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White House Ups the Ante on Cost of Carbon Pollution to the Public

New estimate for cost to society of projects like the Keystone XL is up about 66%. Some say it still low-balls today's price for tomorrow's warming.

Jun 10, 2013
President Barack Obama

WASHINGTON—The Obama administration has sharply increased its cost estimates for the global-warming damage caused by carbon dioxide emissions, a calculation that could significantly affect government policies about fossil fuel projects, including the controversial Keystone XL oil pipeline. 

The new estimates could influence many other government actions, such as setting efficiency standards for appliances and industrial equipment and establishing emissions standards for new and existing power plants. It will also factor into the running debate on whether to impose a carbon tax or find some other way to put a price on carbon emissions.

At issue is what economists call "the social cost of carbon," a measurement of the price society ultimately pays for the damages caused by each additional ton of carbon dioxide emitted. The higher the social cost, the more economic sense it makes to impose strict but expensive emission controls.

A central estimate in the range of possibilities presented in the administration's new calculations is that each additional ton of carbon dioxide emitted in the year 2020 will cost society $43—a number that rises in subsequent years, as the mounting pollution exacerbates the problem of global warming. That estimate is about 66 percent higher than the $26 per ton cost calculated back in 2010, when the administration issued its first set of estimates.

The new price tag attempts to measure today, in dollars, the harm that will happen years, decades or even centuries in the future, as the globe heats, the seas rise, and the bill for each additional year of pollution comes due.

The estimates, completed in May, were calculated by a specialized inter-agency task force and are based on the latest, peer-reviewed scientific research. The task force relied on a set of three models developed over the years by scientists and economists trying to better understand the consequences of greenhouse gas emissions. 

If the administration applies its new social-cost calculations to the emissions attributed to the oil sands crude that would be carried by the Keystone XL pipeline—a project that is still under review and needs a presidential permit to proceed—the calculation would show tens of billions of dollars in additional costs to society over the pipeline's lifetime. The pipeline's opponents say the Keystone would add to global warming by moving high-carbon fuel from the tar sands of Canada to refineries in the United States.

For years, the Environmental Protection Agency has urged the State Department to do just this kind of calculation as part of its environmental review of the Keystone project. But the State Department has never done so.

In April, in a review sharply critical of the State Department's latest draft environmental impact statement for the project, the EPA again urged this approach.

It cited estimates that the tar sands crude oil the pipeline would carry could add 19 million tons of incremental emissions to the atmosphere each year—the amount of extra pollution due to the fact that tar sands oil is dirtier than conventional oil and uses more energy to produce. Using the new carbon cost estimate, the extra emissions from the oil delivered in the year 2020 alone would impose future costs of more than $800 million in today's dollars. Every following year's emissions would add to the economic harm, and at a steadily escalating price per ton.

"If greenhouse gas intensity of oil sands crude is not reduced, over a 50 year period the additional carbon dioxide from oil sands crude transported by the pipeline could be as much as 935 million metric tons," the EPA told the State Department. "It is this difference in greenhouse gas intensity—between oil sands and other crudes—that is a major focus of the public debate about the climate impacts of oil sands crude."

Some analysts contend that the social damage costs from the Keystone would be far higher.

Oil Change International, an advocacy group that opposes the pipeline, says that if all the emissions from burning tar sands oil were counted, instead of just the extra emissions due to its being dirtier than other fuels, the social costs would run to $1 billion, $10 billion, or even more each year using the administration's old formula.

Under the new carbon calculation, the costs would be even higher.

"When it comes to the Keystone XL pipeline, however, it remains to be seen whether the Obama administration will listen to its own analysis and recognize that the costs of this pipeline are too great to ignore," the group said this week.

Many leading economists say the future costs of today's carbon emissions could indeed reach astronomical levels, depending on how social costs are estimated and which worst-case damages are cranked into the models. 

In a recent report, Oil Change International said the true social cost of developing Canada's tar sands and exporting the oil through the Keystone might approach $100 billion a year.

A paper published in a special edition of the on-line journal Economics on the social cost of carbon asserted that the true social cost might be $900 a ton in 2010, rising to $1,500 per ton in 2050, wildly more than the administration estimates.

Nicholas Stern, a respected climate specialist of the London School of Economics, made the case for overhauling the models at a recent conference, where he warned that current scientific and economic approaches greatly underestimate the cost of carbon emissions.

The White House said it updated its estimates to reflect new peer-reviewed research about expected damage from global warming—and that the price change reflected recent alterations to the models it used, not to its own methods For example, the builders of several models changed they way they account for rising sea levels and for the dynamics of heat transfer between the atmosphere and the ocean, two areas in which scientific understanding is rapidly evolving.

"The significance is that the more we learn about climate impacts and climate science, the more we understand how expensive climate change is," said Laurie Johnson, the chief climate economist at the Natural Resources Defense Council, which opposes the Keystone project. She expects that as scientists learn more, the cost estimates will keep rising.

If there is one thing that everybody involved agrees on, it is that a precise calculation is impossibly tricky.

Johnson and other critics of the administration's calculations have argued that the government's calculations consistently understate the social cost of carbon. They say the government uses too high a discount rate – a standard economic tool used to reflect how people value something that happens today more than something that will happen later. By overly discounting future costs, some environmentalists argue, even the White House's new estimates seriously low-ball today's price of tomorrow's warming.

Those who think the administration is trying to crack down too hard on carbon emissions also dispute its approach. "The 'social cost of carbon' is not nearly as objective and scientific as the White House claims," said the Institute for Energy Research, a pro-industry group, in reaction to the change.  It said the social cost of carbon is "based on a series of subjective human decisions, which results in vastly different estimates."

Ari Isaacman Astles, a spokeswoman for the White House's Office of Management and Budget, defended the government's methodology.

"These updated values are well within the range of mainstream estimates," she said. "Indeed, similar estimates are used by other governments, international institutions, and major corporations." 

The administration itself presents its cost estimates as a range. The $43 figure for 2020 is roughly in the center of a table of values. So the revised calculation, like the earlier one, claims to be no more than a reasonably credible ballpark estimate.

Even so, the new calculation—like the old one, which has been used for three years in various policy decisions—could profoundly affect important new regulations, such as those pending under the Clean Air Act to control emissions from future or existing electric power plants. The higher the cost of the damages caused by the carbon dioxide that billows from their smokestacks, the more reasonable it will be to impose costly controls. Power plant emissions currently account for about 40 percent of U.S. greenhouse gas emissions.

The new calculation has already been used by the Energy Department to help set cost-effective efficiency standards for microwaves, the first such rule to reflect the new values.

It could also influence any debate over how much to tax carbon, should Congress someday return to considering that as a way to raise money while tackling the problem of climate change. Many economists say it makes sense to tax carbon at a level that reflects its social cost. If the social cost is higher than previously thought, a tax would collect more revenues. On the other hand, the higher the tax, the less likely that Congress would pass it.

In a recent study of how a carbon tax would affect emissions and the economy, the Congressional Budget Office emphasized the importance of the social-cost calculation in taxation—and also the deep uncertainty about what its "true value" should be.

One reason economists quarrel about this is that the numbers selected to discount future costs into today's dollars—a 3 percent rate is often used, although some economists use higher or lower rates—don't accurately quantify what today's societies should set aside to cover catastrophic damages that might occur a century or more into the future.

A damage figure of $35 a ton for emissions in 2013 "quickly rises to $55 a ton under a lower discount rate—one that doesn't 'discount' harms to the wealth and health of future generations by quite as much as the administration did," said Thomas Sterner, visiting chief economist at the Environmental Defense Fund, in a blog posting.

If nothing is done to restrict carbon emissions, and if concentrations in the atmosphere head toward doubling today's load, scientists predict temperatures rising 4 degrees C, 6 degrees C or more. The melting of ice caps and glaciers would result in higher sea levels, which in turn could trigger catastrophic coastal flooding. Other forms of severe damage could escalate in parallel, almost beyond imagination.

Some damages might be completely unforeseen. Some, while improbable, might have cataclysmic, planet-wide consequences, not just in terms of natural systems, but also in terms of economic crashes, wars, famines and the like.

Applying an annual discount rate of 3 percent to a worst-case risk that is 100 or 200 years into the future can make the cost of an unbearable disaster appear cheap in today's dollar, as Martin Weitzman, a noted environmental economist, has written.

There are also ethical questions about how to fairly estimate costs that will be shouldered by people born two, three, four or five generations in the future—and about whether people who inhabit the world's richest regions can fairly impose future costs on people who live in the poorest regions.

As economists experiment with putting a price on human choices, they continue trying to incorporate these complex factors into their selection of a discount rate. Many now believe that rate should be lower than 3 percent and should even decline over time. But when the administration updated its social cost estimates, it stayed with its original methodology.

It adjusted its figures to bring them in line with the new science; it did not adjust them to the latest economic thinking. 

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