The social cost of greenhouse gases may be the ultimate foil of economic analysis.
Last week a shocking story from NPR largely slipped under the radar. The headline: “Why the EPA puts a higher value on rich lives lost to climate change.” Climate Correspondent Rebecca Hersher shared the “twisted tale of math, ethics and climate change” that is the Environmental Protection Agency’s effort to decide what’s been called the most important number you’ve never heard of: the social cost of greenhouse gases.
This is a number—in U.S. dollars—that tries to represent the cumulative cost to humanity of emitting a single ton of a greenhouse gas. Carbon dioxide, methane, and nitrous oxide each have their own estimated cost. Since a 2007 Ninth Circuit ruling stated that federal agencies must assess the monetary value of carbon emissions reduction, the EPA—as well as an inter-agency working group assembled and disbanded by different administrations over the years—has devised, revised, and revised again this single number.
Obama’s inter-agency working group collaborated with the National Academy of Sciences to decide a whole-of-government estimate of the social cost of carbon. They set it at $51 per ton of carbon dioxide emitted. The Trump administration disbanded the inter-agency working group, and substantially lowered the social cost of carbon to only $7 per ton. They did this by removing damages in countries other than the United States from the analysis and putting less weight on harm to future generations.
President Biden used his first day in office to reinstate the inter-agency working group, directing them to set an interim estimate and develop a new estimate for the social cost of greenhouse gases. The working group has yet to make a proposal, but the EPA has come out ahead of them in proposing its own new evaluation of the social cost of carbon: $190 per ton. EPA also proposed raising the cost of methane emissions to $1,600 a ton, and nitrous oxide to $54,000 a ton—substantial increases from interim estimates putting the cost of carbon at $51 a ton, methane at $1,500 a ton, and nitrous oxide at $18,000 a ton.
This significant increase in the estimated cost of greenhouse gas emissions will impact evaluations of the costs and benefits of proposed federal regulations, communicating more strongly the benefits of reducing emissions and the harms of continuing or increasing current emissions levels. Presumably, this is good news for the planet.
But there’s a problem. Several problems, in fact. The way that the EPA came up with this number, and what it fails to take into account, raises some profound ethical questions.
A Little Background
First of all, it’s worth getting into why federal agencies have a use for this number in the first place. In 1981, the Reagan administration issued Executive Order 12291, which mandated that all “major regulations”—which Reagan defined as having an annual economic impact of $100 million dollars or more—be evaluated using cost-benefit analysis. Cost-benefit analysis is a method used by economists which attempts to convert every impact of a regulation, from the cost of implementing it to how it benefits people’s health, into dollars.
The Office of Information and Regulatory Affairs (OIRA) is the entity responsible for evaluating proposed regulations through cost-benefit analysis. We won’t get further into the weeds on OIRA in this newsletter, but expect more from us on OIRA soon. For those interested in reading more now, we’d recommend our Executive Director Jeff Hauser’s piece “The Little Agency That Could (Block All Good Regulations)” on the agency’s historical impact.
If regulations have to prove their worth in monetary terms—already a flawed and subjective metric to decide what makes a regulation worthwhile—then, the logic goes, it makes sense to try to convert something as important but complex as the impact of greenhouse gas emissions into dollars, because otherwise that impact wouldn’t get taken into account. But reducing complex phenomena to dollars that can be weighed against things that are actually dollar amounts, like the cost to an industry of complying with a new regulation, is a troubled task. The conflations and assumptions that economists have to make in order to turn lives into dollars on a balance sheet often veer far into unethical terrain.
Because the social cost of greenhouse gases is intended for use in cost-benefit analysis, the estimate is based on the inherently problematic “willingness to pay.” Willingness to pay is how cost-benefit analysis tries to represent in dollars how much people value the reduction of various kinds of risks in their life, like the risk of asthma, or a workplace injury, or cancer or premature death. In effect, the social cost of greenhouse gases takes the average across different populations (we’ll get into that soon) of how much economists think (based on surveys or other forms of data) that people would be willing to pay for a reduction in their risk of various harms due to climate change.
This calculation presents all kinds of ethical and moral challenges—an observation that’s hardly new. Cost-benefit analysis as a practice has many critics. One major criticism is that cost-benefit analysis is far more useful to people pushing deregulation, because the financial costs of implementing new rules are so much easier to quantify than the more amorphous benefits. Given the enormity of what the social cost of greenhouse gases purports to represent, it is in some ways a perfect example of the foundational flaws of this kind of economic analysis. This is what Rebecca Hersher’s story last week gestured to, when she characterized the social cost of carbon as both a “powerful tool and ethics nightmare.”
The Value of a Human Life
Hersher noted that “a major reason the EPA’s new social cost of carbon is higher is because this is the first time the federal government has added to its calculations the cost of climate-related deaths outside America, including in developing and low-lying countries that are most vulnerable to the effects of climate change.”
This is obviously important—climate change is the definition of a global issue. We all share a global atmosphere, though of course rich countries in the Global North have historically been far more responsible for polluting it than others. Now here’s the catch: “the EPA didn’t assign the same dollar value to every life. Instead, a life lost in a lower-income country due to climate change is worth less than a life lost in a higher-income country. The upshot is that the value of a climate-related death in the United States is equal to about 9 deaths in India, or 5 deaths in Ukraine or 55 deaths in Somalia. It also suggests that the life of a person in Qatar is worth almost twice as much as the life of an American.”
Why on earth are people’s lives being valued differently depending on the country they live in? The reason is because of that “willingness to pay” metric. People in higher income countries are assumed to be more willing to pay to reduce their risk of various kinds of injury and death from climate change than people in low income countries…because they have access to more money. The consequence of the EPA’s reliance on the limited tools of cost-benefit analysis is that their model of the social costs of greenhouse gases basically puts a higher value on richer lives. You don’t need us to tell you how messed up that is.
In the NPR piece, Hersher mentions a study from economist Tamma Carleton. Ostensibly she’s talking about this study, which models climate mortality in two ways—one with the “value of a statistical life” adjusted by national income, and one based on global average income, where “the lives of contemporaries are valued equally.” The study found that if all lives around the world were valued equally, the social cost of carbon would approximately double. In other words, the EPA’s refusal to stake an ethical position and declare all lives equally valuable, and all unnecessary deaths equally worth avoiding, also has the consequence of lowering the social cost of carbon, and thus reducing the perceived imperative of mitigating climate change.
Herschel wrote that it’s “unclear why EPA economists didn’t choose this route.” Law professor Daniel Hemel speculated that “some policymakers might be concerned about proposing a social cost of carbon that is so high, it appears to require the U.S. to take drastic, and politically unpopular, steps to slash greenhouse gas emissions.” But… if that’s the more accurate social cost of carbon emissions, shouldn’t the EPA use that number, and allow the policy implications to be worked out by the rest of the federal government?
Thanks to the bizarre imperatives of cost-benefit analysis, there are plenty of other flaws in the calculation of the social cost of greenhouse gases, many of them shrouded in technocratic fog. There’s the fact that climate damages are calculated in terms of reduced consumption, as if the point of living were to consume, and climate destruction only significant for getting in the way of goods and services. There’s the fact that these models value present lives more than future lives, when a premature climate-related death today and a death in 50 years are just as impactful, and greenhouse gases are a distinctly intergenerational harm. Emissions are released in an instant, only to persist for generations, shaping the possibilities of life on earth for literal centuries.
And then there’s the matter of equity, which the EPA acknowledges some theorists think “should be addressed directly throughout all elements” of cost-benefit analysis, but which it neglects to incorporate here. The model doesn’t pay attention to intersectional damages, i.e. the accumulation of multiple risk factors for specific communities or regions. It also ignores the historical context of different countries being differently culpable for climate change, with the least responsible populations often the most vulnerable to climate impacts.
The EPA openly acknowledges (see p. 73) that their metric fails to address many known climate change-induced risks including death, illness and injury from air pollutants, infectious disease, allergies, displacement and migration; the availability of safe drinking water and its distribution; extreme precipitation; ozone destruction; threats to biodiversity and the existence of habitats for wildlife, and many others. These omissions aren’t related to a lack of scientific data about the phenomena, but a lack of progress reducing what we know about their harms into dollars that can be plugged into economic analyses.
At several points in the EPA’s November 2022 report on its proposed social cost of greenhouse gases, the agency acknowledges that their metric likely underestimates the true cost of greenhouse gas emissions. This is a gross understatement. And when you take into account the ethical issues inherent to cost-benefit analysis, along with all of the information the social cost of greenhouse gases should account for that doesn’t exist or can’t be converted into dollars, it becomes clear how nonsensical it is that we let economists’ designs be so central to our regulatory processes.
How convenient it is for industry, that all the things which get left out of the equation would increase the social cost of carbon, and compel even steeper systemic change! Of course, corporations are hardly satisfied with their decades-long giveaways. A coalition of Republican attorneys general are currently fighting the Biden administration’s interim estimates for the social cost of carbon ($51/ton), which is only a quarter of the new cost the EPA proposes.
Big picture, these are literally life and death questions that economists are attempting to translate into the stilted language of the U.S. dollar. So literally, that on the bottom of the 61st page of the EPA’s report, there is a random footnote mentioning a 2006 study that “reflects a 91% probability of the human race surviving 100 years.” Don’t worry about that remaining 9%—it’s almost certain that the probability of the survival of the human race can’t be accurately calculated by economists. Worry instead that economists are the ones in charge of designing several tools that shape how actively the government will try to reduce the probability of our planet’s destruction to zero.
Ultimately, the demand for environmental regulation and climate policy to be shaped by ethics—to be guided by a generous, vitalizing sense of responsibility to ourselves and others, near and far, human and non-human, alive today and for generations to come—can only come from the public. No economist will ever suggest that a forest should exist for its own sake, or that people are willing to change the way they’re accustomed to doing things for the wellbeing of their grandchildren’s grandchildren. That will have to come from us.