The legal origin of the Social Cost of Carbon

Over at High Country News, Elizabeth Shogren just posted a helpful explainer on the federal government's Social Cost of Carbon (SCC). It's definitely worth a read. 

Not only is this piece a useful introduction to one of the Obama Administration's climate policy tools, but it also correctly captures the institutional history of the SCC. Most of the expert discussion around the SCC focuses on the economics community, which developed the three integrated assessment models (IAMs) the federal government used to set the SCC. Climate economists offer a critically important perspective, of course, given the nature of climate damages and inter-temporal tradeoffs the IAMs seek to measure. But a singular focus on economics misses the the legal origin and practical function of the SCC in federal policymaking. 

As Elizabeth Shogren notes, the SCC owes its existence to a lawsuit challenging the Bush Administration's CAFE standards for vehicle fuel efficiency (Center for Biological Diversity v. NHTSA, 538 F.3d 1172 (9th Cir. 2008)). In that case, a number of environmental groups and state Attorneys General sued the federal government, arguing that its CAFE standards didn't go as far as the law required. Among other points, they argued that by ignoring the impacts of climate pollution in the regulatory design, the agency (NHTSA) acted in an arbitrary and capricious manner. The Ninth Circuit agreed, noting that while the court was not positioned to select the appropriate cost number, ignoring the issue—which placed an implicit price of zero dollars on emissions—was arbitrary and capricious, and therefore the policy needed to be revised. 

With this prominent court decision in place, federal agencies knew they would have to account for the cost of climate pollution in future rulemaking. But calculating a reasonable number is a huge lift for any one group, let alone every single agency having to complete that exercise for each regulatory action they take. Rather than place this heavy burden on individual agencies (and risk the development of inconsistent price calculations), the Obama Administration initiated an interagency process to develop a standard estimate for the SCC. In turn, the interagency SCC process distilled the complexity of climate economics into a simple lookup table for agencies to use. 

Many experts are now turning their attention to whether and how the SCC should be improved and used over time. I'll write more later on whether the SCC is having an impact on policy—right now, there aren't any significant examples where the inclusion of the SCC has affected the stringency of policies. But several new papers in climate economics suggest that the IAMs behind the SCC potentially underestimate climate impacts. Were the SCC to be revised upwards, it would be more likely to affect future regulations and any other federal government actions governed by the SCC. 

As luck would have it, the National Academy of Sciences just released its Phase I report on the the SCC and its IAM constituents. The scope of the initial report was intentionally narrow, focusing on just a few technical questions about the structure of IAMs and the presentation of results in the SCC; a more substantial second phase is due out in another year or so. Meanwhile, I'm glad to see that the initial National Academy of Sciences report correctly captures the legal history of the SCC (as did an earlier review from the U.S. Government Accountability Office). 

It's important for economists to remember that the SCC was born in the legal system because the legal system will continue to play an important role in shaping the future of the SCC. I'm encouraged that popular writing and expert reviews are taking note of these connections, and hope that this is a sign that the relevant expert communities are increasingly aware of the connections between academic research and practical policy.