By: Paul Bubbosh, CESP Faculty Associate
UPDATE: On May 26, 2022, the Supreme Court rejected the Republican-led states challenge to Biden Administration’s use of social cost of carbon in rulemakings.
In February 2022, a federal district court judge in Louisiana slammed the door on the Biden Administration’s ability to incorporate the full costs of climate change in economic analyses of Federal regulations and actions. Incorporating the economic costs of greenhouse gas emissions is known as the “social cost of greenhouse gases.” This is an estimate in dollars of how much damage is caused over the long run by a ton of greenhouse gases each year. Absent a successful appeal, the Biden Administration’s efforts to curb greenhouse gas emissions through regulations and permits will be severely hampered.
What’s the background?
Back in 2009, President Obama created the Interagency Working Group on the Social Cost of Carbon (WG) which was tasked with publishing technical guidance on determining the full costs of greenhouse gas emissions as accurately as possible. The technical guidance is used in Federal regulations and other actions when conducting cost-benefit analyses.
But in 2017, President Trump disbanded the WG (Executive Order 13783) and rescinded its technical documents. Trump replaced the WG’s social cost with his own, which differed in scope (used domestic only emissions) and discount rate (discounted benefits at a higher rate). Discount rates are relevant because they reduce the overall social costs of greenhouse gases (more on this below).
On January 20, 2021, President Biden issued Executive Order (EO) 13990 which established an Interagency Working Group on the Social Cost of Greenhouse Gases (EO 13990). About a month later, as directed by the EO, the WG issued interim findings on the social cost of greenhouse gas emissions which the government would use until final cost numbers are published (FAQs on Interim Findings). The interim findings incorporated global impacts of greenhouse gas emissions and used a lower discount rate.
In April 2021, ten Republican-led states filed a motion for injunctive relief to stop the use of the WG’s social cost factor. The Republican-led states argued that (1) the government failed to follow the proper public comment period process, (2) the social cost estimates contravened existing law, and (3) the working group exceeded its Congressional authority by including global impacts.
On February 11, 2022, U.S. District Court Judge James W. Cain, Jr, of the Western District of Louisiana, granted the preliminary injunction which halted the use of the WG’s social cost of greenhouse gases in all federal regulations and actions, and reverts to the Trump Administration estimates.
Big deal or little deal?
At the heart of the matter is the way the government conducts cost-benefit analyses of government regulations. Assessment of regulatory costs and benefits began in the Nixon administration, and in 2003 George W Bush’s administration issued guidance on the process in Circular A-4, published by the Office of Management and Budget. Circular A-4 implemented a standardized means of measuring the benefits and costs of Federal regulatory actions (Circular A-4).
When benefits exceed costs, then government action is often warranted. If costs exceed benefits, well, the regulation usually does not survive. Thus, the manner upon which the government assesses costs are vital to the regulation’s passage or demise. For example, Obama’s Clean Power Plan estimated climate benefits of $20 billion per year using the WG’s social cost of greenhouse gases. Under Trump’s social cost factors, those benefits dropped to a range of $500 million to $3 billion. This is because Obama valued the cost to society of emitting greenhouse gases into the air at around $45 per ton, whereas Trump valued it at between $1 to $6 per ton.
The most immediate impact of the judge’s ruling is the risk to currently proposed regulations and permits. According to the Office of Management and Budget, the injunction would impact 38 rules and 87 environmental impact statements (OMB Statement). In fact, in reaction to the ruling, the Biden Administration delayed decisions on new oil and gas leases and permits (Washington Post article) Further, the court’s ruling would directly conflict with another court decision from the U.S. District Court for the Northern District of California. In that case, the court found that the domestic-only estimate of the social cost of methane had arbitrarily “fail[ed] to consider important aspects of the problem” by “ignor[ing],” for example, how methane emissions would affect foreign assets owned by U.S. companies, U.S. citizens and military personnel living or stationed abroad, effects to U.S. companies through foreign trading partners and international supply chains, and geopolitical security. California v. Bernhardt, 472 F. Supp. 3d 573, 613 (N.D. Cal. 2020)
Thus, this is a big deal. It has halted almost all progress on the entire Biden Administration plans on climate change.
What’s the substantive argument?
The Republican-led states argue that the Biden Administration made two substantive errors in its social cost of greenhouse gases. First, the Working Group should not have considered global impacts of greenhouse gases but only domestic impacts. Second, the future damages of climate change in today’s dollars should have been discounted by 7%, and not the 3% selected by both the Obama and Biden Administrations. Recall, the discount factor is about the value of something today (e.g., reducing greenhouse gases) to prevent future climate damages.
What the court gets wrong
The court claims that the EO and WG action attempts a radical shift in regulatory analysis and the national economy. Judge Cain relies on the case Utility Air Regulatory Group v. EPA, 573 U.S. 302 (2014). In this case, Justice Scalia, writing for the majority, found that the U.S. Environmental Protection Agency’s interpretation of the Clean Air Act was not within the bounds of reason because it did not fit within the design of the Clean Air Act. The Act, per Scalia, simply did not envision EPA’s expansive application of the law absent clear Congressional authority to do so. Judge Cain likens the EO and WG actions as fitting this same profile, that is, both attempt to remake the U.S. economy without clear Congressional authority. Conservative judges view this legal theory as the “major question” doctrine or the non-delegation doctrine. The theory works to place administrative agencies in check if they are perceived by these jurists as going too far.
This argument fails for two reasons. First, unlike the Utility Air Regulatory Group case, the EO and WG are not regulatory actions but rather guidance aimed at having the government consider costs of greenhouse gas emissions. Considering costs and benefits in a rulemaking is required by law and including the costs of greenhouse gas emissions is included in this calculation. To wish away this with a fanciful reading of case law is an incorrect interpretation of law.
The second, and more critical flaw, is that Congress delegated rulemaking to administrative agencies for a reason: Congress lacked the expertise and ability to enact enabling regulations. For the court to step-in and say we know better than Congress this risks the same non-delegation claim made by conservative jurists. Why should we delegate the task of interpreting laws to judges who lack technical expertise any more than the administrative agencies that house the experts? If Congress is unhappy with the way administrative agencies interpret their statutes, Congress has recourse in the Congressional Review Act and the ability to amend the laws.
On the substantive arguments about considering global impacts and the discount rate, the court and the Republic-led states erroneously read mandates in the law that simply do not exist. For example, Circular A-4 clearly allows consideration of global impacts, albeit as a separate analysis. “Your analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.” (Circular A-4, pg 15) There is no mandate that only domestic impacts be considered.
On the issue about discounts, the court and the Republic-led states once again erroneously see a mandate where none exists. As OMB points out in its motion to lift the injunction, “Circular A-4 first explains that the “analytically preferred method” for discounting ‘is to adjust all the benefits and costs to reflect their value in equivalent units of consumption and to discount them at the rate consumers and savers would normally use.’ Since 2010, the Interagency Working Group has noted that its estimates of climate damages are in consumption-equivalent units and that a consumption rate of interest, like 3%, ‘is the correct discounting concept to use when future damages from elevated temperatures are estimated in consumption-equivalent units.’ IWG, Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis 23 (2010). In other words, the ‘analytically preferred method’ for discounting the social cost of greenhouse gases, where the integrated assessment models used in the calculation express their results in consumption units, is to focus on consumption-based rates and not to use the capital-based 7% rate.” (Declaration of Dominic J. Mancini submitted in of Defendants’ Motion for a Stay Pending Appeal)
Finally, it is important to point out that the Circular states that regulatory analysis may not lend itself to any particular formula. In such cases, “[C]onducting high-quality analysis requires competent professional judgment. Different regulations may call for different emphases in the analysis, depending on the nature and complexity of the regulatory issues and the sensitivity of the benefit and cost estimates to the key assumptions.” (Circular A-4, pg 3)
We must rely on an appeals court, and maybe the Supreme Court, to apply a sane and rational reading of law to this situation and lift the injunction and dismiss the original plea.
Image: Los Angeles Times