Pricing the future

The price of extracting Montana’s vast natural resources is about to get a lot higher. Or it’s about to be properly valued. Depends on who you ask.

The Biden administration last week took a step toward increasing the “social cost” of carbon, a mechanism used by the federal government to value the future costs of climate pollution in today’s dollars. The tool is then used by federal agencies to make decisions such as implementation of new regulations or whether to expand a coal mine.

The number is especially important in a state like Montana that has significant natural resources, and also faces significant potential damages from climate change. 

The social cost of carbon was established in 2008, after a federal appeals court overturned George W. Bush-era fuel economy standards because they did not put a price on future pollution. The Obama administration established an Interagency Working Group composed of climate scientists, economists and federal government officials to figure out what the price should be. 

The idea behind the mechanism is to put a price on climate degradation. The group fixed the price at about $50 per ton of carbon dioxide, incorporating estimated damages from climate change, including declines in agricultural productivity, human health effects and property damages from wildfire and increased flood risk.

But the Trump administration, in an effort to help justify its goal of energy independence, lowered the cost to as little as $1 a ton, doing so by focusing only on damages to the U.S., as well as applying a much higher “discount rate,” or lowering the estimated value of a future dollar. The administration also eliminated the Interagency Working Group.

The Biden administration has now re-established the Interagency Working Group, which announced Friday it will re-establish the Obama-era figure of about $50 a ton on an interim basis. The new numbers are adjusted for inflation, so they are slightly higher. The group will come up with a new, more comprehensive cost analysis by January 2022.

Under changes established under President Ronald Reagan, the federal government began to require that all new regulations incorporate consideration of economic benefits and harms, said Richard Ready, a professor of agricultural economics at Montana State University in Bozeman.

For environmental rules, that has often meant determining the cost to public health. 

Climate change will likely have drastic effects in Montana. The 2017 Montana Climate Assessment found that wildfires, spring floods and droughts are likely to increase in the state. There is also likely to be an increase in extreme weather events. 

A follow-up report released in January found that those changes will likely have human health impacts statewide, including loss of life, increased disease, physical and mental illness and stress. Negative economic impacts to industries like agriculture and outdoor recreation are expected as well. 

Undervaluing the future costs of climate pollution can have dramatic impacts, said Shiloh Hernandez, an attorney at the Western Environmental Law Center in Helena. 

“As the science is becoming clear, the effects of climate change are really widespread and  really damn expensive,” Hernandez said. “Models are showing more and more clearly we can’t afford fossil fuels.”

Recent analysis has found that the social cost should be much higher than the Obama-era figure. Michael Greenstone, chief economist for President Obama’s Council of Economic Advisors and a professor of economics at the University of Chicago, recently estimated the cost should be near $125 a ton. Nobel Prize-winning economist Joseph Stiglitz also co-authored a paper this month finding that Obama-era carbon prices are not adequate.

“It’s like saying we’re going to have a giant party today and make our kids foot the bill,” Hernandez said.

COMPARING INDUSTRIES

A number of federal courts have ruled that when the government chooses to tout the economic benefits of fossil fuel projects, it has a corresponding obligation to disclose the costs associated with future harm to the public from fossil fuel contributions to climate change. In 2017, U.S. District Judge Donald Molloy overturned an expansion at the Bull Mountain coal mine near Roundup because the federal government failed to account for the social cost of carbon. Earlier this month, U.S. District Judge Susan Watters blocked a proposed expansion at the Spring Creek coal mine, the largest in the state, for the same reason.

“Montana has been at the forefront of the law in this area,” Hernandez said.

Hernandez has a case before the 9th Circuit Court of Appeals involving the Bull Mountain mine, arguing that the Trump administration, in attempting to comply with Molloy’s order, again misled the public by inflating the economic benefits of the mine while vastly underestimating the cost of the carbon pollution released.

A proposed expansion of the mine, challenged by environmental groups, would cost $7.4 billion more than not expanding the mine, using the Obama-era social cost of carbon, according to an analysis Greenstone prepared for the case.  

Montana has about one-third of the recoverable coal reserves in the U.S. The coal industry employed 1,209 people in Montana as of 2019, according to the Montana Coal Council. Under regulations that incorporate the social cost of carbon, the coal will stay in the ground.

“For coal, it doesn’t make sense,” Hernandez said. “For oil and gas, the economics become closer.”

The oil and gas industry supports 29,000 jobs in Montana, according to the Montana Petroleum Association. 

Climate-focused executive orders from the Biden administration halted new oil and gas leases on federal land, drawing the ire of Republicans, and halted construction of the Keystone XL pipeline, which Montana Sen. Jon Tester joined Republicans in opposing. But even as Biden placed a moratorium on new federal-land leases, about 57% of current oil and gas leases on Bureau of Land Management land in Montana are currently idle, according to a fact sheet from the Wilderness Society.

At the national level, groups like the American Petroleum Institute and U.S. Chamber of Commerce have acknowledged that climate change represents a significant cost that requires consideration by the Biden administration, and asked to be involved in setting the new price.

Other industries have much more to lose as the climate warms. 

A 2015 report from the Montana Wildlife Federation found that a warming climate puts 11,000 outdoor industry jobs in the state at risk “due to stream closures, lost hunting opportunities, wildfires and reduced snowpack.”

A 2016 analysis conducted on behalf of the Montana Farmers Union found that unchecked climate change could lead to the loss of 25,000 agriculture jobs and $736 million in lost revenue by mid-century.

The Montana Climate Solutions Plan, released in September, put a particular emphasis on transitioning the state’s economy “away from natural resource extraction sectors and toward services” to achieve carbon neutrality by 2050. The document, created by experts and industry stakeholders from across the state, focused on measures like creating regional innovation clusters to help the state adapt. Most of the plan’s goals were unanimously supported, but the more ambitious goals were largely opposed by industry, including the Montana Chamber of Commerce and NorthWestern Energy.

It is unclear where the plan stands in the administration of newly elected Gov. Greg Gianforte.

At the state level, the social cost of carbon doesn’t play a regulatory role. The Public Service Commission does not take it into account in its decisions, and neither do any state agencies. In fact, under a 2011 amendment to the Montana Environmental Policy Act, state agencies are not allowed to take climate change into consideration, said Jenny Harbine, a staff attorney at the nonprofit legal advocacy organization Earthjustice in Bozeman.

CALCULATING IMPACTS

The social cost of carbon weighs benefits and harms and puts a price on the release of new greenhouse gases, Harbine said.

“It can be consistently applied, and it helps you make rational choices between alternatives with really divergent climate impacts,” Harbine said.

Hernandez said the social cost is “defensible but conservative.” He said some economists argue that the social cost of carbon should be infinity. 

Ready, the economist at Montana State, agreed that putting a price on carbon impacts can be difficult. For example, it’s difficult to financially quantify the extinction of an endangered species or properly price health impacts on future generations of humans.

“A lot of global warming impacts are not included in damage estimates,” Ready said. “A lot of negatives are not included.”

This story was updated Feb. 26, 2021, to include new information announced by the Biden administration.