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Deep in the preamble to EPA’s new methane rule is the regulatory cost/benefit analysis (there are actually two cost/benefit analyses, but I’ll get to that). The New York Times picked up on this and published an article that is already becoming widely-referenced (“Biden Administration Unleashed Powerful Regulatory Tool Aimed at Climate“) which makes the bold statement:

“The new estimate of the social cost of carbon, making its debut in a legally binding federal regulation, is almost four times [the current] amount: $190 a ton.”

Well, yes… kinda. But that’s a massive oversimplification and meaningfully out of context. The meat of the matter is not actually in the rule’s preamble, but in a 171-page supporting document referenced in the preamble called (inhale deeply before trying to say this out loud):

Supplementary Material for the Regulatory Impact Analysis for the Final Rulemaking, “Standards of Performance for New, Reconstructed, and Modified Sources and Emissions Guidelines for Existing Sources: Oil and Natural Gas Sector Climate Review”, EPA Report on the Social Cost of Greenhouse Gases: Estimates Incorporating Recent Scientific Advances

That document is incredibly complicated and I haven’t read it all (not sure I’m going to…), especially given that I am concurrently reading the rule itself. But there are a couple of important matters folks should know before you start building business cases – or going to your boards – with a $190/ton scenario.

To begin with, while the NYT calls $190/ton “a legally binding federal regulation,” it only applies to federal rulemaking cost-benefit analyses for purposes of complying with Executive Order 12866 – not to companies directly. Plus, this is one of the two cost-benefit analyses I referred to earlier, and EPA didn’t use it like you might think. According to the methane rule preamble:

“EPA weighed the relevant statutory factors to determine the appropriate standards and did not rely on the monetized benefits analysis for purposes of determining the standards. E.O. 12866 separately requires the EPA to perform a benefit-cost analysis, including monetizing costs and benefits where practicable, and the EPA has conducted such an analysis.” [Emphasis added].

EPA’s cost-benefit analysis for the methane rule (the second cost-benefit analysis) only considered costs “associated with the [emissions control] options under consideration” specifically for natural gas flaring “based on the statutory factors the EPA is required to consider under section 111(a) of the CAA (including cost, energy requirements and nonair quality health, and environmental impacts).” So EPA developed the social cost of carbon, but didn’t use it. EPA’s own comments on the SC-GHG (social cost of aggregated GHG emissions) methodology don’t inspire confidence: it reflects “omitted impacts” and is subject to change as “the EPA is continuously reviewing developments in the scientific literature on the SC-GHG, including more robust methodologies for estimating damages from emissions, and looking for opportunities to further improve SC-GHG estimation going forward.” Refer to pages 778-781 of the methane rule if you want to read more.

There is no mandate that companies use or report any SC-GHG numbers to EPA or SEC – at least unless and until the SEC promulgates a final climate rule requiring that companies report internal costs of carbon when they are used. If your company uses – or plans to use – internal carbon pricing for managerial accounting, I wouldn’t change your numbers just yet. Compare your assumptions, methodology and results to those in the new analysis to see whether you think it really is warranted – and read the next blog about why $190/ton may not be the correct number anyway.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile