It’s the Externalities, Stupid — Climate Edition

Among the important provisions of President Biden’s Executive Order on Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis is the requirement to review and revise estimates of the social cost of carbon (and nitrous oxide and methane).  The order establishes a working group, co-chaired by the Chair of the Council of Economic Advisers, the Director of OMB, and the Director of the Office of Science and Technology Policy.  The working group has been directed to provide interim updates within 30 days, and a revised SCC, SCN, and SCM by January 2022.

There’s little doubt that the SCC will be greater than $50/ton, and it could be substantially higher.  In fact, the Bloomberg Environmental and Energy Report (subscription required) published an interview last Friday with Michael Greenstone, who is now at the University of Chicago, but was one of the developers of the SCC in the Obama administration.  As of last year, that formula already showed a SCC greater than $50.  However, Greenstone has just co-authored a new paper arguing that the appropriate interim SCC for 2020 would be $125/ton.

I like that Bloomberg asked Greenstone about that fact that he holds a chair at U. of C. named for Milton Friedman.  Given that Friedman was not the economics profession’s greatest fan of big government, there is a certain irony in Greenstone’s work, which almost inevitably would result in a significantly larger role for the government in regulating the economy.  And yet, I agree with Greenstone’s position that Friedman “would support [the SCC] as a means of setting the rules of the road for carbon markets.”

I have previously argued that it is reasonable shorthand to say that the very purpose of government is to address the problem of externalities.  And it would be difficult to find a more important externality today than the climate impacts caused by emissions of GHG by economic actors who aren’t forced to pay for the costs imposed by those emissions.

It’s also important to remember that the idea of externalities isn’t a wild left-wing plot.  It’s basic microeconomics, something that Republicans and conservatives used to believe in.  In any case, even if the SCC (and SCN and SCM) aren’t used as the basis of a carbon pricing bill that will sail through Congress in the next few months, it is going to become a core principle of how environmental impact reports will be prepared under NEPA for at least the next four years, and that by itself is going to have a profound impact on energy and broader infrastructure development.

The times, they are a-changin’.

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