As part of his comprehensive climate change agenda, President Biden convened a task force to assess the social cost of greenhouse gases. At the end of February, the task force published an interim report estimating the "cost" of carbon at approximately $52 per ton, a figure aligned with the Obama Administration's estimates, but significantly increased from the negligible cost of carbon tagged by the Trump Administration.1 As discussed in this client alert, this report is significant because it suggests that the Biden Administration will use that social cost of carbon figure in the cost-benefit analysis supporting what is expected to be a robust regulatory regime.

Federal agencies often have significant latitude in issuing regulations under the statutes they administer. To guide the exercise of their discretion, for four decades, the White House has required agencies to analyze proposed regulations to ensure their projected benefits exceed their estimated costs. But doing so requires making assumptions, not only about monetary costs and benefits but also about the many nonmonetary benefits such as improved public health that, while sometimes difficult to quantify, are meant to accrue from federal regulation.

Cost-benefit analysis is particularly difficult in environmental policy, where complex science meets a changing world, and where risk assessments play a central role in policy decisions. For climate change, the task of cost-benefit analysis becomes even more difficult. How can a policymaker quantify the social benefits of burning one less gallon of gas, given the ubiquitous effects of climate change? Equally challenging is the task of estimating the cost of impacts from greenhouse gas emissions on a per-ton basis.

To support cost-benefit analysis in the realm of climate change policy, the "social cost of carbon" (or "SCC") represents a holistic calculation of the costs of carbon dioxide and other greenhouse gas emissions on a rate-per-ton basis. Both the Obama and Trump administrations used a social cost of carbon analysis to support their regulatory goals, though they reached very different values for the social cost of carbon. The Biden Administration is poised to give the social cost of carbon an even more prominent role in its regulatory agenda.

The Basics of Cost-Benefit Analysis in Federal Regulations

Federal agencies have long been required to perform cost-benefit analyses of any "significant regulatory actions" they take. In 1981, President Reagan issued Executive Order 12291, directing agencies that "regulatory action shall not be undertaken unless the potential benefits to society from the regulation outweigh the potential costs to society." To support that mandate, the order required every agency to submit its proposed regulations, along with a draft cost-benefit analysis, to the Office of Information and Regulatory Affairs, an office within the White House's Office of Management and Budget (OMB). In 1993, President Clinton replaced the Reagan-era order with Executive Order 12866, which, although tweaked by each new president since then, still provides the basic framework for federal regulatory cost-benefit analyses today.

The process quantifies both benefits and costs of a regulatory action in dollars, even though many benefits (and some costs) are not inherently financial, such as avoided deaths or improved water quality for recreation. To capture these kinds of benefits, regulators have developed concepts such as "quality-adjusted life years saved," which they then convert into dollars using estimates of their equivalent monetary value. These methods allow easy comparison among alternatives but require some degree of judgment in setting a monetary value for nonmonetary benefits.

Cost-benefit analysis also uses a discount rate for costs and benefits experienced in the future, which are less valuable than costs and benefits today-the further in the future such benefits will be experienced, the less valuable they are. Using a higher or lower discount rate can significantly affect the analysis of a regulation whose main benefits or costs are felt far in the future.

Cost-Benefit Analysis in the Environmental Context

Cost-benefit analysis poses particular challenges for environmental policymaking for a number of reasons:

  • First, the benefits and costs of a regulation intended to protect the environment are almost never experienced by the same person. The public health benefits of reducing pollution might accrue to everyone living in a certain area, but the cost of reducing the pollution might be borne only by a handful of companies.
  • Second, because the science involved in projecting regulatory benefits is complex and involves some uncertainty, it can be hard to know with certainty what a particular environmental regulation will cause or prevent. This is especially difficult because the public health and other research undergirding these analyses is not static.
  • Finally, many of the benefits of environmental regulation, such as lives saved or health improvements, are hard to reduce to a dollar figure, while the costs, such as factory equipment to comply with a regulation, are typically much more concrete. The tension between monetary cost and nonmonetary benefits is reflected in environmental statutes such as the Clean Water Act, which is built around concepts such as the "best available technology economically achievable" that require the Environmental Protection Agency (EPA) to balance a technology's societal benefits with its monetary cost when prescribing certain standards.

Footnote

1 Interagency Working Group on the Social Cost of Greenhouse Gases, Technical Support Document: Social Cost of Carbon, Methane, and Nitrous Oxide Interim Estimates under Executive Order 13990 (February 2021) ("Interim Report").

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Originally Published by WilmerHale, March 2021

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