Can the New Social Cost of Carbon Estimate Help Stop the Keystone XL Pipeline?

To the list of news items revealed last week that the Obama Administration doesn’t seem to be comfortable talking about, you can now add one more item: The updated social cost of carbon (SCC).

The update on the SCC, which is “an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year,” wasn’t leaked by anyone, but was actually published by the White House Office of Management and Budget (OMB). Nevertheless, I have a feeling the Administration would prefer this information was kept in the dark.

Why? Because the new estimates can cause the Administration a serious headache when it comes to the upcoming decision on the Keystone XL pipeline.

Our story begins on May 31, when Heather Zichal wrote a post for the White House blog on the new energy efficiency standards for microwave ovens that can save consumers money. In the post, Zichal mentioned that “the underlying analysis of these standards includes an update to the social cost of carbon values, which draw on the best available science to calculate the benefits of reducing greenhouse gas emissions, as discussed in this year’s Economic Report of the President.”

This mention led bloggers like Grist’s David Roberts to search and discover, on the OMB’s website, a “Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis,” dated May 2013 with more details on the new values of the SCC. Then, with more mentions on Washington Post, Think Progress and other media outlets, the news was all over the place – the cost of carbon is much higher than what the government previously estimated.

 Before we look into the Keystone XL pipeline consequences of this change and why the White House might have wanted to keep the update under the radar, let’s see what estimating the social cost of carbon means in the first place.

You might not be aware of it (at least I wasn’t), but following an Executive Order President Obama signed in his first term, federal agencies are required “to assess both the costs and the benefits of the intended regulation.” This analysis includes the social cost of carbon, which “is intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change.”

To calculate the SCC is not an easy task, even for the American government, and no less than 12 governmental agencies got involved in this effort, forming the Interagency Working Group on Social Cost of Carbon. Their initial report, released in 2010, showed that the SCC estimates for 2020 were $7, $26, $42 and $81 (2007$), depending on the discount rate used. In the updated report released last month, the corresponding four updated SCC estimates for 2020 are $12, $43, $65, and $129 (2007$).

What’s the reason for this significant increase of 55-70 percent in the SCC values? “Mostly how much experts think sea level rise will damage the economy. The working group updated a simple climate model to a more complex one,” explained Think Progress. “Another model took into account updated sea level rise damage estimates, adaptation assumptions, how temperatures respond to greenhouse gas buildup, and models of indirect methane emissions effects.”

The new SCC values can help the Administration make the case for measures that help reduce carbon emissions, from energy standards for microwaves to carbon pricing regulation, as it basically shows that the damages associated with climate change are more expensive than what we (or at least this Administration) had in mind. Yet, these benefits are either too marginal (efficient microwaves) or theoretical (carbon pricing), which leaves probably one major place where the new update can make a difference – the decision on the Keystone XL pipeline.

The reason is that the new SCC makes the economic case for approving the Keystone project much weaker. Last April, EPA sent officials at the State Department a letter with comments on the State Department draft Supplementary Environmental Impact Statement (SEIS). The EPA identified “significant environmental impacts” that should be assessed including the difference between the SCC of a barrel of oil sands crude and a barrel of average U.S. crude.

“If GHG intensity of oil sands crude is not reduced, over a 50-year period the additional C02-e from oil sands crude transported by the pipeline could be as much as 935 million metric tons. It is this difference in GHG intensity - between oil sands and other crudes - that is a major focus of the public debate about the climate impacts of oil sands crude,” the EPA wrote.

If we use the 3 percent discount rate, which is the middle one among the three discount rate options used by the OMB (2.5, 3 and 5 percent), the average SCC between 2013-2050 is $77.3 per ton according to the updated estimate. Multiply it by 935 million metric tons and you get $72.3 billion of estimated costs from the Keystone XL pipeline.

It’s not that the SCC values we had so far weren’t significant, but using the new SCC gives us costs that are much more substantial compared to the benefits TransCanada presents from the Keystone Project of $172 billion to America’s GDP by 2035. Given that the real benefits are probably lower (some of TransCanada’s figures have already been questioned) you probably have a much smaller difference between the benefits and the costs of the project.

A cost-benefit analysis that doesn’t show clear advantages for approving the Keystone XL pipeline might be an issue for an administration that shows signs that it considers the project positively at this time. This might be the reason that the update wasn’t as publicized as you would expect it to be. Yet, publicized or not, it’s not clear if eventually the new SCC will actually make any difference, even on the Keystone project.

Raz Godelnik is the co-founder of Eco-Libris and an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the Parsons The New School for Design, teaching courses in green business, sustainable design and new product development. You can follow Raz on Twitter.