The Biden administration last week signed an executive order that details plans for updating the federal government's social cost of carbon estimate. RFF's Richard G. Newell and Maureen Cropper—co-chairs of a landmark National Academies of Sciences report on the social cost of carbon—reflect on how the administration can orient the process around scientific and regulatory best practices.
On his first day in office, President Joe Biden took several important actions to get the United States back on track in addressing the climate crisis, the most critical environmental and economic challenge of our time. Rejoining the landmark Paris Agreement, for example, will bring the United States back into the community of nations working together to reduce global emissions. And at least as important will be the domestic actions the United States takes in its own self-interest and in fulfillment of American commitments under the Paris Agreement. This is where another critical Day One action comes into play: the Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis, or the Climate Crisis EO for short.
In addition to reviewing and revoking actions taken during the Trump administration, the Climate Crisis EO lays out a number of steps to fully account for the benefits of reducing climate pollution when assessing government actions. For every ton of avoided carbon dioxide emissions—the dominant greenhouse gas—the related benefits are encapsulated in a metric called the “social cost of carbon” (SCC); other greenhouse gases, such as methane and nitrous oxide, have analogous metrics. Specifically, the Climate Crisis EO lays out the necessary actions to reestablish economic, scientific, and regulatory best practices and ensure that the social cost of carbon is grounded in transparency and applies the best possible science.
The Inauguration Day executive order reestablishes the Interagency Working Group on the Social Cost of Greenhouse Gases (IWG) that was disbanded during the Trump administration, although it had functioned well during the Obama administration to bring together the necessary economic and scientific expertise across the federal agencies tasked with developing solutions to the climate problem. The executive order also tasks the IWG with publishing interim social cost estimates for the three main greenhouse gases—carbon dioxide, nitrous oxide, and methane—within 30 days, with final estimates due within one year. Third, it asks the IWG to recommend where the metrics should be applied and how the metrics should be reviewed and revised over time.
The Climate Crisis executive order lays out the necessary actions to reestablish economic, scientific, and regulatory best practices and ensure that the social cost of carbon is grounded in transparency and applies the best possible science.Richard G. Newell and Maureen Cropper
Finally, in carrying out this work, the executive order directs the IWG to “listen to the science” and consider the recommendations of the landmark National Academies of Sciences (NAS) report, Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide. As co-chairs of that report, we welcome that commitment and think it’s a good time to reflect on last week’s executive order in the context of the main recommendations of the NAS report.
Enabling the Social Cost of Carbon to Reflect the Best Available Science
The NAS study was requested by the Obama-era IWG in 2015 in the spirit of continuous improvement, with the recognition that the approach for estimating the SCC will benefit from revisions that incorporate the best available economic and scientific evidence and methods. To that end, the NAS report recommends an analytic framework, a set of criteria, a policy process, and a research agenda for enabling the SCC to reflect the best available evidence and methods over time.
While the Trump administration did not undertake efforts to implement the NAS recommendations, RFF has made substantial progress toward completing the necessary work through our Social Cost of Carbon Initiative, launched in 2017. The NAS report also outlines a three-step process for updating the SCC, to be carried out roughly every five years. Within this recommended process, the IWG first prepares a draft of revised estimates, incorporating independent scientific assessment and research advances. Then, these revised estimates are made available for notice and public comment and then finalized. Ultimately, the estimates again are subjected to independent scientific assessment. The 2017 NAS report represents the culmination of the final phase of this recommended process, and the beginning of a new cycle has now commenced under the Biden administration. Per the Climate Crisis EO, the IWG will have this year to complete the first two steps of the process, and we applaud the inclusion of scientific advances and a period for solicitation of public comment, as envisioned in the NAS report.
With respect to the interim IWG estimates, we acknowledge the Biden administration’s desire to act urgently to reinstate a science-based SCC but note that 30 days is insufficient to incorporate the full set of NAS recommendations for improvement. Instead, the IWG could rely on the methods developed in 2016, updated for inflation. Doing so will result in a central estimate for the year 2020 of about $53 per ton of carbon dioxide at a 3 percent discount rate, and sensitivity cases of $79 per ton and $15 per ton for alternative discount rates of 2.5 percent and 5 percent, respectively. These estimates and the underlying methods have been subject to multiple rounds of review by analysts, stakeholders, and the courts, and they represent the best estimates currently available for this purpose.
At the same time, an important step can be taken toward implementing a key NAS recommendation during the next 30 days, which is moving the estimation model to the open-source computing platform developed through a Berkeley-RFF collaboration as part of RFF’s Social Cost of Carbon Initiative. Taking advantage of the open-source platform will fulfill the NAS recommendation to increase the transparency and accessibility of the methods underpinning the SCC and will set the stage for implementation of other NAS recommendations as part of the revision process in the coming year.
The additional NAS recommendations can be implemented over the next six to eight months, in time to issue draft estimates, make the estimates available for public comment, and finalize estimates within one year. These recommended improvements involve the creation of an integrated structure that can project socioeconomic variables and emissions, model temperature change and other climate variables, estimate the damages from climate change, and discount and aggregate these impacts over time. Each of these recommendations is being addressed through RFF’s Social Cost of Carbon Initiative, in collaboration with other world-class research partners.
Finally, as is clear from the above estimates, the discount rate is a critical input for determining the social cost of greenhouse gases, due to the very long timeframes relevant for climate impacts, which span hundreds of years. For discounting within SCC estimation to be consistent with other elements of benefit-cost analysis, the focal SCC estimate needs to correspond to the benchmark consumption rate of discount determined by the Office of Management and Budget, which is currently 3 percent.
However, that discount rate was set in 2003, and considerable evidence indicates that the rate should be updated to reflect current market conditions, and likely lowered to about 2 percent. In a separate executive order on modernizing regulatory review, the Biden administration directs the Office of Management and Budget to develop recommendations for updating Circular A-4, which, among other things, sets out the benchmark rates of discount. While that executive order does not have specific deadlines, and does not explicitly mention the discount rate, we recommend that the discounting guidance in A-4 be updated in sufficient time for any revised guidance to be reflected in the final SCC estimates.
To put the importance of the discount rate in perspective using an example: If one applies a 2 percent discount rate to the 2016 IWG methods described above, the SCC would be $125 per ton, in contrast to $53 per ton based on a 3 percent discount rate. As part of the interim estimates, one option would be to augment the existing set of discount rate sensitivity cases with an estimate based on a 2 percent discount rate. Still, it’s important to note that the NAS recommendations include a range of updates, including on discounting methods, so it will be important to rely on a thorough process over the next year to fully reflect revisions to estimates of the social cost of greenhouses gases.
In sum, when assessing the SCC-related elements of the Climate Crisis EO against the process recommendations of the NAS report, we find that the executive order has the potential for a perfect score if implemented in accordance with the full set of NAS recommendations for estimating the SCC. We have high hopes and know that the research community is prepared with the necessary evidence and methods to support a rigorous process led by the IWG.