Top Line: A fee based on the social cost of carbon dioxide, methane, and nitrous oxide should be imposed on fossil-fuel mining leases on federal public lands.
Figure 1. A seam of coal on federal public lands in the American West, destined to send carbon into the atmosphere. Source: Bureau of Land Management.
It has been suggested that the Biden administration impose a “carbon fee” or “carbon adder” on new mining leases that permit fossil fuel companies to drill on federal public lands. This fee would reflect the external costs of greenhouse gas emissions, typically based on what is termed the social cost of carbon (SCC). If this were done—depending on the amount of the fee or adder—the price of leasing federal public lands for fossil fuel extraction could become unattractive to industry. That would be an excellent result. Besides preventing undesirable social costs, it would reap the flip side of the social cost of carbon emitted into the atmosphere: the social benefit of carbon not emitted into the atmosphere.
The Carbon Footprint of Fossil Fuels from Federal Public Lands
The most prevalent greenhouse gas (GHG) emitted by the combustion of fossil fuels is carbon dioxide (CO2), but according to the Environmental Protection Agency (EPA), methane (CH4) is emitted during their production and transport, and nitrous oxide (N2O) is also emitted during their combustion. CH4 has a global warming potential (GWP) of 28 to 36 times that of CO2, and N2O of 265 to 298 times that of CO2. Emissions of CH4 and N2O can be expressed in terms of their carbon dioxide equivalent (CO2e) so that comparisons with CO2 emissions take into account the greater GWPs of CH4 and N2O.
The US Geological Survey reports that in 2014, extracting and burning fossil fuels from federal public lands resulted in total emissions of 1,332.1 million tonnes (abbreviated MMT for “million metric tons”) of CO2e. This is the sum of 1,279 MMT of CO2, 47.6 MMT of CO2e generated from CH4, and 5.5 MMT of CO2e generated from N2O. We will come back to these numbers later.
These emissions from federal fossil fuels represented 25 percent of CO2 emissions, 18 percent of CH4 emissions, and 9 percent of N2O emissions from all US sources in 2015. The net emissions from all US sources in 2019 totaled 5,769 million tonnes of CO2e, so doing the math suggests that 23.2 percent of all US GHG emissions are attributable to fossil fuels extracted from federal public lands. (Worksheet from hell available upon request.) That’s nearly a quarter. That’s a large footprint.
Figure 2. Storing federal crude oil. Source: BLM.
How Should a Carbon Fee or Adder Be Set?
The federal government could set a price on carbon associated with fossil fuel extraction from federal public lands based on either of two principles: (1) the polluter should pay society back for the damage caused, or (2) a price should be set that will adequately move the market in the intended direction and to the desired result. The principles are interrelated. In the case of GHG pollution, if the polluter pays, the markets will move.
The “Polluter Pays” Principle and the Social Cost of Carbon
According to the Grantham Research Institute on Climate Change and the Environment of the London School of Economics, “The ‘polluter pays’ principle is the commonly accepted practice that those who produce pollution should bear the costs of managing it to prevent damage to human health or the environment.” If the “polluter pays” principle is followed in the case of fossil fuels, prices for fossil fuels should reflect the “social cost of carbon” (SCC), a measure first developed in relation to federal policy by the Obama administration. Here is how the EPA defines it:
The SC-CO2 is a measure, in dollars, of the long-term damage done by a ton of carbon dioxide (CO2) emissions in a given year. This dollar figure also represents the value of damages avoided for a small emission reduction (i.e., the benefit of a CO2 reduction).
The Trump administration effectively emasculated the SCC. The Biden administration has reintroduced the concept into policymaking.
Note that there are also social costs for methane (SC-CH4) and nitrous oxide (SC-N2O). By linking carbon fee or adder pricing to CO2e, these other GHGs are included in this analysis.
The 2021 Social Cost of Carbon
The Cost of Carbon project of the Institute for Policy Integrity at the New York University School of Law offers a calculator that lets us figure out the social cost of carbon, “the present value of economic damages from a given amount of greenhouse gas emissions.” It turns out that for 2021 it’s either $15, $53, $78, $127, or $423 per tonne CO2, depending on the discount rate chosen. These figures correspond, respectively, to discount rates of 5 percent, 3 percent, 2.5 percent, 2 percent, and 1 percent.
The discount rate is “the interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows.” A “discounted cash flow” is “a valuation method used to estimate the value of an investment based on its expected future cash flows.”
Lost yet? A discount rate recognizes that money today is worth more than money in the future. In the context of SC-CO2, the discount rate chosen determines how much it is worth to society to spend money today to avoid the costs of climate change to future society. A higher discount rate says it is worth less to society, a lower discount rate that it’s worth more. It is important to distinguish the social discount rate (SDR) from the private discount rate (PDR). PDRs are used by investors and corporations. The SDR I prefer for the good of society and future generations is far lower than I prefer on private investments.
The Appropriate Discount Rate
The choice of a discount rate for the social cost of carbon is controversial because it reflects a moral or ethical judgment. Historically, SCC analyses have centered on a discount rate of 3 percent, which is still the basis for the interim revised SC-CO2 issued by the Biden administration in early 2021. However, academics and other experts have recommended discount rates from 0 to 6 percent. During the Trump administration, the SC-CO2 discount rate was set at 7 percent—and only climate damages specific to the United States were considered.
One survey of the opinions of experts on the appropriate social discount rate found that older experts recommended higher SDRs. The paper noted: “One can only assume that younger academics have been influenced more by the emerging literature on social discounting, which has been through something of a revival this century.” One might also assume that, as younger academics will live longer in a climate-disrupted world, they—perhaps subconsciously—give greater present weight to future costs.
Choosing a lower SDR would show that we the current people give our descendants comparable weight to ourselves in the matter of having a climate similar to the one we have known and loved. But perhaps the best argument for choosing a lower discount rate is that the SC-CO2 (along with the SC-CH4 and SC-N2O) doesn’t begin to include all the costs of climate change.
Costs Not Included in the Social Cost of Carbon
According to the NYU School of Law’s Institute for Policy Integrity (IPI), the federal government’s Interagency Working Group (IWG) on the Social Cost of Greenhouse Gases generally includes in its social cost analysis these climate-related drivers of impacts called out by the Intergovernmental Panel on Climate Change (IPCC):
• warming trend
• precipitation
• damaging cyclones
• carbon dioxide concentration
• sea level rise
The IPI notes that the IWG only partially factors in these drivers:
• flooding (while coastal flooding is included, inland flooding is not)
• storm surge (missing is the combined effect of sea level rise and increased coastal storm intensity)
The IPI further notes that the IWG excludes these drivers:
• extreme temperature
• drying trend
• extreme precipitation
• snow cover
• ocean acidification
One can only conclude that the social cost assessments of greenhouse gases are severely undercounting. However, it is far better to count at least some things and be approximately right than to count no things and be precisely wrong.
Adequately Moving the Markets
The Biden administration is expected to revise the SC-CO2 discount rates (always presented as a range, but preferring one number) in early 2022. The practical result is that the lower the discount rate assumed in an SCC analysis is, the higher will be any carbon fee or adder imposed on federal fossil fuel production. The higher the fee or adder, the more expensive it becomes to extract fossil fuels from federal lands.
Figure 3. Oil and gas development on federal public lands in the American West. There goes the habitat. Source: BLM.
The Right Price on Carbon
Table 1 shows the social cost, at various discount rates, of the carbon emitted from extracting and burning fossil fuels from federal public lands in 2014. Recall from the earlier discussion that the total emissions were 1,332.1 MMT of CO2e (1,279 MMT of CO2 + 47.6 MMT of CO2e generated from CH4 + 5.5 MMT of CO2e generated from N2O).
If fossil fuel use were inelastic and the oil and gas industry just paid the fee and passed it on to consumers, the amount in the last column would be the revenue raised annually by the federal government from a carbon fee or adder. Fortunately, the price of fossil fuels is not inelastic; as the price is raised, demand will decrease. If a reasonable carbon fee or adder were chosen, it would result in the federal government no longer selling any new fossil fuels. This would be a very good thing.
Table 2 shows what fossil fuels extracted from federal public lands would cost if a carbon fee or adder based on various discount rates were levied. This table uses energy prices for December 16, 2021. The rather conservative 3-percent discount rate is highlighted. The likely effect of imposing a carbon fee or adder would be that the market would reject federal fossil fuels because the federal price would be significantly above the nonfederal price, no matter which discount rate was used.
Where would the demand displaced by a carbon fee or adder on federal fossil fuels go? We can hope that it would just go away, with consumers using that much less fossil fuel (by either going without or investing in efficiency to use less). Perhaps more realistically, it could result in a switch to no-carbon fuels. (The levelized cost—which considers capital, operating, and fuel costs—of most forms of renewable energy is lower than that of fossil and nuclear fuels.) Or, least desirably, it could result in increased production on nonfederal lands.
Whatever the case may be, the data suggest that withdrawing the contribution of federal fossil fuels from the US-based supply will have significant effects, since 43 percent of the coal, 25.5 percent of the oil, and 11 percent of the natural gas produced in the United States in 2020 came from federal public lands.
Bottom Line: The federal government should impose a fee on or an adder to the sale of fossil fuels from federal public lands, large enough to dissuade anyone from buying such fuels.
Figure 4. The social benefit of carbon not emitted into the atmosphere thanks to not logging older (mature and old-growth) forests on federal public lands. Source: BLM.
For More Information
Kerr, Andy. 2021. Larch Occasional Paper #26, Social Cost of Fossil Fuels from US Public Lands (pdf). The Larch Company, Ashland, OR, and Washington, DC.