The social cost of carbon was an arcane but important tool in the federal climate toolbox until President Donald Trump targeted it in his sweeping March 2017 executive order to weaken climate actions.
Now, states are taking up the metric.
Policymakers and regulators in several states, including New York, Minnesota, Illinois and Colorado, are using the social cost of carbon to measure and reduce CO2 impacts from their power grids. Some are using it to compensate rooftop solar panel owners who feed low-carbon power in the grid. Others use it to incentivize nuclear power and renewable energy. Their efforts, aimed at reducing planet-warming greenhouse gas emissions, come as Congress and the Trump administration try to restrict its use.
“It’s been striking to see the progress on this front even as the Trump administration has tried to undermine the use of a social cost of carbon,” said Rachel Cleetus, chief economist and manager of the climate program at the Union of Concerned Scientists.
Put simply, the social cost of carbon is a dollar estimate of the future damages from droughts, sea level rise, heat waves and other climate impacts wrought by each ton of carbon dioxide released to the atmosphere. Climate change caused by planet-warming CO2 emitted by fossil fuel power plants will diminish ecosystems, damage infrastructure and harm people’s health, but until there is a price on carbon, most of those costs will not be paid by power generators or passed on to their consumers. Instead they will be borne by the environment and the public.
By calculating a cost in today’s dollars for these impacts, and using it when regulating energy investments and implementing climate policies, the states can put cleaner energy sources on a more level playing field with fossil fuels. Wind and solar farms, nuclear power and energy conservation efforts are often less expensive than harmful alternatives when the damage potential of fossil fuels is taken into account.
Many corporations use a similar approach by incorporating a “shadow carbon price,” which bakes the future costs of climate change into their decision-making, Cleetus notes. Putting a price on carbon adds to today’s cost of polluting power plants, helping companies to more accurately evaluate how expensive these long-term investments could be in the future, especially if stronger climate policies down the road lead to plant shutdowns before they reach the end of their lifespan.
“When making investments that are going to be around for decades, you want to make sure they take account of future conditions,” Cleetus said.
Until recently, the use of a social cost of carbon at the state level has been overshadowed by another means of putting a price on carbon—“cap-and-trade” markets, such as California’s, which set a cap on statewide emissions but allow companies to buy or sell emissions allowances within that cap.
But experts say state adoption of a social cost of carbon may have even greater impact, because social cost of carbon estimates are typically higher than carbon market prices. While states are using a variety of values for a social cost of carbon, most are above $40 per ton—about three times higher than recent carbon prices on the California market.
Power Planning with Future Costs in Mind
Minnesota and Colorado have both made moves this year involving a social cost of carbon: their states’ public utility commissions (PUCs) issued rulings requiring their biggest utility—Xcel Energy—to consider a $43-per-ton social cost of carbon when planning new power plants.
“Whether the commissioners choose to act on it remains to be seen, but at least today they’ll have the information,” said Erin Overturf, chief energy counsel for the Boulder-based environmental group Western Resource Advocates, one of the petitioners that prompted the Colorado PUC ruling.
Colorado’s PUC told Xcel Energy to use $43 per ton of CO2 pollution generated starting in 2022 and to set a schedule for ramping that up to $69 per ton by 2050. The starting figure matches the last estimates from President Barack Obama’s Interagency Working Group on Social Cost of Carbon, which Trump has disbanded.
The figure includes all projected climate damages through the year 2300. It then adjusts them to present values using a 3 percent discount rate—a parameter that spurs much debate among economists. The federal working group used three discount rates: 2.5 percent, 3 percent and 5 percent; higher discount rates afford less current value to future costs, while lower values do the opposite.
Minnesota’s PUC followed suit in July. The state has used a social cost of carbon to guide its policies since 1993, but the value was outdated. The July ruling dramatically increased its upper range, from about $4.50 to $43 per ton. Xcel and other utilities will be expected to run cost-benefit studies using both a low-end figure, of just over $9, and the new high-end figure of $43, when assessing new power plant projects in the state.
Curiously, Xcel Energy appeared to take contradictory positions in the two states. Xcel’s environmental policy manager in Minnesota, Nicholas Martin, told its PUC that “bold action is needed” on climate change and that a higher social cost of carbon would empower Xcel to cut carbon emissions “aggressively and affordably.”
Meanwhile, in Colorado, Xcel officials went on the offensive against the social cost of carbon, arguing that it would be unduly “burdensome” and that large uncertainties in the federal working group’s calculations rendered it unreliable — echoing attacks by conservative think tanks and Republican leaders.
If a social cost of carbon had to be used, Xcel argued, it should include only those climate damages occurring in Colorado or the United States, rather than worldwide. That critique matches changes in federal policy Trump made via his executive order. Federal agencies should set their own social costs of carbon, Trump ordered, but could base them upon harms to the United States only, not the world. Of course, emissions go into the global atmosphere, causing global problems.
During the Colorado proceedings, advocates for climate action and solar power pushed back hard.
“It got pretty heated,” Overturf recalled. Only by valuing the impacts of climate change can the PUC consider how power plants in Colorado contribute to it and the harm it may cause to both Coloradans and the state’s power system.
“By completely excluding … externalities, you’re really just sticking your head in the sand,” she said. “We know that climate change makes our [power] generation fleet less efficient. We know that it causes wildfires and other natural disasters that affect our transmission and distribution system. We know that there are actual costs to utility customers that come from not acting to prevent catastrophic climate change.”
Xcel Energy did not make an official available to comment but provided a statement to InsideClimate News saying it already uses a shadow price to “account for the risk of future carbon regulation.” It added that Xcel opposed using the social cost of carbon in Colorado because that state’s PUC, unlike Minnesota’s, is not obligated by state statute to consider externalities such as climate damage.
Tilting the Scale to Cleaner Investments
The social cost of carbon is already having an impact on power choices in Minnesota, and that can only increase with the higher values approved in July, said Leigh Currie, senior staff attorney for the Minnesota Center for Environmental Advocacy and a leading proponent of Minnesota’s social cost of carbon boost.
She cites two examples where the PUC favored cleaner investments—proposed by power project developers or utilities—that cost a little more today but looked more economical when the social cost of carbon was added:
In 2014, the PUC approved a solar project that made headlines as the first head-to-head win for utility-scale solar power without any state subsidies over competing natural gas proposals. Minnesota’s PUC picked the 100-megawatt solar project, proposed by Edina, MN-based Geronimo Energy, even though it cost “half a percent” more to build and run than the gas-fired competition. The PUC cited several countervailing factors favoring Geronimo’s project, including the social cost of carbon analysis. The resulting Aurora Solar photovoltaic power project, the state’s largest, was completed last fall.
Last year, the PUC approved Xcel’s proposal to beginning shutting down the state’s largest coal-fired power plant early and replacing its generation with a combination of wind, solar and gas-fired power. In the standard cost study, shutting the coal generators appeared to be one of the most expensive options on the table, but the scenario including the social cost of carbon showed it to be the cheapest, Currie said.
Energy consultant and former Maine regulator David Littell, with the nonprofit The Regulatory Assistance Project, estimates that 10 to 20 state PUCs are likely using a social cost of carbon in such planning and procurement decisions, although they may be flying under the radar. He said Maine’s PUC used it during his service from 2010 to 2015.
Other states are giving the social cost of carbon at least an indirect role in competitive power markets, in which power plants bid to determine how often they run and what they earn for their electricity. Last year, New York and Illinois used the social cost of carbon to design revenue-boosting incentives to keep low-carbon nuclear power running despite stiff competition from cheap gas.
New York is now considering a broader application that would directly affect daily bids on the competitive power market.
New York’s concept is to add a fee, based on the social cost of carbon, to bids from coal, gas and diesel-fired power plants. “Generating units that emit carbon would incur a penalty based on their level of carbon emissions and the social cost attributed to carbon,” said Brad Jones, CEO of the New York Independent System Operator, in testimony before the House Committee on Energy and Commerce’s Subcommittee on Energy last month. “The penalties collected by the NYISO would then be returned to customers in some equitable manner,” he said.
Jones said the plan would harmonize NYISO’s wholesale markets with the state’s clean energy policies, which include goals to have half of the state’s power come from renewable sources and cut greenhouse gas emissions 40 percent by 2030.
The idea is popular with economists because it means the prices consumers pay will more closely reflect electricity’s full cost, including externalities (rather than just the cost to build and fuel power plants).
Littell expects that New York’s plan would give an advantage to cleaner resources. Wind and solar farms, nuclear plants, and energy conservation providers should operate more often, he said, and get paid as much as $15 more per megawatt-hour for their resource compared to a power plant burning natural gas. That is a substantial increase from the average $18- to $40-per-megawatt-hour rate that the state’s power suppliers earned last year (depending on the region).
John Moore, a senior attorney at the Natural Resources Defense Council, and Littell said the plan should also have a long-term effect on what types of plants get built, since investors make decisions based largely on the revenue they expect a plant will earn. Moore predicts that it will give a preference to gas plants that cost more to build but that operate more efficiently, and help cleaner options beat even the best gas plants “so that the region doesn’t just continue to rely heavily on natural gas.”
Using a social cost of carbon could help many more states avoid relying too heavily on gas, Cleetus said. She cited a 2015 report by the Union of Concerned Scientists that found that two-thirds of U.S. states were “putting their electricity consumers at financial risk because of an over-reliance on natural gas.” Florida ranked highest, followed by several other southeastern states, Ohio, and Pennsylvania.
NYISO, the New York state power grid operator released a study of its concept by the Brattle Group, a leading energy consultancy, on Friday. In a joint letter NYISO’s CEO Jones and his counterpart at the New York State Department of Public Service announced that they would collaboratively discuss its feasibility with “all stakeholders and market participants.”
Other markets could follow. PJM Interconnection, which operates a regional power market in the mid-Atlantic states, has already issued a proposal for integrating a carbon price.
New York has an advantage—since it has its own competitive market, it does not need to negotiate with other states to move forward. However, it will confront inevitable legal challenges from owners of fossil-fueled plants that argue using the social cost of carbon unfairly tilts the market against them.
Moore and others say recent federal court rulings on related challenges have been deferential to states’ rights to incentivize attributes of their power supply. But a challenge could also be lodged with the Federal Energy Regulatory Commission (FERC), which oversees wholesale electricity and gas markets and whose composition is in flux. The Senate recently approved two Republican Trump appointees to join the panel’s incumbent Democrat. (Two more Trump nominees, one from each party, await Senate confirmation.)
What may be critical for New York and other states using the social cost of carbon is how they implement it. Both the federal courts and FERC have favored state interventions in electricity markets when state leaders, including the legislature and governors, rather than power system operators, define the policy and then delegate its implementation. As Moore put it: “The more the state drives the policy, the more likely the courts and FERC are to go along with it.”
As for the federal government’s use of social cost of carbon? Although Trump killed the inter-agency working group that set values for all agencies to use, the social cost of carbon lives on in Washington as a diminished version of its former self. Trump empowered each federal agency to set its own value, inviting them to ignore climate damage outside the U.S.
That is likely to draw a legal battle since carbon emissions cause global damage, Cleetus said: “Clearly with this administration they’re going to attempt to lowball it. That will prompt legal challenges if they’re using a low number that doesn’t reflect the latest science or their legal obligations.”
Meanwhile, Cleetus said, we’re losing time. “If we don’t take it into account, it doesn’t go away. Society still bears that cost in terms of wildfires, or floods or sea level rise. You’re just shoving that cost onto Americans at large.”