The Social Cost of Carbon Soars to $190/tn

by: Anna Lerner Nesbitt , CEO of Climate Collective

Earlier this fall, the Biden administration ordered government agencies?to get ready to use Social Cost of Greenhouse Gases (SC-GHG), or the ‘social cost of carbon’,?consistently in a host of government activities — including annual budgets, permitting decisions and foreign assistance programs.

Embedded in a much-anticipated crackdown on methane leaks from oil wells, the US Environmental Protection Agency (EPA), just announced the first rule referencing the price for the social cost of carbon (SCC) at $190 per ton.

According to Brookings Institution, a Washington DC based non-profit and policy think tank, the SCC is an estimate of the cost of the damage done by each additional ton of carbon emissions. It is also an estimate of the benefit of any action taken to reduce a ton of carbon emissions. In other words, the social cost of carbon helps us weigh the benefits of climate mitigation against its costs.

Historically, nature has been used as a free input to production, and polluting or degrading environmental assets has not had a cost associated with it. However, the cost of climate change impact on society today is blatantly clear - in 2023 the U.S. has experienced 25 confirmed weather/climate disaster events with losses exceeding $1 billion each, including 2 flooding events, 19 severe storm events, and one event of drought, tropical cyclone, wildfire and winter storm. According to the U.S. National Centers for Environmental Information this is the highest number on record. Putting a price on carbon is therefore critical to scaling up climate action and decarbonizing societies and can be done using a carbon tax, implementing carbon markets or setting internal – or external costs to pollution.?

While academics have used the SCC for a long time, it only showed up in US policy after the US government was successfully sued by the Center for Biological Diversity (CBD) in 2008. The CBD argued that policymakers had implicitly valued the cost of damages from climate to zero, by not including the costs and benefits of changes in GHG in its new fuel economy standard. As a response, the Obama Administration introduced the SCC to calculate the harm to the economy caused by one ton of carbon dioxide pollution.?

The metric is used to weigh the economic benefits and costs of regulations that apply to polluting industries, such as transportation and energy. A higher dollar number provides more of a justification for the government to mandate or incentivize polluters to reduce the emissions they are responsible for.? During that time, the cost was calculated at $42 a ton, before the Trump administration reduced it to $5 a ton. The new number is almost 5x Obama’s estimate, and close to a 40x bump from Trump’s estimate.??

This praxis is seen as a useful tool beyond government policies. Already in 2015, CDP identified 435 companies, ranging from the toolmaker Stanley Black & Decker to the Brazilian mining company Vale reported using an internal carbon price. At that time, most corporations set a rather modest price between $20-$40 a ton, with some outliers up and down. More recently, corporations are setting higher – and more accurate perhaps – reflections of the cost, with Swedish fintech company Klarna leading by example.? Klara is using an ‘internal price on carbon’ at $100 per ton for Scope 1 (direct emissions), Scope 2 (indirect emissions), and travel emissions, and $10 per ton for the rest of Scope 3 and investing the sums in their Climate Transformation Fund.?

Is this a significant development?

The most direct implication is as a reference number – if you’re accounting for less than $190 as the cost of your pollution, you are not accounting for the full cost of your negative impact on the planet.

It can have a couple of other implications:

1. Going forward, this number is a powerful policy tool that could strengthen the legal authority of the government to ‘make polluters pay’. EPA officials say they intend to use that figure in all the agency’s climate regulations moving forward, with regulations to curb carbon dioxide from cars, trucks and power plants coming this spring. A proposal to eliminate pollution from power plants is also in the works.
2. It could also influence other carbon pricing efforts, like the European Emissions Trading System that has long been criticized for not accurately pricing pollution.
3. The Voluntary Carbon Market is emerging from a tumulus year where it has been struggling to shake off its narrative as a market for low-quality, cheap credits. VCMI and ICVCM have both released new guidelines for high-integrity, high-quality supply side credits and demand side corporate claims. This new threshold could offer the VCM a much-needed price signal boost, which is substantially higher than what average carbon credits trade for.?
4. Even if it fails to push carbon markets or corporations’ internal price on carbon, government procurement is a powerful vector. “As the world’s single largest purchaser — spending over $630 billion per year on goods and services — the federal government has the ability to move markets, invest in new ideas, and act as a model contracting partner,” the White House said in a statement.

Although the price reference for SCC was tucked away in a methane regulation, it doesn’t reduce the significance of establishing a significantly higher SCC. In addition to the more medium term implications shared above, three themes to follow in the short-term are how this will play out in the presidential election campaign,how other major policy actors like the European Union, for example, choose to react and what level of decarbonization ambition the world will agree upon in the Global Stocktake language, negotiated at COP28.

*This article was originally published on MCJ's Substack