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How Much Does Climate Change Cost? Biden Expected To Increase Dollar Value Of Carbon

The Trump administration did not give much value to reducing carbon emissions.

In fact, he calculated the benefits of action against climate change up to $ 1 per tonne of carbon dioxide and set policy accordingly. Almost every step towards reducing greenhouse gases seemed too costly given the potential gains negligible for society.

President Joe Biden is taking a crucial first step towards rebuilding US climate policy, and is expected to prompt federal agencies to use a figure close to $ 52 per tonne to guide the so-called “social cost of carbon” figure. temporarily.

While this figure, applied during the Obama administration, likely serves as a baseline, the Biden administration is trying to develop its own measure amongst climate-focused economists’ calls for a value at least twice as high.

Michael Greenstone, an economist at the University of Chicago, who serves as chief economist on Obama’s Council of Economic Advisors, was co-author of a study article last month stating the social cost of carbon at $ 125 per tonne or more. And Nobel Prize winner Joseph Stiglitz and Lord Nicholas Stern, author of a groundbreaking study in the 2006 UK on the economic cost of climate change, published an article published Monday warning that returning to the Obama-era figure would be a fundamentally flawed approach. “It is clear that climate change involves the management of immense and multidimensional risks that can destroy lives and livelihoods around the world, displace billions of people and lead to widespread, prolonged and violent conflicts,” they wrote.

Stiglitz and Stern wrote that the carbon prices achieved using the Obama-era approach were too low to support the policy measures needed to limit warming to 1.5 to 2 degrees Celsius (2.7 to 3.6 degrees Fahrenheit) and thus avoid this future.

Putting a high value on climate action demonstrates that the costs of steps taken to reduce carbon emissions have a value for lives saved, better health, protection of coasts and forests, agricultural productivity and property.

Having set its ambitious goal of a 100 percent clean energy economy with net zero emissions by 2050, Biden is expected to come out Friday with the social cost of a temporary carbon number. Earlier Friday, Biden formalized the US re-entry into the Paris climate agreement at a virtual meeting with G-7 leaders.

Biden had called for the social cost of a new carbon number in the climate crisis administrative decision he signed on Inauguration Day. On the order, Biden established an Inter-agency Working Group on the social cost of carbon distributed by Trump, and within 30 days instructed it to issue an interim value for the metric that could be used by federal agencies until a deadline. a more comprehensive analysis gave a final number by January 2022 at the latest.

Balancing Costs and Benefits

Putting a dollar value on something like a healthier planet may seem odd, but the federal government has routinely engaged in this type of analysis for decades when formulating environmental and health policy. The process involves the same kind of economic modeling and risk analysis techniques used, for example, when determining insurance companies rates. In a process where inputs from shareholders almost always include detailed accounting of potential costs for regulated industries, the government must legally weigh the costs and benefits of new regulations. And if the government did not put a dollar value on seemingly invaluable benefits, such as lives saved by government action, the cost-benefit calculation would be disproportionate.

Precisely when a federal appeals court ruled that the Bush administration did not do it in 2008 when it set fuel economy standards that took into account the costs to auto companies and consumers but did not account for the benefits of reduced greenhouse gas emissions. When President Barack Obama took office the following year, he attempted to address court concerns by establishing an Inter-agency Working Group on the matter, which eventually reached the social cost of a carbon value of $ 52 per tonne.

The metric was part of the cost-benefit analysis of all of the Obama administration’s climate actions to limit greenhouse gas emissions, including power plant rules and vehicle fuel economy standards. And when the Trump administration set out to break these rules, it justified its actions with a new calculation – $ 1 to $ 7 per tonne – for the social cost of carbon.

To reach such a low range, the Trump administration’s economists applied a hefty “discount rate” to value; this is a process used in the economy to take into account the concept that a dollar saved in the future will not buy as much as a dollar spent today. .

While most economists agree that some discounting of future benefits is a solid approach, they say the discount rate should be low at a time of low inflation and low interest rates. Tamma Carlton, an economist at the University of California at Santa Barbara and co-author of last month’s study paper on the social cost of carbon with Greenstone, said it was a significant change they made to reach the $ 125 per ton figures. Apply a lower discount rate than was used in the Obama years when inflation and interest rates were higher.

There are also strong moral arguments against Trump’s approach to drastically reducing future climate benefits, which Trump administration economists have achieved using stock returns as their benchmark.

“We’re talking about long-term intergenerational decisions here,” said Carlton. “And there are many reasons to think that the short-term behavior of the stock market does not reflect the decisions we want to think about when thinking about many future generations, and how we are reducing our future for us. children and our children’s children. ”

The Basis of Everything

The Trump administration also calculated the social cost of the global carbon figure by simply counting the predicted effects of climate change in the United States, low, not global. Biden has made it clear in the executive order that it plans to end this practice and calculate the benefits of reducing carbon emissions based on the worldwide impact of limiting global temperature rise – this approach sees it as an important part of its re-interaction with the international community. .

“It is very important for agencies to keep all costs of greenhouse gas emissions as accurately as possible, including taking into account global damages,” Biden said at his administrative command. Doing so facilitates sound decision making, recognizes the breadth of climate impacts, and supports the United States’ international leadership on climate issues. ”

It was unclear whether the social cost of carbon was part of his talks with G-7 leaders on Friday morning at the first meeting of the world’s largest free market economies since April 2020. The group had a full agenda, including addressing cooperation. On the Covid-19 crisis and the US commitment to rejoin the Paris agreement.

While the concept is too secret to enter into the summit talks, what the Biden administration chooses as the social cost of carbon will be the foundation for everything it does regarding climate change. “The most important economic metric for guiding climate policy decisions is the approach to the valuation process,” said Richard Newell, president and CEO of Resources for the Future think tank, who co-chaired the National Academies of Science panel and called on the government to update its decisions in 2017. The Biden administration is currently taking the academy’s advice that the Trump team ignores, including the government establishing a regular process to review and update the social cost of carbon based on the latest science on climate change and economics.

Newell also said he expects the Biden administration to apply the social cost of carbon to government decision-making processes more broadly than just the regulatory process. For example, Biden stated in the executive order that he wanted the Inter-agency Working Group to consider the application of the social cost of carbon to areas such as government procurement. Biden has already made it clear that he wants to use the purchasing power of the federal government to increase demand for electric vehicles as part of the climate plan; Even if EVs are more expensive than traditional tools in the short run, applying a higher social carbon cost to such decisions will help justify purchases.

Business groups made it clear that they understood the importance of Biden’s decision on the social cost of carbon. The US Chamber of Commerce, the American Petroleum Institute and 10 other business groups sent a letter to the White House earlier this week calling for “broad channels and opportunities for the contribution of the public and stakeholders.”

Of course, this entry will include the driving force of forces within the industry and on the right that support the Trump administration’s approach. The Energy Research Institute, a nonprofit with funders, including right-wing foundations, published a harsh article last month by senior economist David Kreutzer, based on “unknown and almost unknown” and arbitrary input on the social cost of carbon. “Whether the people who died voted a significant number of votes may be an open question, but dead politics are currently developing in DC,” Kreutzer wrote.

Against this background, enterprise business groups are taking a moderate stance and seem to signal a desire to collaborate with Biden.

“Evaluating the social cost of greenhouse gas emissions, as well as re-entering the Paris Agreement, is an important step in climate policy making,” said Stephen Comstock, vice president of corporate policy at the American Petroleum Institute, in an email sent before Biden’s interim decision. announced. “We look forward to including the interinstitutional working group and providing input while developing its proposals to help shape a lower carbon future.”

Of course, the Biden administration has committed to putting the US not only on a lower carbon future, but on a road with zero net carbon emissions. And, according to economists, this will require a much higher social carbon cost than the Obama-era value of the Biden White House for now. Stiglitz and Stern wrote that using this legacy analysis would mean accepting an increase in global temperatures of between 3.5 and 4 degrees Celsius (6.3 to 7.2 degrees Fahrenheit) in the decision-making process. “Almost certainly,” they wrote, “the US is committed to not achieving its Paris goals.”

An earlier version of this article incorrectly stated that the Biden administration’s statement to increase the social cost of carbon had already been published in the Federal Register.

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