The Biden administration has set the social cost of carbon at $51 per ton — 7 times higher than the price set by the prior administration. What does that mean? Economists talk about “untaxed externalities” a lot. That bit of jargon allows them to discuss the failures of the vaunted free market system promoted by reactionaries and Ayn Rand fanatics without actually criticizing them. Basically, the so-called free market isn’t free at all. It is deliberately constructed to enrich certain members of society by excusing them from paying for the damage they do and is often described as privatizing the profits and socializing the costs. Elon Musk explained it best to an audience at the Sorbonne in Paris prior to the climate summit in 2015. Here is a video of part of his presentation.
Let’s put it another way. Let’s assume you own a large amusement park with lots of attractions and restaurants. It will have many restrooms as well. You charge people big bucks to get in, but you pump all the effluent generated by your amusement park into a nearby river that provides drinking water to the surrounding community. People get sick and die from drinking the polluted water. Economists can calculate how many man-hours (and woman-hours) of productive labor are lost due to people being too sick to work or dying prematurely. Add it all up and it becomes the “social cost of effluent.”
The Social Cost Of Carbon
The social cost of carbon is exactly the same concept. It is a way to measure in economic terms the cost of the damage done to people and the Earth by pumping billions of tons of carbon dioxide into the atmosphere every year. In other words, it’s a way to tax that activity instead of giving polluters a free ride. Of course, it makes no sense to allow businesses to keep all the profits of their enterprises and make you pay for the negative impacts they create. But that, in essence, is the heart and soul of the much ballyhooed “free market economy” espoused by Milton Friedman and his coterie of admirers at the Chicago School of Economics.
It is also the basis for the disastrous “trickle-down” policies pushed by Ronald Reagan designed to make the rich richer and the poor poorer. From the perspective of so-called conservatives, that means those policies have worked precisely the way they were meant to and it explains why income inequality worldwide is now greater than at any time in history. What it does not explain is why the poor saps getting hammered by these policies continue to vote for those who promote them while the oligarchs laugh all the way to the bank.
The upshot of it all is, when someone starts preaching about the wonders of the free market, hold onto your wallet with both hands because you are about to become the next victim of these rapacious people and their “heads we win, tails you lose” policies. The proof of the pudding is the full scale, five alarm catastrophe that happened in Texas recently as plummeting temperatures caused gas and nuclear power plants to fail because the state’s embrace of free market principles over the past two decades encouraged grid managers to ignore needed upgrades and seek the cheapest possible utility rates. What this disaster has proven beyond any doubt is that ideology is a lousy way to run any commercial enterprise, whether public or private.
$51 Per Ton
Initially, the social cost of carbon will be set by the Biden administration at $51 per ton, according to a report by the Washington Post. Gina McCarthy, Biden’s national climate adviser, said that will be the starting point while the administration works to determine what the actual price should be in the future. Some estimates suggest the price could go as high as $125 per ton, which is not far off the $79 to $125 range the state of New York adopted as its standard last December.
“A new social cost of carbon can tip the scales for hundreds of policy decisions facing the federal government,” Tamma Carleton, assistant professor of environmental science at the University of California at Santa Barbara, tells the Washington Post. “Any policy, project or regulation that lowers emissions will now have a higher dollar value, reflecting the many benefits future Americans enjoy when emissions fall today. Confronting climate change will cost money,” she said, and putting a higher price on the damage cause by global heating “highlights the large hidden costs of doing nothing.”
The Post points out that whatever the final figure is, it will impact “decisions across the federal government, including what sort of purchases it makes, the kind of pollution controls it imposes on industry and which highways and pipelines are permitted in the years to come. Just as important, the move sends a powerful signal to the private sector and to ordinary Americans that the choices the country makes now could lock in disastrous consequences on both current and future generations — or help to avert the worst impacts.”
For instance, if the new number was used, the economic impact of the prior administration’s rollback of fuel economy standards would be impossible to justify. That group of ideologues set the social cost of carbon at an absurd figure of $1 to $7 per ton. Michael Greenstone, a professor at the University of Chicago, notes that the decision to grant coal mining permits on federal lands in the Powder River Basin would never have passed muster under the new pricing rules since the climate damages associated with the mining “are six times larger than the market price of that coal.”
Let The Pushback Begin!
Predictably, industry groups are nervous about the new rules. Last week the American Chemistry Council, the Council of Industrial Boiler Owners, the Portland Cement Association, and the US Chamber of Commerce wrote to the Biden administration to request “ample channels and opportunities for public and stakeholder input” as part of the process of determining a final number for the social cost of carbon.
Predictably, the Charles Koch-funded Heritage Foundation was livid about the proposed changes. Nick Loris, one of its energy economists, criticized the accounting mechanism as an ineffective way to pursue climate policy. “It’s concerning to me that a figure that has such wild swings … could ostensibly determine whether or not the benefits of a project outweigh the costs. It doesn’t give you any policy or regulatory certainty, or really any confidence in rule making if the costs can swing that wildly.” Loris did not get his knickers in a knot when the prior administration drastically lowered the social cost of carbon, however, which makes Loris a leading contender for a “situational ethics” award.
Senator Barrasso of Wyoming was similarly distraught. “The administration is laying the traps to justify punishing new regulations. Since the president can’t rationalize the crippling costs of his climate policies, he needs to exaggerate the benefits,” he said in a statement. And he has a point. A higher SCC rate will have the effect of making fossil fuels more expensive and renewables less expensive. Gee, that’s a horrible thing, isn’t it? Better to do nothing and let nature take its course. Anyone whose head is not shrouded in clouds of ideology knows nature is doing exactly that as the world experiences raging forest fires, rising sea levels, and more powerful storms.
One complaint by industry has merit. The process of determining the social cost of carbon should not be subject to the vicissitudes of politics. The former president likes being in the White House so much he wants to run again in 2024. If he is successful, America would go right back to the $1 to $7 cost of carbon. Business values predictability above all else and for good reason. It takes years to build supply chains, determine where to build new factories, and train new workers. If the rules are constantly changing, it increase the costs of doing business and everyone suffers.
But the answer is not to do nothing; it is to make the SCC process a permanent part of federal governance the way the UK does. That, however, may be politically impossible even though it would make good economic sense on so many levels.
Lord Nicholas Stern and Nobel Laureate Joseph Stiglitz published a paper recently that suggests the entire process of establishing a social cost of carbon is flawed. They argue it would be better to start by establishing a goal — limiting global heating to 1.5º C, for instance — and then working backward from there to set carbon prices that make reaching the goal possible. The current process often leads to as much as 3.5º C of warming, a result that will be an unmitigated disaster for the Earth and humanity.
Writing in Bloomberg Green last week, Gernot Wagner, a professor at New York University, said, “if you work backward from the climate target of limiting global average warming to 1.5°C and net-zero emissions by mid-century, then you get a much higher dollar value. As boring as it sounds, bringing the best science and economics to the process is indeed the most important step.”
“The fact that the resulting number might be well above even the $125 is important for climate action. More important is the resulting durability of policy that withstands legal scrutiny, potentially up to and including the U.S. Supreme Court. Doing so can help re-establish science based policy making and create a durable U.S. climate policy that goes well beyond the next four years.”
Science-Based Policy Making?
Wagner may be entirely too optimistic if he thinks science-based policy making is here to stay. Such policies are likely to inflame the lunatics who stormed the US Capitol on January 6 and thought they had a right to kill the people inside for ideological reasons. Something similar happened in France last year when the gilets jaunes protests swept like a wildfire through the country, spurred on by outrage over an increase in the price of petrol. Just imagine what might happen in the US if those same radical elements start thinking eggheads in government are messing with their jobs and their sacred freedom to act out in an irresponsible fashion whenever anything displeases them.
New York Times columnist Thomas Friedman had something to say about the difference between science and ideology this past week. He compare the chaos in Texas with the success of the recent Mars landing. “We just sent a high-tech buggy named Perseverance loaded with cameras and scientific gear 292 million miles into space and landed it on the exact dot we were aiming for on Mars! Texas is the poster child for what happens when you turn everything into politics — including science, Mother Nature and energy — and try to maximize short term profits over long term resilience in an era of extreme weather. The Mars landing is the poster child for letting science guide us and inspire audacious goals and the long term investments to achieve them.”
If America is to survive, we will need to find a way to squelch rampantly stupid ideas that suggest Hillary Clinton and friends are eating the flesh of children in the back of pizza parlor in Washington. Who believes such tripe? Wouldn’t anyone with cognitive power of a Golden Retriever know that is pure sophistry — and malevolent sophistry at that? And yet a sizable number of Americans consume such drivel and instantly decide is must be true because they saw it on Fakebook. America will not long endure if it stoops to catering to such small-minded people.
Imposing a cost for polluting the atmosphere makes so much sense, it’s hard to imagine anyone could fault the idea. The Biden administration is clearly dotting every i and crossing every t, anticipating legal challenges to its policy initiatives. Ultimately, the US Supreme Court may be the final arbiter of whether America will be a rational nation or a country ruled by opinions. Given the current makeup of the Court, that is a scary prospect for anyone who believes facts, not fantasies, are the proper basis for a functioning government.
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