Bloomberg News

Obama Quietly Raises 'Carbon Price' as Costs to Climate Increase

June 12, 2013

Tougher Regulations Seen From Obama Change in Carbon Calculation

For example, the administration’s vehicle fuel-efficiency standards would cost industry $350 billion over the next 40 years, while benefits in energy security, less congestion and lower pollution totaled $278 billion. Photographer: Reed Saxon/AP Photo

Buried in a little-noticed rule on microwave ovens is a change in the U.S. government’s accounting for carbon emissions that could have wide-ranging implications for everything from power plants to the Keystone XL pipeline.

The increase of the so-called social cost of carbon, to $38 a metric ton in 2015 from $23.80, adjusts the calculation the government uses to weigh costs and benefits of proposed regulations. The figure is meant to approximate losses from global warming such as flood damage and diminished crops.

With the change, government actions that lead to cuts in emissions -- anything from new mileage standards to clean-energy loans -- will appear more valuable in its cost-benefit analyses. On the flip side, environmentalists urge that it be used to judge projects that could lead to more carbon pollution, such as TransCanada Corp. (TRP)’s Keystone pipeline or coal-mining by companies such as Peabody Energy Corp. (BTU:US) on public lands, which would be viewed as more costly.

“As we learn that climate damage is worse and worse, there is no direction they could go but up,” Laurie Johnson, chief economist for climate at the Natural Resources Defense Council, said in an interview. Johnson says the administration should go further; she estimates the carbon cost could be as much as $266 a ton.

Public Comment

Even supporters questioned the way the administration slipped the policy out without first opening it for public comment. The change was buried in an afternoon announcement on May 31 about efficiency standards for microwave ovens, a rule not seen as groundbreaking.

“This is a very strange way to make policy about something this important,” Frank Ackerman, an economist at Tufts University who published a book about the economics of global warming, said in an interview. The Obama administration “hasn’t always leveled with us about what is happening behind closed doors.”

Industry representatives are equally puzzled.

“It’s a pretty important move. To do this without any outside participation is bizarre,” said Jeff Holmstead, a lawyer at Bracewell & Giuliani LLP representing coal-dependent power producers and other industry groups. A legal challenge to the determination would be difficult, but could be tried by itself or in a challenge to a specific rulemaking that uses the cost, he said.

Leading Models

The administration first arrived at this calculation in 2010 using “leading expert models” and updated it “applying the same methods and assumptions,” Office of Management and Budget spokeswoman Ari Isaacman Astles said in an e-mail.

The Economic Report of the President in March said the administration would update estimates “as new scientific and economic analysis become available.”

The administration’s new carbon cost is key to a wide range of policies, which get subject to cost-benefit analysis in the rulemaking process or at OMB. Obama is considering more energy efficiency standards for everything from buildings to vending machines.

In addition, the Environmental Protection Agency is late on issuing rules to cap greenhouse-gas emissions from new power plants, a standard that would preclude the construction of new coal-fired power plants that don’t have expensive carbon-capture technology. Lobbyists representing companies such as American Electric Power Co. (AEP:US) and Southern Co. (SO:US) have urged the EPA to scale back that plan.

In each of these cases, the carbon costs would help determine if the administration would act, and how far to go.

Fuel Efficiency

For example, the administration’s vehicle fuel-efficiency standards would cost industry $350 billion over the next 40 years, while benefits in energy security, less congestion and lower pollution totaled $278 billion, according to a regulatory analysis using the prior carbon cost estimates cited in a paper by administration economists. It’s only by including the $177 billion in benefits from less carbon dioxide that the rules provide a net benefit to the country, according to the paper by Michael Greenstone, now an economics professor at the Massachusetts Institute of Technology.

The government-wide assessment should be used by Obama in deciding whether to approve TransCanada’s Keystone pipeline from the oil sands of Alberta to refiners along the Gulf of Mexico or by Interior Department in deciding leases for coal mining on public lands, according to environmental activists.

According to the EPA, Keystone could lead to 935 million metric tons of carbon-dioxide emissions over 50 years, putting the cost according to this latest calculation at more than $37 billion. This calculation is under dispute, as the State Department says in its own analysis that the pipeline won’t lead to additional production of oil sands.

Keystone Challenge

“We recommend using monetized estimates of the social cost of the (greenhouse gas) emissions from a barrel of oil sands crude compared to average U.S. crude,” the EPA said in its submission to the State Department. It made a similar request in 2011, and the State Department didn’t include it in its draft assessment.

And if Obama approves the pipeline, the higher carbon-cost estimate could to be a part of any lawsuit challenging the decision, according to Bill Snape, senior counsel for the Center for Biological Diversity.

“It won’t be a game changer, but it would help” in any legal challenge, he said.

The increase in the estimate is being cheered by environmentalists as one small sign that President Barack Obama is going to make good on a pledge from his inaugural address to tackle global warming in the face of opposition from Republicans in Congress.

“Four months ago, President Obama spoke of our obligation to combat climate change, saying failure to do so would betray our children and future generations,” filmmaker Robert Redford said in a statement released by NRDC yesterday. “I just hope he has the courage of his convictions.”

To contact the reporter on this story: Mark Drajem in Washington at mdrajem@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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