on the other hand, has completely updated its values to reflect EPA’s new, state-of-the-art numbers, requiring its Public Utilities Commission to use them for monetizing greenhouse gas emissions associated with electricity generation in Commission proceedings. Ideally, states can serve as policy laboratories where best practices are developed and then distributed widely over time. The use of EPA’s updated values is one such practice that is ripe for dissemination.
Usage in Foreign Countries
Climate change — like the greenhouse gases that cause it — is a global problem, so even perfect decisionmaking on the part of both the U.S. federal government and state governments (something that’s far from likely) will not be sufficient for solving it. Instead, many countries must simultaneously choose to properly account for the climate impacts of future emissions in their policymaking. EPA’s updated SC-GHG doesn’t have to be the only way to do this accounting, but it can serve as a great model.
In 2023, Canada became the first country to formally adopt the new EPA numbers, which it will use in the cost-benefit analysis of regulatory proposals. Germany develops its own version of the SC-GHG for use in cost-benefit analyses for policies and projects, including policies meant to help implement the national climate change strategy. Unlike EPA’s numbers, the German estimates are applied using relatively low discount rates (0% and 1%), resulting in analysis that places significant value on benefits that occur far into the future.
Updating its SC-GHG to incorporate the latest knowledge in climate science and economics was a major analytical success for EPA, and using it to evaluate the benefits of the agency’s new environmental regulations will produce tangible results in the fight against climate change. But transforming the numbers from an analytical step forward to a powerful weapon in the fight against climate change requires rapid, widespread adoption. The Institute for Policy Integrity is already encouraging other agencies and state governmental bodies to use EPA’s estimates through comments in regulatory proceedings. Whether those efforts — and others like them — are successful will largely depend on political factors and the appetite of regulators to seriously and rationally consider the damage that climate change will continue to inflict.
This post was edited to reflect recently proposed rules from the U.S. Department of Energy, which incorporate EPA’s new values for the social cost of greenhouse gases, and to resolve ambiguity about which states are using the new values.
