Read our COVID-19 research and news.

Power plant regulations could get stricter with a rise to estimates of the social cost of carbon.

Trump downplayed the costs of carbon pollution. That’s about to change

Carbon pollution is about to get a lot more expensive. Over the past 4 years, the Trump administration low-balled the “social cost of carbon”—a number representing the burden that carbon emissions place on present and future generations, in terms of the cost of floods, droughts, farming losses, and death. The low estimate served to justify a permissive approach to regulating greenhouse gases, whether through power plant emissions rules or appliance efficiency standards. But now the cost—the price per ton of emitted carbon dioxide (CO2), methane, and nitrous oxide—is set to rise drastically.

On 20 January, its first day in office, the Biden administration recreated an interagency working group (IWG) and ordered it to update the social cost of carbon within 30 days. Many economists believe the cost, set as low as $1 during the Trump administration, will rise as high as $125 in the next month—and higher still come January 2022, when the IWG is due to provide a final number. The update could lead to tighter greenhouse gas regulations. And it is long overdue, says Tamma Carleton, an economist at the University of California (UC), Santa Barbara. “There’s been this huge change in science that hasn’t been reflected in policy.”

Calculating the social cost of carbon is complicated, and it’s based on dozens of fiddly knobs that sometimes obscure the value judgments baked into it. Most economists use integrated assessment models (IAMs), tools first popularized by economist William Nordhaus of Yale University, who in 2018 won a Nobel Prize for his work. IAMs project population, economic growth, and greenhouse gas emissions several hundred years into the future, and use a simple climate model to estimate the warming in those scenarios. Then, they calculate the economic damage that results from this warming—flooding, heat deaths, and more—and the resulting toll on a nation’s gross domestic product (GDP). This economic pain is translated into a present price using a discount rate, which accounts for both the increased buying power expected of future generations (which lowers the current price) and the value we place on avoiding harms to them (which raises it).

The Obama administration’s IWG, after accounting for global damage and applying a standard 3% discount rate, came up with a figure of $53 per ton (in 2020 dollars). But in 2017, the Trump administration disbanded the IWG and rejiggered its carbon cost so that it would only factor in future damage to the United States, not globally. It also increased the discount rate to 7%—a level that devalued much future damage and drastically reduced the social cost figure.

The Biden administration has already said it will return to including global damages in its cost estimate. And many economists favor drastically reducing the discount rate. Inflation-protected 10-year U.S. Treasury bonds now average only a 1% return—a sign that future buying power may not grow as fast as it once did. Surveys of economists have also suggested a 2% discount rate better reflects the need to avoid foisting responsibility on future generations. When New York set its own carbon cost in late 2020, it used a 2% rate, raising the cost to $125 per ton. The IWG, which will include staff from eight federal agencies, should consider adopting a similar interim standard, says Fran Moore, an economist at UC Davis. “Based on the return to capital we’re seeing, there are good reasons those rates should be revised down.”

Damage to be done

Work updating the economic damages included in the social cost of carbon has yielded stark differences from simpler Obama-era estimates for three sectors.

–5 0 5 10 Social cost of carbon, by sector ($ per ton CO 2 ) 15 20 25 Energy demand Mortality Obama-era estimates New empirical estimates Agriculture Energy demand Mortality Agriculture
(Graphic) N. Desai/Science; (Data) T. Carleton and M. Greenstone, Updating the United States Government’s Social Cost of Carbon 2021

Improvements to other IAM components are also likely to raise the social cost of carbon. Previously, each IAM relied on a simplistic climate simulation, written by an economist, in which the globe tended to warm more slowly, for the same emissions, than in more realistic climate models. Now, the IAMs can be linked to models created by climate scientists, which better match current science.

Meanwhile, Resources for the Future, an environmental think tank that has effectively served as an IWG-in-exile, has sponsored work to improve the base economic projections used by IAMs. Teasing out trends from GDP data for 113 countries from 1900 to 2017, a team led by Princeton University economist Ulrich Müller now projects economic growth at the country level, albeit with great uncertainty, until 2100. Similar work is also being done for population growth and energy use.

Perhaps the biggest improvements, however, have come in estimates of the damage done by global warming. Previously, this “damage function” relied on outdated estimates biased toward wealthy and temperate locations. Now, economists at the Climate Impact Lab, an academic consortium, are making these estimates sector by sector, country by country, based on massive data sets that capture, for example, how weather extremes driven by greenhouse warming have already cut agricultural yields or driven up mortality. A flurry of these studies is expected in the next year, in time to inform the final IWG number. And it’s already clear, says Carleton, who works with the lab, that the Obama-era efforts “dramatically misrepresent what we find with the best available tools and data.”

Although these damage function studies are likely to raise the social cost of carbon overall, Carleton says the sector-by-sector trends aren’t always intuitive. For example, much of the Obama-era carbon cost was tied to increased energy demand, and spending, for air conditioning. But according to new estimates, overall energy spending is likely to decline slightly, as decreased heating demands overpowers the slow uptake of cooling devices in poorer countries. Heat-related mortality is a different story: Previous IWG estimates had it contributing $2 to the overall cost of carbon. But new empirical estimates suggest heating deaths will rapidly outpace the downtick in freezing deaths, adding roughly $23 to the cost figure.

These damage functions still carry large uncertainties, says Ben Groom, an economist at the University of Exeter. Ice sheets could collapse faster than anticipated, flooding coasts, or new technology could emerge to help mitigate or adapt to global change, reducing its economic damage. “Overall, we have no idea what the damages are going to be, really,” Groom says. With their reliance on GDP, the models also don’t do a great job of capturing what makes people happy, including the value of nature and biodiversity, Moore says. Last year, Moore published a study that attempted to account for those values—and multiplied the carbon cost fivefold.

A full reckoning of the cost of carbon could boost pressure for stringent new regulations—but there’s also a risk of a backlash if the figure bounces around too much, says Maureen Cropper, an economist at the University of Maryland, College Park. She hopes the Biden administration returns to the Obama-era standards for its interim figure, saving any drastic changes for the final update. “I realize there’s this real pressure to increase things,” she says. But if later damage estimates boost the carbon cost even further, the administration could be in a bind. “It’s difficult to go back on what you put out there.”