How and why states should use the SCC?
As noted above, the SCC is a tool for internalizing externalities; specifically, it provides a monetary value for the cost of carbon emissions that will result from a particular decision. Without having this value on hand, a decisionmaker is faced with imperfect, incomplete information and may struggle to make a policy choice that maximizes net social welfare. The economic literature supports monetizing climate effects to achieve these goals because monetization helps put the impact of climate damages in context.
If an analysis only qualitatively discusses the effects of global climate change, decisionmakers and the public will tend to overly discount that specific action’s potential contribution. Without context, it is difficult for decisionmakers and the public to assess the magnitude and climate consequences of a proposed action. Quantification of these emissions and the monetization of their effects makes it easier to compare costs and benefits.
Monetization provides much-needed context for otherwise abstract consequences of climate change. It allows decision-makers and the public to weigh all costs and benefits of an action—and to compare alternatives—using the common metric of money. Monetizing climate costs, therefore, better informs the public and helps “brings those effects to bear on [an agency’s] decisions.” 1 The tendency to ignore non-monetized effects is the result of common but irrational mental heuristics like probability neglect. For example, the phenomenon of probability neglect causes people to reduce small probabilities entirely down to zero, resulting in these probabilities playing no role in the decision-making process. 2 This heuristic applies even to events with long-term certainty or with lower-probability but catastrophic consequences, so long as their effects are unlikely to manifest in the immediate future. Weighing the real risks that, decades or centuries from now, climate change will fundamentally and irreversibly disrupt the global economy, destabilize earth’s ecosystems, or compromise the planet’s ability to sustain human life is challenging; without a tool to contextualize such risks, it is far easier to ignore them. Monetization tools like the social cost of carbon (and the social cost of other greenhouse gases) are designed to solve this problem: by translating long-term costs into present values, concretizing the harms of climate change, and giving due weight to the potential of lower-probability but catastrophic harms.
Finally, the SCC enables regulators and policymakers to take into account the effect of their decisions on society as a whole, as climate change is a global problem. This consideration can encourage reciprocal actions from other actors, including other U.S. states and other countries. We discuss more above why the “global” SCC estimates are the best ones.
Even though the IWG estimates were developed for use in regulatory analysis, there is wide support for use of the SCC in other contexts. The SCC is useful for evaluating nearly all energy regulations and environmental rules and actions. In general, using the SCC allows us to compare the costs of limiting carbon dioxide pollution to the costs of climate change. The SCC should be used in all appropriate instances, including but not limited to rulemaking that addresses greenhouse gas emissions, electricity ratemaking and regulation, natural resource valuation and royalty setting, regulatory cost-benefit analysis for climate actions, environmental impact statements, and setting carbon emissions caps or taxes.
In market-based emissions reduction schemes, the SCC should be fully internalized to allow the environmental attributes of clean energy resources to be more accurately valued and to ensure carbon-free resources are not under-valued. For states that are members of the Regional Greenhouse Gas Initiative (RGGI), for example, a state-level effort to price carbon should take into account the SCC minus the RGGI price of carbon. Note that if the RGGI carbon price were as high as the SCC, then this additional step would not be necessary.
The SCC can also allow state policymakers to compare the costs and benefits of a proposal or set the stringency of a regulation. If a state wants to set a greenhouse gas emissions cap, for example, legislators can use the SCC to determine what the cap should be. Overall, using the SCC gives states information on which measures will ultimately improve societal well-being vis-à-vis climate change.
Finally, using the SCC to gauge the climate impacts of coal and natural gas leases can help determine new royalty rates, helping the states to improve their leasing programs. Using the SCC can help ensure that taxpayers get a fair deal out of the use of their state’s lands, rather than having a disproportionate amount of benefits fall to privates companies and costs fall to the public.
The emissions from my state/this leasing decision/this regulation/this project are so small, does the SCC still apply?
The SCC absolutely still applies. The argument that individual projects are too small to monetize misunderstands the tools available for valuing climate effects. The social cost of greenhouse gases protocols were developed to assess the cost of actions with “marginal” impacts on cumulative global emissions, and the metrics estimate the dollar figure of damages for one extra ton of greenhouse gas emissions. 3 The integrated assessment models used to derive the estimates work by first running a climate-economic-damage calculation for a baseline scenario, and then adding a single additional unit of greenhouse gas emissions to the model and rerunning the calculation. The approach assumes that the marginal damages from increased emissions will remain constant for small emissions increases relative to gross global emissions. 4 In other words, the monetization tools are in fact perfectly suited to measuring the marginal effects—that is, the effects of one additional unit—of emissions from smaller-scale decisions, as well as from nationwide policies.
It may be helpful for state decisionmakers to understand how other states have used the SCC to date. States including--but not limited to--California, Colorado Illinois, Minnesota, Maine, New York and Washington have all begun using the federal SCC in energy‐related analysis, recognizing that the SCC is the best available estimate of the marginal economic impact of carbon emission reductions. Several states and municipalities have used the SCC in the context of renewable energy decisionmaking, and Illinois and New York State have used the SCC to assess the value of keeping some of the state’s nuclear power plants in operation.
See our State Highlights page for information on what individual states are doing.
My state already has climate policy or renewable energy in place, so why should we still use the SCC?
There is nothing that should prevent a state from using the SCC, even if there is already a climate or renewable energy policy, like a renewable portfolio standard (RPS) or clean energy standard (CES). In fact, states can use the SCC in setting RPSs or CESs or other renewable resource mandates. RPSs and CESs alone can be economically problematic, as such policies effectively “‘pick winners” in electricity markets. The first-best public policy tool to promote clean energy resources and achieve greenhouse gas reductions is to use a carbon price that would lead the power generators that use dirtier energy resources to internalize the externalities caused by greenhouse gas emissions fully. Using a carbon price to achieve greenhouse gas reductions would be the least-cost way of achieving carbon emission reductions compared to other alternatives. 5 However, using the SCC to set the standard can make RPSs or CESs more efficient. When state agencies are determining standards, the SCC and other externalities, including other societal costs and benefits, should be incorporated into the analysis. We elaborate on this process below.
- See Baltimore G. & E. Co. v. NRDC, 462 U.S. 87 (U.S. 1983), at 96. ↩︎
- Cass R. Sunstein, Probability Neglect: Emotions, Worst Cases, and Law (John M. Olin Law & Econ., Working Paper No. 138, 2001), available here. ↩︎
- TSD 2010, supra note 3, at 1. ↩︎
- Id. at 2. ↩︎
- Erik Paul Johnson, The Cost Of Carbon Dioxide Abatement From State Renewable Portfolio Standards, 36 Res. Energy Econ. 332, 349–50 (2014); Karen Palmer & Dallas Burtraw, Cost‐Effectiveness Of Renewable Electricity Policies, 27 Energy Econ. 873, 893 (2005); Carolyn Fischer, Richard G. Newell, Environmental And Technology Policies For Climate Migration, 55 J. Of Envtl. Econ. Mgmt. 142, 160 (2008) (finding that lowest cost emissions reductions come from a combination of an emissions price with a small ‘‘learning subsidy’’). ↩︎