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Ignoring the Social Cost of Carbon is Anti-Capitalistic

The House is currently taking up a bill called the Energy Consumers Relief Act, which looks to put stricter rules on the Environmental Protection Agency (EPA). The bill requires the EPA to report to Congress on any rule that has costs greater than a $1 billion. It also allows the Department of Energy to veto any rule that it believes will cause “significant adverse effects to the economy.” Of course, the vague wording gives the DOE the ability to vacate nearly any rule it wants.

But I want to focus on two similar amendments to it. The first comes from Rep. Tim Murphy (R-PA) and it would prevent the EPA from considering the social cost of carbon (SCC) when it creates rules that have costs greater than $1 billion. The second amendment, from Reps. Duncan Hunter (R-CA) and John Culberson (R-TX), would only allow the agency to take into account the SCC if it put out a separate rule finalizing what the cost would be.

Preventing the EPA to consider the SCC is absurd. Pollution is the quintessential example of a negative externality in every economics class. Basically, companies emit huge amounts of carbon and other chemicals into the air, harming the environment and hurting society, but don’t have to pay for those costs. Since no one “owns the air,” companies can offload pollutants into it without hurting their bottom line. That’s where the EPA comes in. They set regulations to limit this behavior and force companies to pay for the pollutants they emit through regulatory compliance. The SCC is a major way of doing so. It estimates the social costs to society of releasing a ton of carbon dioxide into the air. In May, the Office of Management and Budget (OMB) increased the SCC from $21/ton to $35. That’s a big change.

The SCC takes into account pollution.

The SCC increases the estimated benefits of regulation.

The way this works is that when the EPA creates a rule that will, for example, reduce carbon emissions by 100,000 tons, the social benefit of that regulation would be $3.5 million (100,000 tons*$35/ton). That would then be compared to the costs of the regulation. When the SCC is higher, the total benefits and net benefits will be higher as well. Companies want the SCC to be low – the lower it is, the less chance the EPA’s proposed rules will produce net benefits and the lower the chance the industry will have to comply with them. But economists love the SCC. It internalizes the negative externality of carbon pollution, creating more efficient, fair markets.

But Reps. Murphy, Hunter and Culberson aren’t buying it. The SCC is not an easy number to determine and the EPA and other agencies have tried to estimate it for a while. That means figuring out a final number, such as Reps. Hunter and Culberson want the agency to do, is challenging and will take a while. In the meantime, we shouldn’t just ignore the SCC because we don’t have a final answer. We should use the best numbers we have while continuing to research climate change and develop a more perfect metric. Rep. Murphy, on the other hand, doesn’t even care if the EPA comes up with a final number. He wants to ban the agency from using it altogether (for rules with costs greater than $1 billion).

The OMB’s decision to increase the SCC infuriated conservatives, but the correct response is not to prevent the EPA from using it. If it wants to develop a more accurate number, then increase the agency’s funding so that it can do more research on the social costs of carbon. But these amendments attempt to fix the problem by ignoring the SCC altogether. They do not promote free markets. In fact, they do the opposite. By preventing the EPA from internalizing the negative externality, they allow companies to pollute the environment without facing the costs.

For a party so committed to laissez-faire economics, that’s incredibly anti-capitalistic.

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