In regulating carbon pollution, the price put on it matters

Starting Wednesday, President Obama will make a series of speeches on the economy. He's trying to set the stage for this fall.

Tomorrow at Georgetown University, President Obama will give a long-awaited speech, on climate change. The issue went dormant during his re-election race, a silence that has engaged many of his supporters on the left.

We don't expect him to propose congressional action -- Congress being Congress and all. But he is expected to push new rules limiting carbon pollution emissions from power plants.

What those rules need is justification that the benefits exceed the costs. And that's where a seemingly obscure concept becomes central. Something called the Social Cost of Carbon. What's that?

When you and I litter, we call it bad. Economists like to use bigger words, like "externality" -- something that hurts the surrounding environment.

"Greenhouse gases are externalities on steroids," says environmental economist Michael Greenstone at MIT. "In that they produce damages that go way into the future.

Here's what he means: Take a gallon of gas -- I just paid $3.69 on Lee Highway by my house.

But the world pays a price, too. It's like a planetary secondhand smoke problem, except we're all puffing CO2.

"It remains in the atmosphere for hundreds of years," Greenstone says. "It's going to change the climate for centuries. And that will produce changes that impose damages on my children and their children and their children."

How much damage is an estimate called the Social Cost of Carbon. For years, the federal government's number was roughly 22 cents of damage per gallon of gas burned -- it's derived from a larger-scale figure of $22 per ton of carbon dioxide emitted.

Last month, it was upped to 36 cents, based on new science, and new climate events like storm patterns. Much of the newly incorporated evidence has to do with projected elevated seas.

"There's now an increasing awareness this will put a lot coastlines -- I think Miami is a prime example -- in real danger," Greenstone says. "And we also learned from Hurricane Sandy that this is not predictable flooding, but rather storm surges that could impose costs."

Here's why 36 cents matters: The president tomorrow is expected to push power plants to spew less carbon. That will cost industry money.

"This means that when a coal-fired power plant generates electricity to allow households to surf the Internet, or to allow a grocery store to refrigerate fish sticks, that utility is going to have to pay that bill," says UCLA economist Matthew Kahn, author of the climate economics book "Climatopolis." "And they're likely to have to raise electricity prices."

That's a cost. On the other hand, there's also a benefit to less carbon in the atmosphere. And saving $36 in warming pollution for every ton of carbon not burned is a big benefit.

"Obviously we'd rather be doing regulations where the benefits outweigh the costs," says economist Billy Pizer at Duke University. "So having a higher Social Cost of Carbon does make the case more compelling for greater amount of regulation."

Still, climate math is tricky and riddled with estimates and uncertainties. Governments around the world are trying to make their own dollar-value calculations, as are companies assessing the risk of exposure to rising seas, less predictable harvests, and insuring coastal properties.

"At some level there's a bit of subjectivity that comes into play," Pizer says. "There's going to be uncertainty about these things no matter what we do. But the key thing is, we're recognizing the answer is not zero. We know there are negative conseqeunces. And we are trying to put an accurate dollar value on it."

It's a bit like the uncertainty of what your retirement fund will someday be, Pizer says.

The White House says its carbon damage estimate is the mid-range of estimates. But UCLA's Matthew Kahn thinks it may be too high. He says when seas rise in the future, many models assume coastal houses will be doomed. But don't forget, he says, homeowners adapt.

"When we anticipate a new threat, rational households and firms will move to higher ground," Kahn says. "Those in currently at-risk areas will invest in stilts or other devices, hard sea walls to protect themselves. Or they will retreat."

So, he argues, climate change could be less costly than we think. Perhaps. But there's one thing virtually every environmental economist agrees on: the social cost of carbon, the damage to the future, should not be valued as zero.

About the author

Scott Tong is a correspondent for Marketplace’s sustainability desk, with a focus on energy, environment, resources, climate, supply chain and the global economy.

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