Carbon prices will be applied to car exhaust for the first time under the Obama administration's new tailpipe rule, launched yesterday. But while environmentalists were celebrating, some economists were quietly concerned that U.S. EPA's carbon calculation is too low.

The agency incorporated a preliminary price of $21 for every ton of carbon dioxide expelled from vehicles to help reach its new standard of 35.5 miles per gallon in 2016. That amounts to about 20 cents per gallon or, as two economists claim, a level that's "far too small a price incentive to prompt substantive mitigation measures."

"If widely adopted, this low estimate of the [social cost of carbon] could result in ineffectual regulations that would barely reduce U.S. emissions, if at all," Frank Ackerman and Elizabeth Stanton of the Stockholm Environment Institute say in a new white paper.

The "social cost of carbon" is not a direct tax on gasoline. It is, rather, a calculation that applies a price to each ton of CO2 that's released into the atmosphere, now and decades in the future, based on its potential damage to humans. More damage could occur from rising seas, for example, but less might happen if fewer people die from cold winters. A slew of factors could be plugged in to come up with different prices.

Hazy, but important concept
It's a hazy mathematical concept, and government officials have been working to pin down the right price. That's important, because the price will influence a menu of future policies ranging from energy efficiency to engine efficiency.

"The social cost of carbon may be the most important number you've never heard of," the white paper says.

It is an analysis that weighs the costs of addressing carbon damages against the benefits. The paper provides this analogy: If each ton of emissions would incur $5 in damages, then people would be willing to pay less than that to avoid the impact. It's similar to sinking $4 into a parking meter to avoid a $5 ticket.

But what if the parking ticket costs less than the meter? People will accept the damage. That's what the authors believe is happening with carbon.

"The policy choices the government makes would be very different if it estimates climate damages not at $5 but at, say, $500 per ton of carbon (in the same way that a $500 parking fine would make you pay much more attention to putting money in the meter)," the paper says.

Therefore, it might be a good idea to scrap the social cost of carbon methodology and replace it with a different calculation that assumes the worst will happen from climate change, the authors suggest. They assert that the government's analysis largely omits the potential for catastrophic damage.

"The urgent priority is to protect ourselves against those worst cases, not to fine-tune expenditures to the most likely level of damages," the paper says. "The risk of spending 'too much' on clean energy alternatives pales in comparison with the risk of spending too little and irreversibly destabilizing the earth's climate."

Estimates range from $5 to $65 a ton
Viewpoints vary widely about the social cost of carbon. There's a government working group with experts from across agencies tackling the issue. It has established wide-ranging prices for carbon because of the uncertainty. Costs per ton range from $5 to $65, but agencies are using $21, which was established as a middle range in a report last month by the working group.

"The government report is, in my view, very well done," Robert Stavins, director of the Harvard Environmental Economics Program, said in an e-mail. "Some of the best economists in the White House, CEA, Treasury, EPA, [Office of Management and Budget], and elsewhere in the Administration worked on it, drawing broadly upon the best available methodologies and literature."

He said the white paper "seems to rely on a very selective review of literature, thereby leading to likely bias."

The new tailpipe regulations are expected to cut emissions from the nation's cars and light trucks 21 percent by 2030. Environmentalists praised the move as a major victory in the effort to address global warming.

Michael Livermore, an economist with New York University, said the government's social cost of carbon analysis is not perfect. He would like to see a higher price per ton, and more consideration given to potential catastrophic risk.

Still, government economists are considering those things, he said.

"I don't think this is the end of the road in terms of analysis," Livermore said. "They've made a lot of progress. They're tackling lots of the underlining questions."

Reprinted from Climatewire with permission from Environment & Energy Publishing, LLC., 202-628-6500