Investors have welcomed a ruling by a US court which for the first time has upheld the use of a social carbon price to inform policymaking.
The verdict was given by the 7th US Circuit Court of Appeals, in relation to new efficiency rules for commercial refrigeration equipment. The Department of Energy was being challenged by the industry on its use of a $36-per-ton estimated social price of carbon in its decision-making. The figure was criticised for not being based on ‘real-world’ data.
But the court ruled that being “limited or imperfect” is not a reason to dismiss the pricing model. “Rather, we will remand only if the model ‘bears no rational relationship to the reality it purports to represent’ or if the agency fails to provide a full analytical defense” when the model is challenged,” it stated.
“This is an exciting development, for a federal court to confirm that they can rely on the social cost of carbon,” said Sue Reid, vice president of climate and energy programmes at investor-backed advocacy body Ceres, describing the decision as having “enormous implications” and being “a significant move towards comprehensively putting a price on carbon”.
The concept of a social price on carbon was flagged up in President Obama’s State of the Union address in January, but harks back to the 1980s, when his predecessor Ronald Reagan issued an executive order requiring all new regulation to include a cost-benefit analysis. The social cost of carbon takes into consideration damage done to agricultural productivity, human health, property and other area impacted by carbon emissions and the consequent effects of climate change.This is the first time a court has ruled on its legal validity.
The model has already received criticism from those on both sides of the climate-change debate, with some saying the estimate is too high, and questioning the robustness of the methodology that underpins it. Others say it is too low, and implies that legislation should only be passed if the cost of implementing it would be lower than the estimated social costs.
This, they argue, would hinder more ambitious climate policy – especially if the figure remains at $36 per ton of carbon. Leading climate economist Lord Stern puts the cost at nearer $200, for example.
“The $36 figure is modest, but it’s a step in the right direction,” said Reid, adding that there would “undoubtedly” be further court challenges and decisions on the subject. “But any such further challenges would face long odds.”
“Putting a social cost of carbon on the Government’s ledger when it comes to potential regulations and projects can totally tip the balance in favour of low-carbon infrastructure and energy procurement,” she explained, suggesting it could result in improved opportunities in the renewables investment space, as well as boosting energy efficiency programmes.
“It should also send a corresponding negative signal to investors about buying into high-carbon opportunities,” she added.
With reporting by Sophie Robinson-Tillett.