Last week, President Trump took a swing at former President Obama’s climate agenda. Trump issued an executive order that calls for the Environmental Protection Agency (EPA) to roll back limits on carbon pollution from power plants, rewrite rules on methane pollution from oil and gas drilling, and recalculate the social cost of carbon. Of these changes, the last is possibly the most significant and least understood.
The social cost of carbon is the number that undergirds all federal climate protections. It is the cost of damages incurred by carbon dioxide — the heat-trapping gas seeping from cars, planes and power plants that’s wreaking havoc on the climate.
Here’s a simple analogy to understand how it works.
Imagine one of your neighbors organizes a party in the park. You pay for a ticket, and he supplies the hot dogs, potato chips, watermelon, coleslaw and lemonade. You eat and drink your fill, play frisbee and listen to music. When the party stops and everybody goes home, you leave behind a mess of wet paper plates and sticky plastic cups.
You enjoyed the party. Your neighbor made a little money. But, together, you have trashed a public park. Thanks to you, the Rotary Club will have to call off its yearly softball game.
The costs of cleanup and cancelled softball are what economists call negative externalities. You paid for food and beverage, but you didn’t pay for the mess you made. Those costs are external to your transaction with the party organizer.
It would make sense, in this case, to chip in a few extra bucks to pay for someone to clean up the park — or at least know how much it would cost. That way, if you don’t want to pay for cleanup, you can decide not to make a mess in the first place — maybe gather a few extra trash cans and lay down a tarp next to the grill.
In this analogy, the party is fossil fuels. Our economy was built on cheap, abundant coal, oil and natural gas. For more than a century, these fuels have driven economic expansion, spurred technological progress, and made a small number of people very, very rich.
But, fossil fuels also created a planet-sized mess.
The social cost of carbon is a way to put a price on that mess. Every gallon of gas you burn makes the planet a little bit warmer, fueling droughts, floods and severe storms that will cripple agriculture, damage critical infrastructure and destabilize vulnerable regions. As a result, we will pay more for food, roads, bridges and national defense — among other things.
The social cost of carbon currently stands around $40 per metric ton of carbon CO2. For context, the average American generates about 20 metric tons of carbon dioxide each year. Many scientists think the social cost of carbon should be much higher. A 2015 study said it should be as much as $220 per metric ton of carbon pollution. How could these sources produce such vastly different numbers?
One reason is something called the discount rate— a measure of how much to discount future damage caused by climate change. If the discount rate is zero, that means you would be willing to pay $1,000 today to prevent $1,000 of damage in the future. With a modest discount rate, you might pay only $220 today to prevent $1,000 of damage in the future. With a higher discount rate, you might pay just $40 today.
Trump’s executive order calls for an outlandishly high discount rate, one that would set the social cost of carbon at less than $5 per metric ton emitted.
Here’s why this matters. Federal agencies use the social cost of carbon in the cost-benefit analyses when issuing new environmental safeguards. That one number underpins some 79 regulations — including fuel standards, energy efficiency rules and EPA limits on carbon pollution. The social cost of carbon shows these measures produce quantifiable benefits. If you want to dismantle federal climate policy, then you need to take aim at the social cost of carbon.
Trump’s effort to lower the social cost of carbon may face legal challenges, but the administration has wide latitude to adjust this number. The new president aims to extend the party for fossil fuels, even if it that means we make a much bigger mess.