The Trump administration didn’t put much value on lowering carbon emissions.

In fact, it calculated that the benefits of action on climate change added up to as little as $1 per ton of carbon dioxide, and it set policy accordingly. Almost any steps to reduce greenhouse gases seemed too costly, given the paltry potential gain for society.

President Joe Biden’s White House took a crucial first step toward building back U.S. climate policy on Friday by directing federal agencies to use a figure closer to $52 per ton as their guidance for the so-called “social cost of carbon” number on a temporary basis.

That figure, applied during the Obama administration, will serve as a baseline while the Biden administration works on developing its own metric amid calls by climate-focused economists for a value that is at least twice as high.

Michael Greenstone, a University of Chicago economist who served as chief economist for Obama’s Council of Economic Advisers, was a co-author of a working paper last month that put the social cost of carbon at $125 per ton or more. And Nobel laureate Joseph Stiglitz and Lord Nicholas Stern, author of a groundbreaking 2006 U.K. study on the economic cost of climate change, published a paper released Monday that warned a return to the Obama-era number would be a fundamentally flawed approach. “It is clear that climate change involves the management of risks of enormous magnitude and multiple dimensions, which could destroy lives and livelihoods across the world, displace billions, and lead to widespread, prolonged, and severe conflict,” they wrote. 

The carbon prices arrived at using the Obama-era approach are too low to support the policy measures needed to limit warming to 1.5 to 2 degrees Celsius (2.7 to 3.6 degrees Fahrenheit) and so avoid that future, wrote Stiglitz and Stern.

Putting a high value on climate action indicates that the costs of the steps taken to cut carbon emissions are worth something in lives saved, better health, preservation of coasts and forests, agricultural productivity and property.

Biden, who has set the ambitious goal of a 100 percent clean energy economy with net-zero emissions by 2050, was expected to come out with an interim social cost of carbon number by Feb. 19—the day Biden formalized the U.S. re-entry to the Paris climate accord in a virtual meeting with G-7 leaders. After a week’s delay, the White House published its preliminary numbers, along with a strong statement that it was considering evidence that higher values were needed.

“This Administration will follow the science and listen to the experts,” the White House said in a statement. 

Biden had called for a new social cost of carbon number in the climate crisis executive order he signed on Inauguration Day. In the order, Biden re-established an Interagency Working Group on the social cost of carbon which had been disbanded by Trump, and directed it to publish, within 30 days, an interim value for the metric that could be used by federal agencies until a more thorough analysis yielded a final number no later than January 2022. 

Balancing Costs and Benefits

It might seem strange to place a dollar value on something like a healthier planet, but for decades, the federal government has routinely engaged in such analysis in making environmental and health policy. The process involves the same sort of economic modeling and risk-analysis techniques used, for example, when insurance companies set their rates. The government is legally required to weigh the costs and benefits of new regulations, in a process where the input from stakeholders almost invariably involves detailed accounting of the potential costs to regulated industries. And the cost-benefit calculus would be lopsided if the government did not also put a dollar value on seemingly priceless benefits, such as the lives saved through government action.

That’s exactly what a federal appeals court ruled that the Bush administration failed to do in 2008, when it established fuel economy standards that took into account the costs to car companies and consumers but not the benefits of reduced greenhouse gas emissions. When President Barack Obama took office the following year, it sought to address the concerns raised by the court by establishing an Interagency Working Group on the issue, which eventually arrived at a social cost of carbon value of around $52 per ton. 

The metric was part of the cost-benefit analysis for all of the Obama administration’s climate actions to curb greenhouse gas emissions, including its power plant rules and vehicle fuel economy standards. And when the Trump administration set out to dismantle those rules, it justified its actions with a new calculation for the social cost of carbon—$1 to $7 per ton.

To arrive at such a low range, the Trump administration’s economists applied a hefty “discount rate” to the value, a process used in economics to account for the concept that a dollar saved in the future will not buy as much as a dollar spent today.

Although most economists agree that some discounting of future benefits is a sound approach, they say the discount rate should be low at a time of low inflation and low interest rates. Tamma Carlton, an economist at the University of California, Santa Barbara and a co-author, with Greenstone, of last month’s working paper on the social cost of carbon, said that one key change they made in arriving at their $125 per ton figure was applying a lower discount rate than was used during the Obama years, when inflation and interest rates were higher.

There are also strong moral arguments against the Trump approach of greatly discounting future climate benefits, which Trump administration economists achieved by using stock market returns as their key metric.

“We’re talking about long-run intergenerational decisions here,” said Carlton. “And there are many reasons to think that the sort of short-run behavior of the stock market does not reflect the decisions we want to think about when we’re thinking about many generations into the future,  and how we discount the future for our children and our children’s children.

“The Biden Interagency Working Group followed the practice of the Obama administration in including a range of three discount rates in its analysis—all of them below the Trump discount rate. But it added, “Based on the IWG’s initial review, new data and evidence strongly suggests that the discount rate regarded as appropriate for intergenerational analysis is lower.”

The Foundation of Everything

The Trump administration also low-balled its social cost of carbon figure by counting only the projected impacts of climate change in the United States, not around the globe. Biden made clear in his executive order that he intends to end that practice and calculate the benefits of cutting carbon emissions based on the worldwide impact of limiting global temperature rise—an approach he sees as an essential part of his re-engagement with the international community.

“It is essential that agencies capture the full costs of greenhouse gas emissions as accurately as possible, including by taking global damages into account,” Biden said in his executive order. “Doing so facilitates sound decision-making, recognizes the breadth of climate impacts, and supports the international leadership of the United States on climate issues.”

Although the concept may be arcane, what the Biden administration chooses as its social cost of carbon will be the foundation for everything else it does on climate change. “It’s the single most important economic metric for guiding climate policy decisions,” said Richard Newell, president and CEO of the think tank Resources for the Future, who co-chaired a National Academies of Science panel that in 2017 urged the government to update its approach to the valuation process. The Biden administration is now taking up the academy’s recommendations that the Trump team ignored, including that the government should establish a regular process of reviewing and updating the social cost of carbon based on the latest science on climate change and economics.

Newell said he also expects that the Biden administration will apply the social cost of carbon across government decision-making more broadly than just the regulatory process. For example, Biden noted in his executive order that he wanted his Interagency Working Group to consider the application of the social cost of carbon to areas such as government procurement. Biden has already made clear that he wants to use the federal government’s purchasing power to boost demand for electric vehicles as part of his climate plan; applying a higher social cost of carbon to such decisions would help justify purchases, even if EVs cost more than conventional vehicles in the short-term. (In testimony before Congress on Feb. 24, U.S. Postmaster General Louis Dejoy, a Trump appointee, said he would commit to only converting 10 percent of the Postal Service’s vehicles to EVs, citing the cost.)

Business groups made clear that they recognize the importance of the Biden administration’s decision on the social cost of carbon. The U.S. Chamber of Commerce, the American Petroleum Institute, and 10 other business groups sent a letter to the Biden White House calling for “ample channels and opportunities for public and stakeholder input.”

Of course, that input will include a push from forces within industry and on the right who supported the Trump administration’s approach. The Institute for Energy Research, a nonprofit with funders that include right-wing foundations, posted a scathing essay last month by its senior economist, David Kreutzer, calling the social cost of carbon “unknown and virtually unknowable,” and based on arbitrary inputs. “Whether or not dead people vote in significant numbers may be an open question, but dead policies are flourishing in DC right now,” Kreutzer wrote.

Against that backdrop, the establishment business groups appear to be taking a moderate stance, and signaling a desire to cooperate with Biden.

“Along with reentering the Paris Agreement, assessing the social cost of greenhouse gas emissions is an important step for climate policymaking,” said Stephen Comstock, vice president of corporate policy for the American Petroleum Institute, in an email sent before the Biden decision was announced. “We look forward to engaging the interagency working group and providing input as they develop their recommendations to help shape a lower-carbon future.”

Of course, the Biden administration has committed to putting the United States not just on a path to a lower-carbon future, but one with zero net carbon emissions. And according to  economists, that will require a social cost of carbon much higher than the Obama-era value the Biden White House has adopted for the time being. Using that old analysis, wrote Stiglitz and Stern, would amount to accepting a hike in global temperatures  of 3.5 to 4 degrees Celsius (6.3 to 7.2 degrees Fahrenheit) in decision-making. “Almost surely,” they wrote, “the U.S. would be committing itself not to achieve the Paris goals.”

The article has been updated to reflect the decision announced by the Biden administration’s Interagency Working Group on Feb. 26.