Oh, carbon, how do I value thee?

A couple months ago, the US government moved from using a rather low social cost of carbon to a somewhat higher one. The shift happened to debut in a new energy-efficiency standard for microwave ovens, though it could just as well have been somewhere else. The analysis behind the microwave rule valued emissions of carbon dioxide (CO2) at $38 per ton in the year 2015, where previous analyses used $24 per ton CO2. The higher value is the outcome of an update to a major interagency effort carried out in 2010, using leading integrated assessment models and data, relying on up-to-date peer-reviewed research methods, and including sensitivity for varying future discount rates.

What makes this interesting? If you hope to reduce society’s carbon footprint, you would more highly value CO2 in benefit-cost analyses for new environmental policies. On the other hand, if you’re a climate-change denier you want to say there is little or even no benefit to reducing our CO2 emissions. And so the question, “What’s the most accurate value for a ton of CO2 emitted into the atmosphere?” becomes an ideological issue. For example, Rep. John Culberson calls the interagency social cost of carbon a carbon tax, in the course of explaining his amendment to the 2014 Department of the Interior Appropriations bill that would prohibit the EPA from using it. Note that ideas of actually pricing or taxing carbon have been dead for quite some time in federal US policy (though apparently even some Republican thought leaders feel that market-based approaches that price carbon offer the best path to reducing greenhouse-gas emissions).

The eventual outcome of this debate is a big deal for the climate in the long run. But in the short run, it’s striking just how small these current social carbon cost values are in context. Two points:

Point #1: The US’ social cost of carbon is considerably lower than how other nations look at the social costs of petroleum use

One way of putting these carbon valuations in perspective is seeing how they compare to the cost of fuel. A carbon valuation of $38 per ton CO2 is equivalent to about 34 cents per gallon of gasoline, or about 9% of the current retail gasoline cost price for US reformulated gasoline. The US has among the lowest fuel prices globally, in large part because it does not tax fuel like most other nations do. The current US fuel taxes of about $0.50 per gallon (federal, state, and sales), mostly to pay for transportation infrastructure, whereas most EU nations tend to tax fuels at $2 to $4 per gallon. Yet, there are plenty of hidden economic consequences from our petroleum use, like balance-of-trade transfers, price shocks, monopsony effects, and the geopolitical costs. And the carbon damage costs are one of the foremost externalities not priced in the market.

The figure below puts the implicit US carbon valuation of $38/ton in the context of fuel prices in the leading oil-consuming nations. It shows quite clearly just how small a proportion of the total price of fuel that carbon cost amounts to, especially in countries that tax fuel more heavily in response to the wider array of economic and social and environmental consequences of cars. It’s perhaps no wonder that EU drivers, even with the same technologies available to consumers, tend to drive considerably more efficient vehicles and will continue to do so.

Gasoline price, 20 largest petroleum-consuming nations
Fuel price for US and next 20 largest petroleum-consuming nations, with the implied social cost of carbon shown for comparison

Point #2: Efficiency policies today are “no regrets” policies, even without consideration of a carbon cost

Regardless of the dollar value of carbon, efficiency programs tend to easily sell themselves on energy savings alone. For example, the 35.5 miles per gallon 2012-2016 vehicle regulations in the US will produce fuel savings far greater than the incremental vehicle technology costs and an overall 4.8-to-1 benefit-cost ratio (see EPA’s Regulatory Impact Assessment). A 60% greater social cost of carbon would result in a 5.1-to-1 benefit-to-cost ratio for the vehicle regulations that are now being implemented. The overall result is so similar, even with a higher carbon valuation, because the fuel savings are so much greater than all the other costs and benefits. The second phase of US efficiency standards, which call for an average of 54.5 mpg in 2025 vehicles, is similar, but the benefits are about 3.5-to-1. Clearly, the efficiency standards are a no-brainer proposition either way.

Chart, Benefits and costs of US EPA 2012-2016 vehicle regulation
Benefits and costs of US EPA 2012-2016 vehicle regulation, with original estimated impacts, and update for 60% higher social cost of carbon

Ignoring the costs of carbon emission-related impacts in the deliberations over an energy-efficiency or climate-related policy action does not make good sense (unless, of course, you deny that humans are having an impact on the climate). Including a social cost of carbon values is right, and getting the numbers right based on best available science surely does make good sense—increasingly good sense, in fact, as we transition to more advanced electric-drive technologies for ultra-low-carbon in the decades ahead. So it’s good to see that the US government is committed to getting agency experts in a room and using rigorous analytical tools and data to do exactly that.