Low-Energy Fridays: Does the Social Cost of Carbon Repeal Matter?

The Environmental Protection Agency (EPA) recently announced a slew of actions aimed at curtailing climate-related regulation, including repealing the Social Cost of Carbon (SCC), the metric regulators use to estimate the economic benefits of avoiding climate change and determine whether climate regulation is worth its burdens.

While one could argue that the EPA’s move is purely political, the reason the Trump administration can do this without much blowback is because the SCC they are rescinding is viewed as politically influenced.

Whether regulations are implemented or repealed is governed by processes managed by political appointees, so in a way, regulations flow from politics. Republicans typically view the costs of climate regulation as outweighing the benefits, and Democrats anticipate exceptionally large future climate damages that justify high-cost regulations in the near term.

But while politics play a large part in the SCC, the bigger issue is the need for improved regulatory quality—and the SCC is emblematic of this.

Politics and Regulatory Implementation

At the core of climate regulation is a 2007 Supreme Court case that determined greenhouse gases (GHGs) to be a pollutant that the Clean Air Act compels the EPA to mitigate. The EPA then crafted an “endangerment finding” confirming as much, and from that flows the EPA’s need to estimate the “social cost” of GHGs. In other words, this is how the EPA estimates the harm caused by climate change and the benefits of reducing GHG emissions. The SCC is the dollar figure of benefit per ton of GHG avoided, equivalent to one metric ton of carbon dioxide.

From a political perspective, most of this process is controlled by whomever is in the White House. This is especially so regarding the SCC, which is used to quantify the benefits of climate regulation and determine whether they exceed the burdens. In the past, we have explained that regulatory guidance requires that regulations provide benefits that outweigh their costs, so the SCC’s role in benefit calculations further enmeshes it in politics.

If an administration wants to govern via regulation, then they have an interest in producing as high an SCC estimate as possible. Alternatively, if an administration desires less regulation, then they would desire as low an SCC as possible (or no SCC at all). The EPA’s latest actions mean little in the long term because a future administration can simply go through the process again to restore the SCC. In fact, that is very similar to what has already happened.

During the first Trump administration, the SCC was revised to a much lower value, from about $50 per ton to $7 per ton. The Biden administration modified the SCC to a much higher value—about $190 per ton. In the grand scheme of things, the new actions from the EPA rescinding the SCC and endangerment finding throw a major wrench into the formulation of new climate regulation from a future administration, since it will take some time to reestablish an SCC. But as we saw during the Biden administration, these procedural hurdles do not majorly impede the pursuit of climate regulation if a president has a mind for it.

Ultimately, the EPA’s rescission of the SCC is more performative, since it was unlikely that the Trump administration would have pursued climate regulation anyway and because a future Democratic president would still have the legal authority to once again implement climate regulation.

Credibility Is the Real Issue

While the SCC is emblematic of a political football, a bigger issue looms because the EPA should ideally not be involved in such gamesmanship in the first place. The core of the EPA’s regulatory directive is accurately identifying costs and benefits to address externalities (i.e., the human health impact from pollution). When politics influence the mathematics behind EPA policy, then Americans end up with worse policy.

If regulators fumble by underestimating costs or overestimating benefits, the effectiveness of the regulation wanes—and Americans end up with higher burdens that may not be outweighed by hoped-for health and economic benefits. Getting back to the SCC, while its defenders could claim that the Trump administration’s ire is purely political, they would be doing regulatory policy a disservice by ignoring the very credible critiques of the SCC’s formulation.

There are good reasons to say that the SCC needs work. For one thing, it permits regulators to leverage global benefits against domestic costs, allowing them to implement climate regulation that is net-burdensome to the U.S. economy despite a net benefit across the globe. The critique that the SCC could support regulations that weaken the U.S. economy is true.

There is also the issue of discount rates—the annual percentage rate by which a future benefit is discounted to a present-day value and compared to the costs of new regulation. Discount rates are confusing, but think of them as the inverse of compounding interest on an investment: Instead of starting with a value and estimating what it will be after a number of years, the discount rate starts with a known future benefit—the value of the avoided pollution—and tells us the present-day value. In other words, if it is known that the value in 10 years of avoiding a pollutant is $100, then if it is discounted at 3 percent the equivalent value today would be $74, and at 7 percent it would be $51. If the cost to abate the pollution is lower than those values, then so long as the rate of return on capital is lower than the discount rate (7 percent in this example), the regulation would be a preferable investment.

But the SCC estimates values 300 years into the future, so just like a compounding interest formula it is highly sensitive to the discount rate. Under a 7 percent discount rate, the SCC was estimated at $6 to $9 per ton, and at a 3 percent rate was $53 to $63 per ton. The Biden administration favored a 2 percent rate, which yielded a value of $190 per ton.

As much credible debate as there is on which discount rate is appropriate, there is no perfect way to know which discount rate is most accurate since it reflects difficult-to-predict economic and environmental conditions far into the future. To address this, regulators are supposed to offer cost and benefit estimates under a range of discount rates to demonstrate that their regulations are net-beneficial even under a variety of potential scenarios. The Biden administration’s SCC, which estimated a value at no rate higher than 2.5 percent, will of course be viewed skeptically since their climate regulations essentially rewrote the rules for passing cost-benefit analysis.

The upshot is that policy is ultimately vulnerable to politics, and the SCC is a good example of how significant policies like climate regulations are ultimately beholden to political realities. But it would behoove policymakers, as well as external analysts, to recognize that making policy effective rather than political requires credibility. The SCC value underpins any claim of climate regulation benefits, so it must be held to an exceptionally high standard.

Republicans’ recent electoral victories partially represent frustration from the American public at rising regulatory burdens. If and when an SCC is adopted in the future, its formulators must be perceived as having Americans’ best interests in mind rather than chasing the largest possible number. The lack of resistance to Trump’s deregulatory actions is evidence that the Biden administration did not clear this bar, and future regulation advocates ought to do better.