The gears of the administrative state are whirling as President Biden refocuses federal agencies on fighting climate change.  Yesterday’s Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis (“EO”) shows just how seriously the incoming Administration views this reorientation, and it identifies a tool central to its strategy: enlarging the Social Cost of Greenhouse Gases (“GHGs”).

The Role of the Social Cost of GHGs in Environmental Regulation

Administrative agencies have been required to conduct cost-benefit analyses of major rulemakings since 1981.  However, the methodology used to assess the costs and benefits of environmental rules and environmental actions (during NEPA review) is not statutorily codified and is often subject to shifting political winds.  Yesterday’s EO, for example, mandates an “immediate review” of the Increasing Consistency and Transparency in Considering Benefits and Costs in the Clean Air Act Rulemaking Process Rule finalized by the Trump Administration in December 2020.

A key battleground in environmental cost-benefit analysis is pricing the social cost of GHGs.  This metric is an estimate, in dollars, of the economic damages that would result from emitting one additional ton of GHGs into the atmosphere.  The proper way to calculate the social cost of GHGs remains scientifically and politically unsettled, but different approaches to pricing have profound effects on policy.

The Obama Administration calculated the social cost of carbon (“SCC”) by factoring in global damages from a ton of CO2, and it used a discount rate of 3% to value the future damages of climate change in today’s dollars.  Conversely, the Trump Administration only considered domestic damages and used a discount rate of 7%.  These strategies led to vastly different outcomes: the Obama administration calculated the SCC to be $45, whereas the Trump Administration priced it somewhere between $1 to $6.  The stark difference in SCC between the Obama and Trump Administrations was a key rationale in the latter’s repeal of the Clean Power Plan.

Biden Administration’s Social Cost of GHGs Interagency Working Group

Yesterday’s EO signals the Biden Administration’s desire to return to a methodology more closely resembling the Obama Administration’s view.  Deeming it “essential that agencies capture the full [global] costs of greenhouse gas emissions as accurately as possible,” Section 5 of the EO establishes an Interagency Working Group on the Social Cost of GHGs.  The Working Group’s membership includes a wide range of agencies, including departments without an express environmental focus like Treasury and HHS.  The EO instructs the Working Group to:

  • Publish interim social costs for CO2, nitrous oxide, and methane within 30 days, and final social costs by January 2022.
  • Recommend areas of decision-making, budgeting, and procurement where the social costs of GHGs should be applied by September 1, 2021.
  • Recommend a process to ensure social cost calculations remain current and supported by the best available economics and science, and to further ensure that they adequately consider climate risk, environmental justice, and intergenerational equity by June 1, 2022.

The EO further instructs the Working Group to solicit public comment and engage with the public and stakeholders.  Covington will continue to monitor these efforts and add to the Firm’s sustainability toolkit as it unfolds.