The destructive costs associated with climate change are no longer a distant hypothetical. Globally, 21.5 million people per year are displaced from their homes due to extreme weather events.
In the United States, 2017 surpassed 2005 as the most expensive hurricane season on record.
These phenomena are associated with changing weather patterns due to climate change
and are but one component of the catastrophic costs that accompany a warming climate.
Federal agencies have begun incorporating such costs into regulatory cost–benefit analyses. Currently, executive agencies may adopt new regulations only upon finding that their benefits justify their costs.
In performing these cost–benefit analyses, agencies are required to consider the regulation’s climate effects.
In 2009, the Obama Administration created an interagency working group to develop the social cost of carbon (SCC)—an analytical tool that aggregates the costs associated with a federal rule or program’s greenhouse gas (GHG) emissions
—to create greater uniformity in how federal agencies treat GHG emissions in their cost–benefit analyses.
Agency use of the SCC was controversial from the start and received strenuous pushback from industry.
However, in a landmark decision in 2016, the Seventh Circuit upheld the use of the SCC in the regulatory cost–benefit context.
Yet, despite the relative progress made in this context,
the internalization of climate costs into the federal agency decisionmaking process remains incomplete and wholly inadequate. The approach adopted in the regulatory cost–benefit context contrasts starkly with that taken in the environmental review process required of federal agencies under the National Environmental Policy Act (NEPA).
NEPA’s reach is in many ways broader than that of the regulatory cost–benefit analysis mandate and applies to federal permit approvals, federal programs, and some government financing projects, in addition to proposed regulations.
NEPA review requires a qualitative consideration of GHG emissions,
but it does not, as currently undertaken, require quantification of GHG emissions using the SCC when agencies evaluate the climate effects of federal programs.
Most courts that have addressed the issue have concluded that an agency does not act arbitrarily and capriciously by electing to not utilize the SCC in its NEPA analysis.
The disparity in the treatment of climate change effects under the regulatory cost–benefit and NEPA-review mandates has a significant practical consequence: Federal agencies do not need to consider or provide to the public the monetary impacts of GHG emissions associated with many carbon-intensive federal programs. This is true even of programs that are justified by their aggregate economic benefits. This Note labels this chasm in the federal GHG reporting scheme—in which agency activities with anticipated GHG effects are subject to NEPA but not to the regulatory cost–benefit analysis mandate and, thus, are not evaluated using the SCC—the “CO2 monetization gap.”
The GHG reporting of the activities of the Export-Import Bank (Ex-Im), which promotes the export of U.S. goods and services by providing financing for high-risk projects domestically and internationally,
offers a prime illustration of the consequences of the CO2 monetization gap. In 2011, Ex-Im’s financing activities generated $4.9 billion in U.S. exports for fossil-fuel projects that will emit sixty-eight million metric tons of CO2 per year.
The Agency does not use the SCC in its NEPA review of financing projects—yet, when considering the lifetime climate effects of these activities, the purported economic benefits disappear.
This Note argues that the CO2 monetization gap has led to suboptimal decisionmaking in GHG-intensive federal programs and is inconsistent with NEPA’s twin aims: (1) to ensure that federal actors consider the present and future consequences of their decisions and (2) to meaningfully inform other government actors and the public of the environmental impacts of proposed projects.
Further, this Note advances the argument that the Seventh Circuit’s reasoning in Zero Zone, Inc. v. United States Department of Energy is inconsistent with the prevailing treatment of the SCC and GHG emissions in the NEPA context.
Its structure proceeds as follows: Part I provides an overview of the SCC and its use in the regulatory cost–benefit context. It also introduces the NEPA-review process and its GHG reporting requirements. Part II then explores the tension between the GHG reporting approach currently taken in the regulatory cost–benefit and NEPA-review contexts. It also illustrates how the CO2 monetization gap has led to poor decisionmaking by examining Ex-Im’s GHG disclosures. Part III provides a normative justification for the incorporation of the SCC into NEPA’s environmental impact statement requirement, arguing that legal integration of the SCC into the NEPA environmental review process would best fulfill the goals of NEPA. Part III concludes by assessing the legal feasibility of implementing the SCC into NEPA review via CEQ regulation or executive order and discusses efforts states may undertake to minimize the effects of the CO2 monetization gap.
I. GHG Reporting in Regulatory Cost–Benefit Analysis and in NEPA Review
Both the regulatory cost–benefit analysis mandate and NEPA review require consideration of GHG emissions.
However, the GHG reporting requirements under the two programs differ greatly in their treatment of climate effects. While the SCC has been embraced in the cost–benefit context
—creating a de facto requirement that agencies utilize the SCC in assessing the costs and benefits of a proposed regulation—the use of the SCC has largely been rejected in the NEPA-review process.
This Part provides an overview of the GHG reporting requirements in the regulatory cost–benefit and NEPA-review contexts. Section I.A traces the development of, and the controversies surrounding, the use of the SCC by agencies when they conduct cost–benefit analyses. It also analyzes the Zero Zone, Inc. decision, which upheld the use of the SCC in this setting. Section I.B introduces the NEPA-review process and its GHG reporting requirements. It then considers recent court decisions examining the use of the SCC in the NEPA-review process.
A. The Regulatory Cost–Benefit Mandate and the Social Cost of Carbon
Executive Order 13,563 requires that agencies conduct cost–benefit analyses for proposed regulations and that regulations be economically justified.
In these analyses, agencies must consider the costs and benefits of GHG emissions resulting from the proposed regulation.
Section I.A.1 traces the history of the SCC in this context. Section I.A.2 then discusses the controversies surrounding the development of the SCC. Finally, section I.A.3 examines the Seventh Circuit’s recent decision in Zero Zone, Inc. v. United States Department of Energy.
1. The Duty to Monetize GHG Emissions and the Origins of the SCC. — The history of the duty to consider the effects of GHG emissions in the regulatory cost–benefit analysis context began with the Ninth Circuit’s decision in Center for Biological Diversity v. NHTSA.
In that case, the court rejected the National Highway Traffic Safety Administration’s (NHTSA) decision not to include carbon emissions reductions in its cost–benefit analysis for a new average fuel economy standard for light trucks.
The court concluded that NHTSA’s failure to do so was arbitrary and capricious when it had quantified economic benefits, including impacts on employment and sales, associated with the new rule.
In response to this decision, the Office of Management and Budget and the Council of Economic Advisers convened an interagency working group in 2009 to create a uniform method for agencies to incorporate “the social benefits of reducing carbon dioxide . . . emissions into cost–benefit analyses of regulatory actions.”
This effort culminated in the development of the SCC—a tool that estimates “the long-term damage done by a ton of carbon dioxide (CO2) emissions in a given year.”
The SCC incorporates changes in agricultural productivity and human health, property damage from flooding, and changes in energy-system costs, which are aggregated in a present value of climate change damages.
The SCC offers cost projections employing three discount rates: 5%, 3%, and 2.5%.
At these discount rates, the current SCC estimates that a metric ton of CO2 emitted in 2015 costs $11, $36, and $56, respectively.
The SCC was widely used by agencies under the Obama Administration in a variety of contexts to reinforce the justification for energy-efficiency measures, fuel-efficiency standards, and regulatory actions having beneficial climate effects.
The first regulation to employ the federal SCC was the Department of Transportation’s Corporate Average Fuel Economy standards for passenger cars and light trucks, promulgated in March 2009.
Since then, dozens of other final rules have utilized the interagency working group’s SCC figure in cost–benefit analyses.
2. Controversies Surrounding the Social Cost of Carbon. — Agency use of the SCC has been controversial from the beginning. Specifically, the discount rates used, the SCC’s treatment of unknown risks, and the metric’s consideration of global costs have been particularly contentious.
Because the SCC incorporates future costs associated with GHG emissions, a discount rate is employed to convert costs associated with future emissions into present-day dollars.
The chosen discount rate is important because small changes in the discount rate can result in huge cost changes in the context of climate change.
As the discount rate is increased, the projected cost of emitting a ton of GHGs will decrease—likewise, as the discount rate is decreased, the projected cost of emitting a ton of GHGs will increase.
Accordingly, deciding which discount rate to utilize is a highly controversial task. Some academics argue that the discount rates used are too high given the intergenerational problem of climate change.
Conservative and industry groups have generally argued, however, that a discount rate of 7%—the rate that the Office of Management and Budget typically uses for valuing future lives—would be more appropriate.
The SCC has also been criticized for insufficiently considering unknown risks associated with aggregate GHG emissions. Critics argue that a proper carbon price must take into consideration the possibility of “tipping points,” or extremely bad outcomes—for instance, the possibility that climate change will release methane that is now trapped in the frozen Arctic, accelerating warming, causing the release of more methane, and resulting in a disastrous feedback loop.
Taking these unknown risks into consideration, the SCC might be far lower than is appropriate to truly encompass the risks climate change poses.
Equally controversial is the SCC’s inclusion of global, rather than merely domestic, costs of climate change. The use of global costs reflects a departure from the traditional cost–benefit approach,
since a typical U.S. regulation primarily impacts the domestic United States,
and incorporating extraterritorial costs could be seen as inappropriately accounting for foreign interests in U.S. GHG-mitigation efforts.
Furthermore, including global costs has legal ramifications; Professor Arden Rowell argues that this approach mandates a statute-by-statute analysis to determine whether consideration of global costs is consistent with the relevant statute being administered.
Other commentators have defended the inclusion of global costs on moral grounds.
More fundamentally, however, some commentators oppose the use of any form of cost–benefit analysis in examining the impacts of climate change. Professors Jonathan Masur and Eric Posner, for instance, argue that cost–benefit analysis is inappropriate “whenever a regulation raises principally normative, political, and institutional questions, rather than technical ones.”
Professors Frank Ackerman and Lisa Heinzerling argue that cost–benefit analysis is improper when it would require the translation of “priceless” values—such as lives, health, and the natural environment—into monetary terms.
Despite its many controversies, the SCC has become a staple of the regulatory cost–benefit analysis process and will likely remain so in future administrations.
3. Challenging the Social Cost of Carbon: Zero Zone, Inc. v. Department of Energy. — In 2016, the SCC finally had its day in court. In Zero Zone, Inc. v. United States Department of Energy, industry groups challenged a Department of Energy (DOE) regulation requiring improved energy efficiency standards for commercial refrigeration equipment.
Plaintiffs made two specific challenges: (1) the SCC’s compatibility with the Energy Policy and Conservation Act (EPCA) and (2) the specific application of the SCC in DOE’s cost–benefit analysis used to justify the rule.
As to the first challenge, the plaintiffs claimed that the EPCA did not allow for the consideration of GHGs.
Relying on National Ass’n of Home Builders v. Defenders of Wildlife,
the Seventh Circuit summarily dismissed this argument, finding that the statutory requirement that DOE consider energy conservation demanded that environmental costs, including costs associated with climate change, be taken into consideration.
The court then concluded that DOE had recognized possible shortcomings in the SCC, but had sufficiently demonstrated why the SCC could nonetheless be utilized.
As to the merits of the SCC itself, the petitioners challenged the time scale employed in the SCC, arguing that DOE “arbitrarily considered indirect benefits like carbon reduction over hundreds of years,” while ignoring long-term employment effects.
Plaintiffs further argued that DOE arbitrarily considered global environmental benefits from carbon reduction, while only considering national costs, thereby weighing the cost–benefit analysis in favor of regulation.
Again, the court disposed of the plaintiffs’ claims in summary fashion. The court accepted DOE’s argument that there was no inconsistency in the timeframes applied for costs and benefits, as well as DOE’s choice of discount rates: Because the SCC estimates represent “the full discounted value . . . of emissions reductions occurring in a given year,” a “reduction of carbon over thirty years would have long-term effects on the environment.”
At the same time, the court reasoned, wages bring the labor market into equilibrium so increased costs over thirty years would not have long-term employment effects.
Thus, the court concluded, DOE’s analysis was neither arbitrary nor capricious.
Significantly, the court also rejected the plaintiffs’ challenge based on the SCC’s inclusion of global benefits.
Implicitly accepting DOE’s argument that national energy conservation has global effects that should be reviewed when considering national policy, the court examined whether there were any global costs that DOE ignored in its analysis.
Finding none, the court concluded that inclusion of global benefits was reasonable under the circumstances.
In summary, the Seventh Circuit proceeded in a highly deferential manner in Zero Zone, Inc., upholding a number of the more controversial aspects of the SCC in the cost–benefit regulatory analysis context, including the SCC’s selection of discount rates and its inclusion of global climate costs.
The decision also read the language of the EPCA broadly when it found that Congress intended DOE to consider the SCC in furthering energy conservation,
thus leaving DOE and other federal agencies with significant discretion to utilize the SCC in the cost–benefit context, despite its inherent flaws and uncertainties.
B. The National Environmental Policy Act
President Nixon signed NEPA, what some have deemed the “environmental bill of rights,”
into law on January 1, 1970.
NEPA declares that it is the continuing policy of the government to serve as a trustee of the environment for future generations; to assure a safe and healthful environment; to attain development without degradation; to preserve important historic, cultural, and natural aspects of our heritage; to curb consumption in light of population growth; and to promote the use of renewable resources.
Despite this sweeping substantive language, NEPA’s reach has largely been procedural.
Courts have interpreted NEPA as not mandating any particular environmental outcome, but as requiring that federal agencies conduct an environmental review and consider the environmental consequences of a proposed action.
Section I.B.1 provides an overview of NEPA’s environmental reporting requirements, section I.B.2 discusses GHG emissions reporting under the Act, and section I.B.3 addresses the use of the SCC in NEPA review.
1. NEPA and the Environmental Impact Statement. — The operational part of NEPA is section 102, which lays out reporting and procedural requirements for federal agencies and agents when they undertake actions that have significant environmental impacts.
Section 102 mandates that all agencies of the federal government undertaking “major Federal actions significantly affecting the quality of the human environment” include an environmental impact statement (EIS) detailing: (1) the environmental impact of the proposed action; (2) any unavoidable adverse environmental effects associated with the action; (3) alternatives to the proposed action; (4) the long-term consequences of the action; and (5) any irreversible and irretrievable commitments of resources involved in fulfilling the proposed action.
The EIS requirement serves two purposes: to “ensure that the agency, in reaching its decision, will have available, and will carefully consider, detailed information concerning significant environmental impacts [and] [to] guarantee that the relevant information will be made available to the larger audience that may also play a role in . . . the decisionmaking process.”
In practice, the NEPA review process proceeds as follows. An agency first determines whether the given proposal is one that normally requires an EIS or if some categorical exclusion applies.
If the proposed action falls into neither category, the agency must prepare an environmental assessment (EA) to determine if an EIS is needed.
EAs must include a brief discussion of the need for the project, alternatives to the proposal, and the environmental impacts of the proposed action and considered alternatives.
When an EIS is required, CEQ regulations mandate that the statement be “concise, clear, and to the point,” and that it provide evidence that the agency has made the necessary environmental analysis as required by section 102.
The regulations also demand that agencies explore alternatives to the proposed action, instructing agencies to present the environmental impacts of the proposal and the alternatives in comparative form, to devote substantial treatment to each option considered, and to analyze the choice of no action.
EISs are not required for all federal actions—NEPA review applies only to “major federal actions significantly affecting the quality of the human environment.”
“Major federal actions” include projects, programs, policies, or rules funded or carried out by the federal government and certain private projects that require federal approval.
Moreover, federal funding of a project may necessitate preparation of an EIS; such an inquiry requires examination of the extent of federal involvement.
Determining whether an action will “significantly” affect the environment requires consideration of both the context and intensity of its potential effects.
Relevant to the purpose of this Note, CEQ regulations do not require the use of cost–benefit analysis in EISs.
If a cost–benefit analysis is relied upon, however, it must be included in the EIS.
2. GHG Reporting in Environmental Impact Statements. — Having established the basics of the EIS requirement of NEPA, this section reviews the GHG reporting requirements under the statute. It is now firmly established that EISs must consider the effects of GHGs. The final sea shift came in the Ninth Circuit’s Center for Biological Diversity v. NHTSA decision.
In that case, the Ninth Circuit evaluated the NHTSA’s determination that its proposed Corporate Average Fuel Economy (CAFE) standards for light trucks and SUVs would have no significant impact on the environment and its decision to not evaluate the climate effects of the proposed standard in its NEPA review.
It determined that “[t]he impact of [GHG] emissions on climate change is precisely the kind of cumulative impacts analysis that NEPA requires agencies to conduct.”
Ultimately, the court concluded that the NHTSA’s cursory assumption—that it was “self-evident” that the carbon emissions at stake were not environmentally significant—was supported by neither data nor analysis provided by the Agency.
Accordingly, the Ninth Circuit remanded to the NHTSA to prepare a revised EA, or a complete EIS if necessary, taking GHG effects into consideration.
Under the Obama Administration, the CEQ issued final guidance on GHG reporting under NEPA, which declared that “[c]limate change is a fundamental environmental issue, and its effects fall squarely within NEPA’s purview.”
The guidance recommended that agencies quantify direct and indirect GHG emissions,
and it directed agencies to a variety of quantification tools available in evaluating climate effects.
However, the guidance did not require the quantification of climate effects in all circumstances—it provided that when agencies do not quantify GHG emissions “because tools, methodologies, or data inputs are not reasonably available,” agencies should include a qualitative analysis and explain why the quantification is not reasonably available.
Significant for the purposes of this Note, the guidance did not require cost–benefit analysis in assessing GHG impacts, in conformity with CEQ regulations.
In Executive Order 13,783, President Trump ordered CEQ to rescind this final guidance.
Because federal agencies still have a duty to consider GHG emissions under NEPA,
however, the practical effect of this order on agencies’ NEPA analyses is yet to be seen.
3. The SCC in NEPA Review. — This section examines the cases that have addressed whether federal agencies should utilize the SCC in assessing the effects of GHG emissions under NEPA. Courts have only rarely entertained this question.
When they have, courts have almost universally rejected arguments that the relevant federal agency acted arbitrarily and capriciously by not utilizing the SCC in conducting its environmental review.
Just three weeks prior to the Zero Zone, Inc. decision, which upheld the use of the SCC in the regulatory cost–benefit analysis context,
the D.C. Circuit considered the applicability of the SCC in the NEPA context in EarthReports, Inc. v. FERC.
This case concerned the adequacy of the Federal Energy Regulatory Commission’s (FERC) NEPA analysis for the approval of a liquefied natural gas import-export facility.
Environmental plaintiffs challenged FERC’s approval, arguing that FERC’s EIS did not use the SCC in assessing indirect climate effects, and therefore failed to adequately consider the consequences of the project’s potential GHG emissions.
In its EIS, FERC acknowledged the existence of the SCC tool, but rejected using it in this particular instance, arguing that there was no consensus on the proper discount rate that should be used and citing uncertainties concerning the quantification of incremental climate impacts from GHG emissions.
Ultimately, the court accepted these arguments, concluding that the plaintiffs’ response that FERC “should have ‘present[ed] values calculated with the full range of rates’ or ‘disclosed the limitations of the tool[,]’ belies their contention that the Commission acted unreasonably in finding the tool inadequately accurate to warrant inclusion under NEPA.”
The court then asked whether another quantification metric could have been used
and, after accepting that no such tool existed, the court concluded that the petitioners had provided no compelling reason to doubt FERC’s analysis.
The D.C. Circuit did not deviate from this approach in its recent Sierra Club v. FERC decision.
In that case, environmental plaintiffs challenged FERC’s decision to approve the construction and operation of three natural-gas pipelines, arguing that FERC’s EIS did not consider the downstream GHG emissions that will result from the combustion of the natural gas that the pipelines will transport.
While the court did conclude that FERC must give a quantitative estimate of downstream GHG emissions or specifically explain why it cannot do so,
the court did not require that these emissions be monetized, or that the SCC be used.
Instead, the D.C. Circuit held only that FERC must explain, on remand, why the SCC was not useful in its NEPA review.
In so doing, the court explicitly left open the possibility of adopting the same reasoning employed in EarthReports.
Other courts that have squarely addressed this issue have adopted a similar approach to that of the D.C. Circuit in EarthReports. In WildEarth Guardians v. United States Forest Service, environmental groups challenged the Bureau of Land Management and United States Forest Service’s approval of two large coal mining projects partly located within the Thunder Basin National Grassland.
The U.S. District Court for the District of Wyoming rejected the argument that NEPA required the agencies to monetize the effects of GHG emissions from the project.
The court further added that the uncertainty of the coal leasing program’s effects on climate change meant that quantification was not feasible: “[T]he [climate] impacts of the proposed [coal] leases could not be reliably calculated with precision.”
Recently, the U.S. District Court for the District of New Mexico adopted a similarly deferential approach in a challenge to the NEPA review conducted for a mining plan modification at the El Segundo Mine in New Mexico.
In one significant deviation from this approach, the U.S. District Court for the District of Colorado required the use of the SCC in an EIS for a coal mining project in western Colorado.
In High Country Conservation Advocates v. United States Forest Service, the court found an EIS inadequate when it quantified the benefits of the project, but failed to quantify the costs associated with increased GHG emissions.
In so doing, the court rejected an argument from the U.S. Forest Service that a standard methodology to quantify climate change effects was not presently available, finding “a tool is and was available”—the SCC.
Notably, however, the court did not hold that the Agency would have had to utilize the SCC in all EISs.
The court merely found that the Agency’s justification for not monetizing the costs of the project—that standardized tools to quantify the effects of GHG emissions were unavailable—was inadequate, particularly in light of the fact that the agency had utilized the SCC in its draft EIS.
Subsequent cases have interpreted the High Country Conservation Associates holding narrowly in line with the dominant approach represented by the D.C. Circuit’s opinion in EarthReports. In League of Wilderness Defenders/Blue Mountains Diversity Project v. Connaughton, for instance, environmental groups challenged the U.S. Forest Service’s decision to approve logging of old-growth forests in northeastern Oregon.
The plaintiffs challenged the adequacy of the Forest Service’s EIS, arguing that because the Agency had quantified the benefits associated with the project, it should have also quantified the costs of utilizing the SCC.
The court distinguished the case from High Country Conservation Advocates, reasoning:
Here, the Forest Service did not rely on a tool to provide a quantitative analysis of the cost or benefit of the Project in relation to climate change because “there are a number of different views on the topic and still no clear science as to the effect of forest thinning projects and carbon storage.” Because there was no way to quantify the benefits or costs, the Forest Service did not selectively omit which data to share in the final EIS, as the agency did in High Country.
Consequently, the court approved the Agency’s qualitative assessment of the project’s GHG emissions.
A more recent case from the U.S. District Court of Montana—Montana Environmental Information Center v. United States Office of Surface Mining—however, adopted the partial reasoning advanced later in this Note
and found it arbitrary and capricious for the U.S. Office of Surface Mining and Enforcement (OSME) to not quantify the costs associated with GHG emissions when benefits had been monetized in its NEPA review of a federal mining plan modification.
Notably, however, the court’s holding does not preclude the OSME, on remand, from using some quantification metric other than the SCC, assuming that it provides some justifiable reason for so doing.
In this way, the court’s decision does not necessarily advance the law beyond the Ninth Circuit’s central holding in Center for Biological Diversity v. NHTSA.
In sum, courts have adopted a highly deferential approach in addressing whether federal agencies are required to utilize the SCC in conducting their EISs. In so doing, courts have expressly and implicitly accepted the argument that the SCC is too imprecise and involves too much uncertainty to warrant inclusion in the NEPA review process—despite the fact that the federal government has embraced and the Seventh Circuit has unambiguously blessed the use of the SCC in the regulatory cost–benefit analysis context.
II. The CO2 Monetization Gap
The divergence of approaches in evaluating the effects of GHG emissions in the regulatory cost–benefit and the NEPA-review contexts has resulted in what this Note labels the “CO2 monetization gap.” Because NEPA covers a broader range of federal activities than does the regulatory cost–benefit analysis mandate, federal agencies are not currently required to consider the monetized effects of GHG emissions associated with a slew of federal projects, policies, financing activities, and permitting decisions, which do not go through the rulemaking process but may have significant environmental consequences.
The effect of this lapse in the GHG reporting regime is significant. Since 2009, for instance, Ex-Im has financed seventy fossil-fuel projects, resulting in annual CO2 emissions of 164 million metric tons.
Ex-Im does not utilize the SCC in its environmental reports, despite evidence that such activities come at massive costs to American citizens and the world at large.
This Part explores the consequences of the CO2 monetization gap in greater depth. Section II.A argues that the divergent approaches used in the NEPA and regulatory cost–benefit contexts are jurisprudentially inconsistent and the approach in assessing agencies’ environmental impact statements runs counter to the goals of NEPA. Section II.B utilizes a case study—the financing activities of Ex-Im—to illustrate how the CO2 monetization gap has undermined the information-forcing objectives of NEPA and has contributed to suboptimal decisionmaking.
A. Tension in the Federal Approaches to Analyzing the Effects of GHG Emissions
Divergent approaches in courts’ assessments of regulatory cost–benefit analyses and environmental impact statements under NEPA have created considerable tension in the law with respect to how agencies should analyze the GHG emissions associated with their actions. Section II.A.1 argues that courts’ rejection of the SCC in NEPA review, best exemplified by the D.C. Circuit’s opinion in EarthReports, is jurisprudentially inconsistent with the treatment of climate change in the regulatory cost–benefit context and courts’ handling of uncertainty in other environmental situations. Section II.A.2 then argues that courts’ treatment of the SCC under NEPA is inconsistent with the aims of NEPA and existing NEPA jurisprudence.
1. Inconsistent Approaches in Assessing GHG Emissions. — In both the regulatory cost–benefit and NEPA-review contexts, the federal government is tasked with fundamentally the same duty: to quantify the effects of GHGs in a manner that allows for a meaningful analysis of the merits and demerits of a proposed regulation and government action, respectively. Neither mandate explicitly requires the monetization of environmental consequences. The text of Executive Order 13,563 states that “[w]here appropriate and permitted by law, each agency may consider (and discuss qualitatively) values that are difficult or impossible to quantify.”
Further, CEQ regulations do not require cost–benefit analysis for NEPA review.
It is surprising then that courts have come to strikingly different conclusions as to whether the SCC should be used to conduct environmental reviews of proposed government actions in the regulatory cost–benefit and NEPA-review contexts. In Zero Zone, Inc., the Seventh Circuit dismissed arguments that reliance on the SCC in developing energy efficiency standards for commercial refrigeration units was arbitrary and capricious, finding that the selection of damage factors, discount rates, and its inclusion of global climate costs were reasonable.
Just three weeks before this decision, the D.C. Circuit reached a decision in EarthReports largely at odds with the court’s decision in Zero Zone, Inc. when it accepted FERC’s argument that the SCC is too imprecise and entails too much uncertainty to warrant inclusion in NEPA review.
It is, of course, important to note that the Seventh Circuit’s finding that it was not arbitrary and capricious for DOE to rely upon the SCC in performing its cost–benefit analysis does not logically imply that it would have been arbitrary and capricious for DOE to not consider the SCC in its cost–benefit analysis. Nor does it imply that it would be arbitrary and capricious for an agency to not consider the SCC when evaluating climate effects in other circumstances. An agency, for instance, may have a principled reason why monetization, and therefore utilization of the SCC, is not appropriate in a particular instance, and the Seventh Circuit’s decision in Zero Zone, Inc. does not foreclose that possibility. However, FERC’s rationale in EarthReports, which the court accepted, did not rest on such a reason—instead, it questioned the validity of the SCC altogether by highlighting the range of discount rates available and the inherent uncertainty involved in assigning damage-function values in the monetization process.
This reasoning is, therefore, fundamentally at odds with the Seventh Circuit’s approach in Zero Zone, Inc.
The D.C. Circuit’s approach in EarthReports is also inconsistent with how courts have dealt with uncertainty in other environmental contexts. The court’s concern regarding the unreliability involved in applying the SCC did not address the obvious response that cost–benefit analyses that monetize environmental impacts will always involve these uncertainties, particularly with respect to the discount rates employed.
Despite the inherent uncertainty involved in this process, courts, including the D.C. Circuit, have consistently accepted a reasoned selection of a discount rate or the use of multiple discount rates in cost–benefit analyses involving environmental impacts and, in some instances, courts have even required the use of multiple discount rates in the preparation of EISs.
Thus, the dominant judicial reasoning, as exemplified by EarthReports, is fundamentally at odds with the treatment of uncertainty in environmental cost–benefit analyses more generally.
2. Defying the Aims of NEPA and Existing NEPA Jurisprudence. — The courts’ approach in the NEPA context is also inconsistent with the fundamental aims of NEPA and preexisting jurisprudence. NEPA’s environmental reporting mandate has two main purposes: (1) to ensure that federal actors take into consideration the present and future consequences of their decisions and (2) to meaningfully inform other government actors and the public of a government action’s environmental consequences.
In fulfilling these aims, NEPA does not require that agencies use a specific type of environmental review or analysis,
nor does it require a formal cost–benefit analysis.
However, “[i]f an alternative mode of EIS evaluation is insufficiently detailed to aid the decision-makers in deciding whether to proceed, or to provide the information the public needs to evaluate the project effectively, then the absence of a numerically expressed cost–benefit analysis may be fatal.”
There is good reason to believe that NEPA’s current GHG reporting regime is not sufficiently detailed to meaningfully inform decisionmakers and the public of the environmental consequences at stake when proposed projects will emit large amounts of GHG emissions. Unlike the proposed clear-cutting of a forest or the construction of a hydroelectric dam, a government proposal that would result in a marginal increase in GHG emissions does not immediately elicit tangible conceptions of environmental harm.
Further, given the ubiquitous nature of GHGs and the global and temporal scale of climate change, it is conceptually difficult to appreciate the climate effects of a given project without monetization.
Is a project in the public interest if it will decrease energy costs by one cent per kilowatt-hour for New York residents, but also cause a net increase in emissions of two million tons of CO2 per year? What if the project increases net annual emissions by four million tons of CO2 per year? The current approach, by requiring only a general consideration of GHG emissions in the NEPA context, does not allow for a meaningful or reasoned way to answer such questions.
This critique is particularly relevant to projects and government programs that are justified on economic grounds and the monetary costs associated with GHG emissions are not considered. Courts have recognized that misleading economic assumptions can undermine the purpose of NEPA review since “[t]he use of inflated economic benefits . . . may result in approval of a project that otherwise would not have been approved because of its adverse environmental effects. Similarly, misleading economic assumptions can also defeat the . . . function of an EIS by skewing the public’s evaluation of a project.”
Yet, by wholesale rejecting a requirement to use the SCC in the NEPA-review context, courts have implicitly sanctioned the use of misleading economic assumptions to justify federal projects. As will be discussed at greater length in section II.B, the climate costs associated with some federal programs that fall within the CO2 monetization gap are quite high.
By allowing agencies to ignore these costs, courts have licensed agencies to impermissibly inflate the economic benefits of certain projects, undermining the very purposes of NEPA.
Lastly, the deferential posture courts have adopted in reviewing the use of the SCC in the NEPA context is arguably inconsistent with the typical role of courts in reviewing EISs and EAs. While NEPA does not require that agencies prioritize environmental considerations,
NEPA does require that agencies take a “hard look” at environmental consequences before undertaking major federal actions.
Further, the arbitrary and capricious standard of review does not grant agencies a free pass to ignore environmental risks: “[C]ourts must independently review the record in order to satisfy themselves that the agency has made a reasoned decision based on its evaluation of the evidence.”
The SCC considers many of the indirect effects associated with GHG emissions,
identifying and aggregating environmental risks that a mere reporting of annual GHG emissions or a qualitative assessment of climate effects would not otherwise capture. By allowing agencies to provide only a cursory examination of the climate effects of a proposed action despite the availability of a more nuanced analytical tool, courts have allowed agencies to systematically ignore evidence of environmental risks in violation of this “hard look” requirement.
In short, the courts’ divergence in approaches in the regulatory cost–benefit and NEPA-review contexts has led to a series of legal inconsistencies that courts have yet to reconcile. The rationale used to reject the SCC in the NEPA context is in direct conflict with the Seventh Circuit’s holding in Zero Zone, Inc. Further, this approach clashes with courts’ traditional treatment of uncertainty in other environmental contexts. Lastly, the rejection of the SCC in the NEPA-review setting conflicts with NEPA’s aims of ensuring that public officials meaningfully consider environmental consequences and inform the public of environmental costs associated with federal proposals.
B. The Effects of the CO2 Monetization Gap: Climate Change Disclosures of the Export-Import Bank of the United States
This section examines the practical consequences of the CO2 monetization gap, using Ex-Im’s investment activities as an illustration. Ex-Im is subject to NEPA,
but is not subject to the Executive Order 13,563 cost–benefit mandate.
Accordingly, the Bank does not use the SCC to analyze the climate effects of its activities. However, as this Note will show, Ex-Im’s investment activities have profound environmental consequences, resulting in great expense to the American public
and undermining the United States’ ability to address climate change. Section II.B.1 provides an introduction to Ex-Im and its role in financing carbon-intensive projects abroad. Section II.B.2 then examines the adequacy of Ex-Im’s GHG disclosures. Finally, section II.B.3 applies the SCC to Ex-Im’s investment activities.
1. An Introduction to the Export-Import Bank of the United States. — Ex-Im is an independent federal agency with a mission of “supporting American jobs by facilitating the export of U.S. goods and services.”
The Bank supports projects that the private sector would otherwise be unwilling to finance by taking on relatively risky ventures, backed by the credit of the United States.
Ex-Im supports such projects through the provision of “export credit insurance, working capital guarantees, and guarantees of commercial loans to foreign buyers.”
Ex-Im’s operations have profound environmental consequences. During Obama’s presidency, Ex-Im provided nearly $34 billion in low-interest loans and financing for projects that will emit 164 million metric tons of carbon dioxide per year.
In 2011 alone, the Bank authorized $4.9 billion in financing for fossil-fuel power, exploration, production, and transportation projects, which will produce sixty-eight million metric tons of CO2 per year.
Though it was initially unclear whether NEPA applies to the activities of Ex-Im, the Bank is currently operating as if it is bound by NEPA’s environmental-reporting requirements.
In Friends of the Earth v. Watson,
environmental groups alleged that the Overseas Private Investment Corporation (OPIC)
and Ex-Im had financially supported projects contributing to climate change without complying with NEPA.
On motion for summary judgment, Judge White concluded that OPIC is subject to NEPA because the record did not evince a congressional intent for OPIC’s statute to displace NEPA.
The court, however, did not decide whether the particular projects at issue required environmental impact statements because it could not conclude as a matter of law that they were “major federal action[s].”
Ultimately, the parties settled the case, with Ex-Im agreeing to adopt climate change reporting measures that broadly comply with NEPA’s mandates.
The Bank agreed to provide, “for all financing applications submitted . . . to the Ex-Im Bank Board of Directors (‘Board’), information about carbon dioxide (‘CO2’) emissions as part of and for consideration in conjunction with Ex-Im Bank’s decision whether or not to approve transactions related to fossil fuel projects.”
In addition, the Bank must state whether NEPA review is necessary for each project and provide a rationale for such a determination at least thirty days in advance of any decision by the Board.
The settlement also requires that the Bank post environmental review documents and provide annual CO2 emissions estimates.
2. Export-Import Bank Climate Disclosures Under NEPA. — This section examines the adequacy of Ex-Im’s climate change disclosures,
considering NEPA’s twin aims of ensuring agencies carefully consider significant environmental impacts and provide relevant information to the public.
The analysis of several of Ex-Im’s climate disclosures reveals the practical consequences of the CO2 monetization gap and the current approach’s shortcomings in fulfilling the information-forcing purpose of NEPA.
An examination of Ex-Im’s ESIA for a liquefied natural gas (LNG) production–export facility in Queensland, Australia is illuminating.
The Curtis Queensland LNG Project is one of Australia’s largest capital investments and its ESIA incorporates a number of economic benefits associated with the project, including the creation of more than 4,000 jobs during construction, 1,000 permanent jobs upon completion, and $32 billion in economic growth.
The ESIA also reports that the project will emit approximately ninety-five million tons of carbon dioxide equivalent (CO2e) over the course of its lifetime, but the report includes no economic analysis of the consequences of these GHG emissions.
Additionally, the CO2e figure does not factor downstream emissions resulting from the subsequent consumption of the liquefied natural gas
—emissions that could be far more significant than those associated with the construction and actual operation of the facility.
An ESIA for a proposed LNG extraction, refinement, and transportation complex in Cabo Delgado, Mozambique similarly extolls the economic benefits of the project while only cursorily considering its projected GHG emissions. The report describes the project as representing an investment of up to $25 to 30 billion—“potentially the largest investment project in Mozambique to date.”
Economic benefits include “a significant increase in the GDP” and increased government revenue through royalty, tax, and equity gas rights, which could “improve the health, education and quality of life of the people of Mozambique.”
At the same time, the report only nominally considers the climate effects of the project. The report indicates that the project will emit approximately thirteen million tons of carbon dioxide per year during full operation in 2022, increasing Mozambique’s national GHG emissions by more than nine percent.
The report does not consider the environmental ramifications of the proposal’s GHG emissions in global or monetary terms,
nor does it discuss the downstream effects of increased fossil-fuel consumption resulting from the project.
The reporting of GHG emissions in this way has significant consequences for the American public, host countries, and for the global community at large. While the development goals of the Queensland and Mozambique projects are laudable, the decision to not monetize GHG emissions associated with these enterprises is troubling, especially considering Mozambique’s particular “vulnerability to climate related events”
and climate change’s predicted impacts on Queensland’s coastal communities.
The economic benefits of these projects must be meaningfully compared with the corresponding climate costs in order to truly analyze development effects and assess whether a project will have net positive economic impacts. Moreover, without utilizing the SCC, these reports provide no meaningful way for the American public to assess whether the export benefits that accrue from these ventures are worth their corresponding GHG emissions.
3. Applying the SCC to the Activities of the Export-Import Bank. — This section explores the consequences of the CO2 monetization gap as applied more generally to Ex-Im’s activities. The application of the SCC is particularly appropriate in this context because the Bank’s activities are justified in economic terms.
Further, the bulk of the annual emissions that result from the Bank’s activities generally stems from a small number of very large, carbon-intensive projects.
Yet, the Bank’s annual reports only cursorily consider annual GHG emissions, and individual project environmental assessments do not use the SCC.
In 2011, Ex-Im estimates that it supported $41 billion in American exports and 290,000 American jobs at no expense to the American taxpayer.
That same year, however, Ex-Im generated $4.9 billion in U.S. exports associated with fossil-fuel projects projected to produce sixty-eight million tons of CO2 per year.
Applying the SCC and employing a 3% discount rate, these emissions come at an annual cost of almost $2.5 billion in 2015 dollars.
Making the modest assumption of a twenty-year lifespan for these projects, they come at a cost of $56.3 billion,
eclipsing the value of both the exports generated by these projects and all Ex-Im activities in 2011. Because this estimate does not include all the downstream climate effects associated with these projects,
this figure likely far underrepresents the true costs at stake.
This analysis indicates that Ex-Im’s current GHG reporting approach does not adequately fulfill NEPA’s goal of ensuring that decisionmakers meaningfully consider the environmental consequences of the Bank’s financing activities.
Ex-Im’s fossil-fuel financing activities come at an extreme cost to American citizens, suggesting that welfare would be improved by shifting resources toward less carbon-intensive investments. Yet, Ex-Im continues to invest heavily in fossil-fuel projects abroad.
Moreover, there is no evidence that the settlement agreement reached in Friends of the Earth, requiring reporting of GHG emissions and compliance with NEPA,
has resulted in improved decisionmaking.
In 2008 and 2009, Ex-Im estimated that its financing activities would produce 5.1 and 17.9 million metric tons of CO2 per year, respectively.
In 2010, after the settlement agreement took effect, Ex-Im projected that its financing activities for the year would produce 20.46 million metric tons of CO2 annually.
Carbon-intensive investment continued to rise in subsequent years: In 2011, 2012, and 2013, Ex-Im predicted its foreign projects would emit 68, 22.9, and 31.54 million metric tons of CO2 per year, respectively.
Far from fulfilling the twin aims of NEPA, these toothless climate disclosures reveal that the CO2 monetization gap has resulted in a climate reporting regime that fails to adequately inform the public or to ensure that agency officials sufficiently consider the costs associated with GHG emissions. In this way, the CO2 monetization gap has contributed to suboptimal decisionmaking, threatening the United States’ ability to address global climate change.
III. Fixing the CO2 Monetization Gap
After considering the CO2 monetization gap and its consequences in Part II, this Part offers a way forward. As a threshold matter, the relevance of the social cost of carbon must be addressed given the Trump Administration’s open hostility toward the tool and to environmental regulation more generally.
Indeed, on March 28, 2017, President Trump issued an executive order disbanding the SCC interagency working group, ordering the withdrawal of the metric’s technical support documents, and directing agencies to calculate GHG emissions in accordance with OMB Circular A-4—a George W. Bush-era Office of Management and Budget guidance document.
Still, the executive order did not ring the death knell for the SCC, and there are limits to the Trump Administration’s ability to rescind the tool completely. For one, agencies remain under a legal obligation to consider climate change in the regulatory cost–benefit analysis context in accordance with the Ninth Circuit’s decision in Center for Biological Diversity v. NHTSA.
Further, the Supreme Court has embraced a presumption that environmental statutes require the consideration of regulatory costs and benefits,
including ancillary costs and benefits, which presumably include costs arising from GHGs.
Therefore, the wholesale rejection of climate considerations in the regulatory cost–benefit context seems contrary to law, at least for now.
While the executive order’s directive that agencies calculate costs associated with GHG emissions in conformity with OMB Circular A-4 does suggest that agencies should assign a lower cost to GHG emissions,
the Trump Administration has yet to issue guidance as to what number agencies should assign GHG emissions in their cost–benefit analyses.
In the absence of this guidance, agencies will have to arrive at a number on their own,
and any figure assigned to GHG emissions will have to be defended under an arbitrary and capricious standard of review.
Given the recent cases upholding the use of the SCC, agencies may face legal pressure to not deviate significantly from the status quo in the absence of formal guidance.
More fundamentally, even if the Trump Administration successfully depresses the price of the SCC, nothing prevents a future administration from using the SCC as it was applied under the Obama Administration, and states remain free to integrate the federal SCC into state programs.
With these considerations in mind, this Part focuses on the strategies a future administration may utilize to integrate the SCC into the NEPA review process and initiatives states should consider in addressing the CO2 monetization gap. This Part is organized as follows: Section III.A offers a brief normative argument in support of integrating the SCC into the NEPA review process as a necessary means of faithfully fulfilling the purposes of NEPA. Section III.B discusses various legal strategies a future administration may take to integrate the SCC into the NEPA review process. Finally, section III.C discusses actions states may take to mitigate the negative consequences of the CO2 monetization gap within their own jurisdictions.
A. In Support of Integrating the SCC into NEPA Review
This section provides a normative argument in favor of the monetization of GHG emissions in NEPA-review analyses, keeping in mind the twin aims of NEPA.
While a comprehensive discussion of the merits and demerits of cost–benefit analysis is beyond the scope of this Note, a brief overview of these arguments is useful here.
Professors Frank Ackerman and Lisa Heinzerling argue that many of our most important health, safety, and environmental values are priceless and cannot adequately be expressed in dollar terms.
As they write, “The imperatives of protecting human life, health, and the natural world around us, and ensuring equitable treatment of rich and poor, and of present and future generations, are not sold in markets and cannot be assigned meaningful prices.”
While some of the benefits associated with protecting life, health, and nature can be assigned a price, Ackerman and Heinzerling argue that doing so will never fully reflect “the full strength of our impulse to protect” these values.
At the same time, cost estimates of regulations are relatively complete, with the result that cost–benefit analyses skew in favor of deregulation.
Ackerman and Heinzerling’s critique of cost–benefit analysis is germane in assessing the utility of the SCC as a tool for crafting social policy. First, the discount rates employed are contentious
and inevitably involve assigning a value to the well-being of future generations. Second, the damage functions
utilized in the SCC are, likewise, controversial
and undervalue important costs associated with climate change, such as reduced productivity in the agriculture, forestry, and fishery sectors, diminished ecosystem services, and harms to human life and health, not to mention the “priceless” values discussed above.
Despite these shortcomings, this Note proposes that the SCC should be integrated into the NEPA review process. As a preliminary matter, the use of cost–benefit analysis in environmental decisionmaking is well established and is unlikely to disappear anytime soon.
Accordingly, the decision to not monetize GHG emissions is akin to assigning them a value of zero in the regulatory cost–benefit analysis context, resulting in the undervaluation of climate change in the decisionmaking process.
Moreover, as Professor Richard Revesz points out, there is nothing inherent about cost–benefit analysis that results in the undervaluation of human life, health, and environmental considerations; such values are undervalued when they are underpriced—however, “[t]he benefits of saving lives, preserving nature for future generations, and avoiding environmental catastrophe, [when] properly calculated, will often outweigh the short-term costs of regulation.”
Integration of the SCC into NEPA review also serves to best fulfill NEPA’s twin aims of ensuring that agencies take into consideration the present and future consequences of their decisions and of apprising the public of the environmental consequences of federal actions.
As to the first aim, assigning a value to GHG emissions associated with a project removes, or at least reduces, possible bias in decisionmaking for activities that fall within the CO2 monetization gap.
Courts have held that environmental analyses that undervalue environmental costs or artificially inflate economic benefits are inherently misleading and in conflict with the very purposes of NEPA review.
By assigning a positive value to the cost of GHG emissions, integrating the SCC into NEPA alleviates this systemic bias, which currently favors development and carbon-intensive projects.
With regard to NEPA’s second function, translating the effects of GHG emissions into tangible terms strengthens federal actors’ ability to meaningfully inform the public and other government actors of the environmental impacts of a proposed project.
Because of the complexity, scale, and intangibility of climate change, the true cost of a marginal increase in GHG emissions can be difficult to appreciate.
By expressing these effects in economic terms, integration of the SCC into NEPA ensures that the public is given a meaningful opportunity to know the consequences of carbon-intensive federal activities, such as Ex-Im’s fossil-fuel financing initiatives.
An informed public, in turn, helps keep federal agencies accountable, increasing the likelihood that government actions are undertaken in the public interest.
B. Potential Strategies to Integrate the SCC into NEPA via Executive Action
Having argued that integration of the SCC into NEPA is necessary to fulfill the primary aims of NEPA, this section examines possible strategies a future administration might take to integrate the SCC into NEPA to address the CO2 monetization gap. Section III.B.1 argues that integration of the SCC into NEPA review is legally feasible via CEQ regulation. Section III.B.2 then examines the plausibility of incorporating the SCC into NEPA review via executive order.
1. Integrating the SCC into NEPA via CEQ Regulation. — This section examines the legal feasibility of integrating the SCC into NEPA via CEQ regulation. As will be shown, this approach is likely to survive judicial scrutiny. This section first examines whether a CEQ regulation integrating the SCC into NEPA review would be a permissible construction of the NEPA statute and then considers whether such a regulation would survive arbitrary and capricious review.
In examining whether CEQ could integrate the SCC into NEPA via regulation, it must first be determined whether such a regulation would constitute a permissible construction of the NEPA statute. Typically, an agency’s construction of the statute it administers is subject to Chevron deference.
However, the fundamental logic guiding the Chevron framework is inapplicable here because Congress did not delegate authority to CEQ to issue regulations directing how agencies must conduct NEPA analyses.
Indeed, NEPA’s statutory text does not give CEQ the authority to issue regulations regarding NEPA analyses, and, at the time of NEPA’s promulgation, CEQ guidelines were understood to be merely advisory in nature.
Instead, CEQ’s authority to issue regulations derives from the executive branch—-President Carter, through executive order, directed that CEQ “‘[i]ssue regulations to Federal agencies for the implementation of the procedural provisions’ of NEPA.”
However, the Supreme Court has reiterated that, while not technically binding, CEQ regulations are entitled to “substantial deference.”
Ordinarily, mere Skidmore deference would apply here since Chevron is inapplicable,
but in Robertson v. Methow Valley Citizens Council,
the Supreme Court concluded otherwise. In considering the controlling weight of a new CEQ regulation that eliminated a requirement that agencies conduct worst-case analyses in preparing EISs, the Court held that the new regulation should be afforded “substantial deference” because there was “good reason for the change” and “the amendment was designed to better serve the twin functions of an EIS.”
As already discussed, there is good reason to integrate the SCC into the NEPA review process—there is evidence that the current GHG reporting regime has failed to fulfill the information-forcing purpose of NEPA, resulting in suboptimal environmental decisionmaking.
Moreover, integrating the SCC into NEPA review would best fulfill the twin aims of NEPA, as discussed at length in section III.A.
Accordingly, incorporation of the SCC into NEPA review would likely survive a challenge based upon CEQ’s construction of NEPA’s text and would be afforded “substantial deference.”
Further bolstering this argument, NEPA’s text seems to permit agencies to utilize cost–benefit analysis in preparing EISs.
In Entergy Corp. v. Riverkeeper, Inc., the Supreme Court clarified that it was permissible for an agency to utilize cost–benefit analysis when the relevant statutory provision does not explicitly preclude the application of cost–benefit analysis,
unless the statutory silence is “best interpreted as limiting agency discretion.”
Nothing in the statutory text of NEPA precludes the consideration of costs in the preparation of EISs,
and current CEQ regulations and CEQ guidance explicitly consider the application of cost–benefit analysis in NEPA review.
Moreover, courts have consistently upheld the use of cost–benefit analysis in NEPA review so long as the relationship between quantified and unquantified environmental costs and benefits is discussed.
Early cases even characterize the NEPA-review process and the mandate to consider alternative courses of action as a form of cost–benefit analysis.
Thus, the statute’s silence as to cost–benefit analysis is best interpreted as permitting consideration of monetary costs, such as those considered within the SCC.
Even after considering whether NEPA’s text permits the application of monetized environmental costs in the NEPA-review context, the inclusion of GHG emissions in this analysis may be challenged as arbitrary and capricious under the Administrative Procedure Act (APA).
The Seventh Circuit’s analysis in Zero Zone, Inc. is instructive here. In that case, the court considered the Energy Policy and Conservation Act’s mandate that DOE consider “the need for national energy . . . conservation.”
The court concluded that “[t]o determine whether an energy conservation measure is appropriate under a cost–benefit analysis, the expected reduction in environmental costs needs to be taken into account . . . . Congress intended that DOE have the authority under the EPCA to consider the reduction in SCC.”
Certainly if Congress’s mandate to consider energy conservation under the EPCA is broad enough to include costs resulting from GHG emissions, NEPA’s requirement that agencies examine “environmental impact[s]” and “adverse environmental effects” encompasses the damages caused by GHG emissions.
Further, courts have interpreted NEPA’s language as requiring agencies to consider GHG emissions.
Both of these considerations strongly support the conclusion that monetized effects of GHG emissions are a permissible factor for an agency to consider when conducting its NEPA-review analysis.
A more credible, though surmountable, legal obstacle to integrating the SCC into the NEPA review process is the SCC’s consideration of the global effects of GHG emissions.
As Professor Rowell points out, “[E]ven where a statute is reasonably read to permit cost–benefit analysis, it might not be reasonably read to permit a globally scoped cost–benefit analysis.”
Moreover, the Supreme Court has reiterated a presumption against the extraterritorial reach of statutes, which may create the inference that NEPA review should implicate only domestic environmental concerns.
The Seventh Circuit’s decision in Zero Zone, Inc., however, suggests that courts may take a highly deferential approach when analyzing whether a statute allows for the consideration of global, rather than domestic, costs and benefits associated with GHG emissions. In that case, the court accepted DOE’s argument that reducing GHGs provides global benefits that have no corresponding global costs that could have been included in the analysis and concluded, therefore, that DOE did not act arbitrarily and capriciously.
Moreover, NEPA expressly contemplates that agencies consider global environmental consequences, requiring the federal government to “recognize the worldwide and long-range character of environmental problems and, where consistent with the foreign policy of the United States, lend appropriate support to initiatives, resolutions, and programs designed to maximize international cooperation in anticipating and preventing a decline in the quality of mankind’s world environment.”
As to the presumption against extraterritoriality, the D.C. Circuit has made it clear that NEPA applies to activities over which the United States has sovereignty or that affect the global commons.
Courts have interpreted this holding generally to include domestic activities having international effects, so long as legal application of the statute does not infringe on another nation’s sovereignty.
There is a compelling case to be made that global climate considerations fit within this category of activities. First, the atmosphere, like Antarctica or the high seas, is a “global commons” over which no nation has sovereignty.
More fundamentally, the application of the SCC to NEPA would not implicate the sticky practical considerations that motivate the presumption against extraterritoriality—i.e., to protect against clashes between U.S. laws and those of other nations and to avoid “international discord”
—because application of the SCC to the NEPA-review process does not require applying U.S. law to foreign activities; it merely requires that certain global environmental considerations be factored into the decisionmaking process for domestic federal activities.
Accordingly, for the aforementioned reasons, integrating the SCC into the NEPA-review process via CEQ regulation appears to be a permissible application of the NEPA statute and would likely withstand judicial scrutiny.
2. Integrating the SCC into NEPA via Executive Order. — This section provides a broad overview of the legal feasibility of implementing the SCC into NEPA via executive order. Executive orders under NEPA are not subject to the APA.
Accordingly, an executive could direct agencies to utilize the SCC in their NEPA analyses without going through notice and comment procedures or facing judicial scrutiny under that statute.
Still, executive orders are reviewable for constitutionality and, in order to have the force of law, their authority must derive from congressional delegation or from the Constitution.
To defend the constitutionality of an executive order directing agencies to apply the SCC in NEPA review, therefore, a future administration must find support in the text of a statute or the Constitution.
As to the congressional authority for such an executive order, a future administration could look to the language of NEPA and argue that it gives the Executive the authority to mandate specific reporting requirements in order to fulfill NEPA’s provisions. Specifically, section 102(B) requires that agencies “identify and develop methods and procedures, in consultation with the Council on Environmental Quality.”
Given that Congress created the CEQ in the Executive Office of the President and the Council members serve at the pleasure of the President,
an administration would have a forceful claim that Congress implicitly granted the executive branch the authority to enforce the terms of NEPA.
A future administration could also argue that its authority to issue such an executive order stems from the President’s constitutional obligation to “take care” that the laws are faithfully executed.
In so doing, an administration could argue that the faithful execution of NEPA’s mandate that agencies assess “the environmental impact[s] of [a] proposed action” and meaningfully consider “alternatives to [a] proposed action” requires use of the SCC in the NEPA process.
In practice, executive orders passed under NEPA invoke both constitutional and statutory sources of authority.
The legality of implementing the SCC into NEPA through executive order is supported by the extensive use of executive orders in the NEPA context throughout the statute’s history. Starting in 1977, presidents have issued at least forty-two executive orders related to NEPA.
This history provides strong precedent for implementing substantive reporting mandates via executive order. President Clinton’s Executive Order 13,186, for instance, requires federal agencies conducting NEPA environmental analyses to consider an action’s effects on migratory birds.
In another executive order, President Clinton directed that environmental reviews be conducted for trade agreements, requiring that they include “[a]s appropriate and prudent, . . . global and transboundary impacts.”
In sum, implementing the SCC into NEPA via executive order is a viable legal approach. Proceeding in this manner has two distinct advantages. First, through executive order, an executive can integrate the SCC into NEPA through a mere stroke of the pen.
Second, an administration could more easily tailor the scope of an executive order by targeting only specific federal agencies or activities.
Still, the use of executive orders to implement substantive policy measures has been heavily criticized and is a frequent target of partisan vitriol.
Moreover, the formal rulemaking process serves important public-participation and accountability purposes.
Accordingly, a future administration should favor proceeding through formal CEQ rulemaking, though implementation through executive order remains a feasible legal alternative.
C. Integrating the Social Cost of Carbon into State Environmental Programs
Significant opportunities exist for states and cities to integrate the SCC into state and local environmental programs. This section provides a brief overview of some methods states and municipalities may consider to address the CO2 monetization gap. A number of states have already elected to utilize the federal SCC in circumstances beyond the regulatory cost–benefit context. For instance, Illinois recently adopted the Future Energy Jobs Act, which subsidizes nuclear energy production for avoided economic damages based on the federal SCC.
A similar Zero-Emission Credit program subsidy based on the federal SCC exists in New York as well.
Minnesota has used the federal SCC to credit electricity customers who generate excess energy from residential solar panels since 2014.
States and cities may utilize the SCC by integrating the tool into state and city environmental-impact-assessment statutes. Currently, sixteen states, the District of Columbia, New York City, and Puerto Rico have adopted state and local environmental reporting laws—known as “little NEPAs”—that operate analogously to NEPA.
Nothing in NEPA prevents states from incorporating more stringent reporting requirements in their analogous environmental-impact-assessment statutes. New York State’s State Environmental Quality Review Act (SEQR) has incorporated a number of provisions that depart in significant ways from the requirements of NEPA.
Under NEPA, for instance, an EIS is required when an action “will cause an adverse environmental impact”; under SEQR, the threshold is whether an action “may cause an adverse environmental impact.”
Similarly, when the CEQ amended NEPA’s worst-case-analysis requirement to require only a discussion of “reasonably foreseeable significant adverse impacts,”
NEPAs retained the worst-case-analysis mandate. New York City’s City Environmental Quality Review (CEQR) statute, for instance, requires agencies to include a reasonable worst-case-development scenario in their analyses.
In a similar fashion, city and states could require use of the SCC in assessing GHG emissions in environmental assessments and impact statements.
Admittedly, this approach toward addressing the CO2 monetization gap has significant limitations. First, federal agencies are not subject to the mandates of state and municipal reporting requirements.
Thus, integrating the SCC into the reporting requirements of little NEPAs will not capture certain actions of federal agencies and programs, such as the fossil-fuel financing activities of Ex-Im or the federal coal-leasing program. Second, generally, if an action is subject to the EIS requirements of NEPA, state and local agencies are not required to prepare a separate EIS under the relevant little NEPA.
Despite these limitations, integrating the SCC into little NEPAs could significantly improve environmental reporting at the state and local levels where agencies do not currently contemplate the monetary effects of climate change.
Cooperative-federalism schemes in the Clean Air Act provide additional opportunities for states to address the CO2 monetization gap. Section 110 of the Clean Air Act, for example, requires states to submit and adopt implementation plans (SIPs) ensuring that the state will attain national air quality standards.
While the enforcement, monitoring, and permitting requirements are firm, states are given considerable flexibility in the specific measures included in SIPs.
Indeed, so long as a SIP provides for timely attainment and maintenance of air quality standards, EPA must approve it.
Consequently, a state could require parties to submit an environmental analysis that considers the SCC before it grants new or renewed Clean Air Act permits for projects or facilities.
In addition, a state could, as a matter of state law, adopt procedures such that state officials apply the SCC to SIP proposals before they are submitted to EPA for approval.
Additionally, opportunities exist for states to apply the SCC to the Prevention of Significant Deterioration permitting-approval process.
For instance, step three of the top-down Best Available Control Technology process requires a reviewing state agency to consider environmental and energy impacts when ranking control technologies by effectiveness.
States could require that state agencies apply the SCC to projected GHG emissions of a proposed project or modification.
In such ways, states can play an integral role in minimizing the effects of the CO2 monetization gap irrespective of the inaction at the federal level.
The divergence of approaches with respect to how federal agencies consider the effects of GHG emissions in the regulatory cost–benefit and NEPA contexts has led to what this Note labels the CO2 monetization gap—those federal activities that are subject to NEPA, but not the regulatory cost–benefit analysis mandate, and thus do not use the SCC in examining GHG emissions. The rejection of the SCC under NEPA has led to a subversion of the information-forcing purposes of NEPA, which in turn has contributed to poor decisionmaking in carbon-intensive federal programs, as exemplified by Ex-Im’s foreign financing activities. In order to ensure that agencies consider the climate effects of their actions and that the public has a meaningful opportunity to engage in the environmental-decisionmaking process, the SCC must be integrated into NEPA review through CEQ regulation or executive order. In the interim, significant opportunities exist for states to minimize the negative consequences of the CO2 monetization gap through state programs and existing cooperative-federalism schemes. Only in this way will NEPA’s environmental reporting mandate better serve the lofty objectives declared by Congress in passing the Act—“to create and maintain conditions under which man and nature can exist in productive harmony, and fulfill the social, economic, and other requirements of present and future generations of Americans.”