Here’s what you need to know about 'the social cost of greenhouse gases'—a key climate metric

Putting an accurate figure on the cost of greenhouse gasses can have massive consequences on the future of climate change.

In order to do this, the new White House administration announced late February it will use the Obama-era estimates for the "social cost of greenhouse gasses" after adjusting them for inflation. The social cost of greenhouse gasses was first used by the Bush administration and later standardized by President Barack Obama's White House.

The Trump administration discontinued the group responsible for updating the metric and used "revised estimates" which, according to the Biden administration, did not "rely on the best available science."

Michael Greenstone, former chief economist of the Council of Economic Advisers, has in recent years called the social cost of greenhouse gasses — which is typically referred to as the the social cost of carbon — "the most important figure you've never heard of."

However, the SCC's reinstatement is already facing some pushback. Twelve states filed a lawsuit against the Biden administration on Monday, claiming its calculus of the metric would harm their local economies.

Below is a breakdown what the social cost of greenhouse gasses is, and why it is seen as critical by some and devastating by others.

What is the social cost of greenhouse gasses?

The social cost of greenhouse gasses is a measurement tool established by industry experts to put a dollar figure on the total damages done by emitting one ton of a greenhouse gas into the atmosphere.

"In many ways, it's the 'holy grail' of climate economics," Gernot Wagner, a climate economist at New York University, tells CNBC Make It in an email. "How much does each ton of CO2 emitted today cost us — and, thus, how much should each ton of CO2 cost for all of us to be making the right decisions?"

Answering that question is not easy.

The measure "combines climate science and economics to help Federal agencies and the public understand the benefits of reducing greenhouse gas emissions," writes Heather Boushey, a member of the Council of Economic Advisers. "The metric is a range of estimates, in dollars, of the long-term damage done by one ton of greenhouse gas emissions."

The estimates change, depending on which factors are considered important by decision makers.

"There is, of course, a broad range of possible answers, depending on a number of inputs — primarily how large climate damages are, and how to convert them back into today's dollars and cents," Wagner says. "In short, climate damages are typically an underestimate of reality. There is only so much science can attribute to climate change, and so much economics can then translate into dollars."

Factors that are considered include changes to agricultural productivity, human health effects, property damage from increased flood risk, natural disasters, disruption of energy systems, risk of conflict, environmental migration and the value of ecosystem services, according to technical support documents released by the Biden administration.

There are estimates for the cost of three greenhouse gases: carbon, methane, and nitrous oxide. For carbon dioxide, the social cost of releasing a metric ton is $51. A metric ton of methane costs $1500, and releasing a metric ton of nitrous oxide costs $18,000, according to the SCC measure.

The costs of methane and nitrous oxide "are much higher because these pollutants cause greater near-term warming and health impacts, thus greater near-term economic damages," Susanne Brooks, senior director of U.S. climate policy and analysis for Environmental Defense Fund, tells CNBC Make It.

The social cost of greenhouse gases changes with who is in the White House

The president can also have a major influence over the social cost of greenhouse gasses.

"The Trump administration disbanded the [Interagency Working Group] in 2017 and instead relied on its own 'interim cost' to inform important regulatory decisions that was seven times lower than the IWG's estimate – between $1 to $7 per ton," Brooks says. "These dangerously low estimates, which flew in the face of established economic principles, were used to justify the Trump administration's rollbacks of climate and health protections like the federal Clean Car Standards."

The Biden administration used the estimates established by the IWG before it was disbanded, Boushey writes. This is considered an "interim step" for governmental agencies to use "while we continue the process of bringing the best, most up-to-date science and economics to the estimation of the social costs of greenhouse gases," she says. A more comprehensive analysis will be a released in January 2022.

"This was a strong first step," Tamma Carleton, an assistant economics professor at UC Santa Barbara's Bren School of Environmental Science and Management, said of the reinstatement of the social cost of greenhouse gasses. Carleton co-authored a paper with Greenstone published in January that outlined the steps toward updating the social cost of greenhouse gasses.

"Increasing the social cost of carbon from its unjustifiably low levels under the Trump administration will lead to policy choices that lower emissions, ultimately lowering the harm that Americans face from a warming and more variable climate," Carleton says.

Why it is important

Supporters of the measure argue it policy makers a way to make decisions by being able to account for the cost of a legislative action on the environment.

"The social cost of carbon, for example, is designed to capture the costs of climate damages on families, communities, businesses and more, ensuring they are factored into policy decisions by federal agencies," says Brooks of the Environmental Defense Fund.

"When we do not fully account for the realities of climate change, we are essentially making decisions half-blind. Policymakers need estimates that reflect the real costs of climate change in order to make fair and unbiased policy decisions that will affect our lives and the lives of future generations," Brooks adds.

This means that getting an accurate cost figure is of the utmost importance, according to renowned economists Nicholas Stern and Joseph Stiglitz. in a paper they co-authored and published in February.

The price on greenhouse gases need to be high enough that economies "don't do anything foolishly expensive," Stern and Stiglitz write in a paper published last month.

"On the other hand, if the [social cost of greenhouse gasses] is set too low, there are many regulations and/or projects that won't be undertaken—the value of carbon reduction simply isn't worth the cost; but that means the level of carbon emissions, and climate change, will be greater than it otherwise would have been," they say.

Why it could be problematic

Detractors say, however, that the measure's flaws render it an inefficient policymaking tool.

"The fact that simple and very reasonable changes to the inputs of the models produce significantly different results demonstrates why they're not credible tools for regulatory rulemaking," Nick Loris, an economist who focuses on energy, environmental, and regulatory issues at the Heritage Foundation, tells CNBC Make It.

Loris testified before Congressional lawmakers in 2017 about the flaws of such a system. "These models also aim to estimate damage out to the year 2300, which is obviously no easy task," he says.

The implications of using an estimate which is hard to calculate is severe, Loris says, adding tool has been used in 150 regulations.

"The higher figure would carry greater weight in terms of whether a project moves forward or not as part of the environmental review and permitting process," Loris says. "By boosting the climate cost of projects, regulator could use the social cost of carbon to derail everything from energy to infrastructure projects. Agencies can also use the higher value to justify new regulations on everything from power plants to appliances in your house."

Monday's lawsuit — from Missouri, Arkansas, Arizona, Indiana, Kansas, Montana, Nebraska, Ohio, Oklahoma, South Carolina, Tennessee and Utah — calls the Biden administration calculation and use of the social cost of greenhouse gases "arbitrary and capricious."

One of the most significant causes for variability when calculating the social cost of a greenhouse gas is the discount rate, Loris says. This determines what price is necessary now to prevent various climate threats in the future.

"There's literature that argues for both a high and a low discount rate as it pertains to the social cost of carbon, which makes it tricky because the difference between a 2% discount rate and a 7% discount rate can change that value dramatically – that's how you can get from $7 per ton to $50 per ton," Loris says.

The aforementioned social costs per ton of carbon, methane and nitrous oxide are based on a discount rate of 3%. But, a small adjustment to that rate could result in big swings to those dollar sums.

"The National Academies of Sciences and the U.S. Council of Economic Advisers strongly support a 3% or lower discount rate for intergenerational effects," Brooks of the Environmental Defense Fund says. "Fundamentally, this is an issue of fairness: ensuring we are fully valuing the climate impacts on future generations in decisions we make today."

The name of the metric is also problematic, even for supporters like Greenstone.

"There is no good name for it. It's a terrible name," Greenstone, who is currently the director of The Energy Policy Institute at the University of Chicago, told Bloomberg Green in January. "I don't know, have you come up with a better one?"

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