Five Things You Should Know About the Interim Social Cost of Greenhouse Gases

This is not a minor bureaucratic adjustment. The SC-GHG has also been used to assess a proposed project’s impact on the environment under the National Environmental Policy Act (NEPA). On February 23, the White House Council on Environmental Quality (CEQ) rescinded a draft Trump administration guidance and reinstated a 2016 guidance directing agencies how to consider GHG emissions under NEPA, including when to use the SC-GHG. This action, in conjunction with the revised SC-GHG estimates, has the potential to delay or block infrastructure and energy projects across the country.

Moreover, the new SC-GHG estimates revert to the Obama administration’s estimates of the social cost of carbon, methane, and nitrous oxide — adjusted for inflation — and show a sharp increase from those used under the Trump administration. Using a 3% discount rate, the interim estimates for 2020 emissions show an over 700% increase:

Both estimates rely on the same empirical data with the exception of two key assumptions: global damages and different discount rates. These differences, along with other scientific and technical developments, will be further analyzed and considered as the IWG works to issue a final update of the estimates in 2022, as directed by EO 13990. Until then, the interim estimates will be used broadly to justify regulatory and other decisions.

Litigation in this area is expected to continue. Courts have reaffirmed the need to assess climate effects and have upheld the application of the SC-GHG in rulemakings and environmental reviews under NEPA but have largely deferred to agencies on the specific analytical tools used in benefit-cost analyses. Stakeholders in the automotive, aviation, oil and gas, utility, and manufacturing sectors, among others, should take note of this marked change in policy and consider strategies for engaging in the development of the final SC-GHG estimates and corresponding rules and permit decisions relying on the estimate.

Here are five things you should know about the estimates

1. IWG Is Back

In 2009, the Obama administration convened an informal working group to develop a governmentwide social cost of carbon (SCC). The White House Office of Management and Budget (OMB) and Council of Economic Advisors led the IWG, which included a dozen other executive offices, departments, and agencies. In August 2016, the IWG issued the first governmentwide estimates of the social cost of methane and nitrous oxide and was rebranded the IWG on GHGs. In March 2017, then-President Trump issued EO 13783, which disbanded the IWG, and the Trump administration instead addressed the SC-GHG directly in rulemakings using a revised estimate from the U.S. Environmental Protection Agency (EPA). President Biden’s EO 13990 has reinstated the IWG, which again will be led from the White House and joined by representatives from across the executive branch including EPA and the Departments of Agriculture, Commerce, Energy, Interior, Transportation, and Treasury. New members of the reinstated IWG include the National Climate Advisor (Gina McCarthy, former EPA Administrator in the Obama administration) and the Department of Health and Human Services.

2. Accounting for Global Climate Impacts Again

Reverting to consider global damages would of course have a major bearing on the ultimate estimates to be issued in 2022: The larger the scope of damages, the larger the SC-GHG. The reach of the SC-GHG, however, is derived in part from OMB Circular A-4, which directs agencies to “focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.” The Obama administration and now the Biden administration have based the estimates on the global damages of GHG emissions, citing the global impacts of climate change. The Trump administration accounted only for those damages of emissions within the United States, taking a strict application of the OMB Circular A-4 and recognizing statutory limits of domestic action. Given the Biden administration’s focus on climate action, and the flexibility in Circular A-4, it is likely the IWG will continue to use the global damages of GHGs. New climate studies, including the National Climate Assessment, may further adjust the global damages calculation. EO 13990 also called on the IWG to account for the full costs of GHG emissions, including environmental justice, which has been identified as a top domestic environmental priority for the Biden administration. 

3. The Choice of Discount Rates Materially Affects the SC-GHG

A key factor to watch will be the discount rates the administration uses to determine how much weight is placed on effects that occur in the future. In the context of the SC-GHG, the discount rate represents how much society is willing to pay today to avoid climate effects into the future. The lower the discount rate, the higher the value today versus in the future — resulting a higher SC-GHG. OMB Circular A-4 generally informs agencies to use a 3% and 7% discount rate in regulatory benefit-cost analyses.

The Obama administration developed the SC-GHG based on discount rates of 2.5, 3, and 5%, although some had called for lower discount rates or even none. The Trump administration used the 3 and 7% discount rates. The new interim estimates reverted to the lower discount rates of 2.5, 3, and 5% in recognition of the need to curb the effects of climate change now. The administration is likely to receive renewed requests for an even lower discount rate. Another area to watch is how the IWG accounts for intergenerational equity. EO 13990 called on the IWG to consider intergenerational equity in updating the SC-GHG, but a revision to Circular A-4 may be needed before the Biden administration can incorporate such equity factors.

4. Expect a Broad Application of the SCC Across “All of Government”

Looking ahead, interested stakeholders will need to track closely how the new administration applies the SC-GHG as it implements its “all of government” approach to climate policy. While designed for regulatory benefit-cost analysis, the SC-GHG has been applied in nonregulatory federal permitting actions as well as a host of state and local actions. During the Obama administration, over 150 proposed and final rules and other regulatory actions from the EPA, Departments of Agriculture, Energy, Interior, Housing and Urban Development, and Transportation, and the CEQ cited or relied on the SC-GHG. The Trump administration continued to use its adjusted SC-GHG in rulemakings but limited its use in other instances such as NEPA reviews.

The Biden administration has already taken steps to reinsert the estimate into various actions. For instance, last month CEQ reinstated a 2016 guidance that cited the SCC as a tool for assessing GHGs in NEPA reviews. The U.S. Federal Energy Regulatory Commission (FERC) recently reopened a comment period that also posed a question regarding the SCC’s application to its Certification of New Interstate Natural Gas Facilities. Moreover, the interim estimates will be applied in many of the rules EO 13990 directed agencies to reconsider. At the EPA, these rules include GHG emissions standards for utilities, methane standards for the oil and natural gas industry, emission standards for new aircraft, and GHG and fuel economy standards for light-duty vehicles.

5. Watch for Opportunities to Participate

The public is expected to have the opportunity to be heard as the administration develops its final SC-GHG update in the coming months. During the Obama administration, the IWG issued the first-ever governmentwide SCC in 2010 and provided a corresponding update in 2013. However, the lack of public process drew calls from Congress for greater transparency, as little was publicly known about the IWG, including its government participants, use of consultants, frequency of meetings, or agency-specific contributions. In response, in late 2013 the IWG updated the SCC and opened a public comment period on the estimates. Prior to this public comment period, the public had been able to comment on the SCC only within the scope of the particular rulemaking in which it had been applied. The Biden administration is poised to take a more open approach. The IWG announced a forthcoming public comment period to collect public input on its approach and indicated that it will consider recommendations made by the National Academy of Sciences in a comprehensive 2017 report identifying research priorities to improve the SCC. Moreover, in a statement, the IWG co-chair declared the IWG was “committed to engaging with the public and diverse stakeholders, seeking the advice of ethics experts.”

As the administration continues its review of the SC-GHG and the parallel track of reconsidering rules that account for changes in GHG emissions, clients should consider their options for engaging the administration.