#Wonk warning: a #thread on social cost of #carbon (SCC). We at @CVEPLLC expected @JoeBiden not just to reinstate higher SCC in his #dayone #climate order but also to look at incorporating #environmental #justice into it.

He did, and it matters. #OOTT /1

Background: when #federal #agencies write rules, they try to maximize net benefits or minimize net costs.

The goal is that adding up all benefits for (and costs to) society + all costs to (and benefits for) regulated parties should be > 0. /2

In this context, SCC offers a way for agencies to “monetize” societal benefits of #climate rules. Oversimplification version: Benefit = (tons of GHG avoided) * (SCC, in $/ton). There are couple of quirks, tho. /3

Analyses of net benefits commingle financial costs to regulated parties (often a negative number) with avoided societal costs of #climate change (usually a positive number). Let me be clear: both things matter. /4

The difference, though, is that financial costs to regulated parties often translate into companies spending money up front (in “year zero” or early years). Benefits often come later b/c it can take a while for mitigation efforts to come onstream. /5

Time value of #money is also a thing (i.e., $1 today > $1 in 10Y). So, agencies take present values (PV) of costs and benefits. But that diminishes benefits that are backloaded. (Visuals to explain just ahead). /6

Agencies sometimes average net benefits over time to “smudge” away early net-cost years (like concealer for balance sheet blemishes). Agencies can also be subjective about what they count, and how: benefits that can be quantified & costs that can be minimized usually are. /7

Some things don’t get counted at all. And then there’s the question of whether “co-benefits” of rules should count. It is easy for cost-benefit analysts of #climate rules to get lost in the weeds (insert #weed joke). /8

SCC is malleable, too. The Trump Admin. trimmed SCC so it only counted U.S. domestic #climate impacts, a ~7.3x downsizing. That made Obama’s rules look more costly, and Trump used the resulting, on-paper costs to justify #deregulation. /9

It works the other way, too: a higher SCC can create more cost-benefit “room” for #climate rules to be stricter without looking more costly (i.e., cost-benefit analyses can show net on-paper benefits despite large real-world compliance outlays by regulated entities). /10

Counting global #climate effects would make SCC bigger again. We don’t know yet how #environmental #justice impacts might get monetized. It could mean a still-higher SCC when all is said and done, tho. But let’s go to visuals. /11

Simplified scenario where industry pays all costs, society receives all benefits: $500 delivers 5 MtCO2/Y for 5Y. At a SCC of $25/MtCO2 and 7% discount rate, net present value (NPV) works out to $13. /12

If we assume #environmental #justice adds $5/MtCO2 to SCC, NPV goes up to $115. Of course, that leaves “room” for deeper emissions cuts (read: industry outlays)… /13

…and further cuts could generate on-paper net benefits, even if they came with diminishing returns to scale (i.e., $200 for 1 incremental MtCO2/Y vs. $100 per MtCO2/Y for the first 5 MtCO2/Y). /14

Which brings up something else. @JoeBiden’s #climate order also called for consideration of #intergenerational #equity. How? Dunno. Maybe a lower discount rate (i.e., valuing the future more like the present)? … /15

At 2% instead of 7%, the NPV of net benefits rises to $148, diseconomies of scale and all. Would that leave room for another 0.5 MtCO2/Y even at $300 per MtCO2/Y? … /16

…why, yes, it could. In short, counting #environmental #justice and #intergenerational #equity in #climate cost-benefit analyses could theoretically justify bigger non-maintenance capex obligations for emitters. /17

Of course, this hypothetical industry might argue against bearing the brunt of diminishing #climate returns. Industry might win that argument IRL, but much seems likely to depend on process. /18

Which brings up another thing @JoeBiden did on #dayone: he issued an order calling for a re-think of the #regulatory process, cost-benefit analysis and all.

Bottom line: many questions yet to be asked & answered (and many reports to write for @CVEPLLC clients!) /fin