Fifth Circuit Permits the Use of the Social Cost of Carbon, For Now

While the Fifth Circuit’s ruling permits the Biden administration to continue to develop the SCC, questions remain regarding the SCC’s implementation, scope and permissible uses.

The Social Cost of Carbon, Explained

The SCC is an attempt by the federal government to estimate the dollar cost of each additional ton of carbon emissions associated with a specific agency action. Beginning with the Reagan administration, the White House has directed federal agencies to perform cost-benefit analyses when promulgating many different types of new agency rules, regulations or actions.

First promulgated by the Obama administration in 2010, the SCC offers a tool to federal agencies assessing the costs and benefits of their decisions to help quantify the climate change-related impacts of a proposed course of action into the traditional cost-benefit analysis process.

The Obama administration convened multiple interagency working groups to develop SCC values for agencies to use and set the SCC at around $43 a ton. The Trump administration substantially lowered the SCC values, choosing only to consider emissions in its modeling that originated from the United States and estimating the SCC to be between $3 – $5 per ton.

Executive Order Issued, States Sue Immediately

Soon after taking office, President Biden signed Executive Order (E.O.) 13990, directing a new interagency working group to promulgate updated SCC estimates. In February of 2021, the working group released interim estimates that set the SCC at $51 per ton, relying on similar technical assumptions as the Obama administration.

In April of 2021, plaintiffs filed suit in the U.S. District Court for the Western District of Louisiana, claiming that E.O. 13990 violated the Administrative Procedures Act (APA). On February 11, 2022, the District Court sided with the plaintiffs, blocking the federal government from using the SCC in any agency decision-making. The federal government then appealed to the Fifth Circuit.

The plaintiffs in Louisiana had more success than another group of states, led by Missouri, who chose to challenge the SCC by filing suit in the U.S. District Court for the Eastern District of Missouri. The District Court dismissed that challenge on standing and related grounds, and the United States Court of Appeals for the Eighth Circuit affirmed.

Lack of Standing: The Waiting is the Hardest Part

The Fifth Circuit, mirroring the reasoning of the Eighth Circuit, held that the plaintiffs lacked standing to sue the federal government over the proposed use of the SCC. The court based this finding on the bedrock legal principle that to have standing, a plaintiff’s injury must be “actual or imminent, not conjectural or hypothetical.” 

The court reasoned that in this case, the plaintiffs had only raised allegations of potential future injuries from the use of the SCC because E.O. 13990 merely permits, and does not require, federal agencies to use the SCC. Agencies may consider the SCC in evaluating federal rules, regulations and actions, but there is no guarantee that an agency will use the SCC in a way that harms the plaintiffs. The court concluded that the hypothetical possibility of a harmful regulation cannot meet the “actual or imminent” legal standard. 

While the Fifth Circuit found that plaintiffs did not have standing at present, the ruling does not foreclose a challenge once federal agencies resume using the SCC in decision-making. The decision simply asks that states or other interested parties simply wait for an agency to explain its use of the SCC before filing suit.

EPA Poised to Substantially Increase the SCC

Future challenges to the SCC could be bolstered by the Biden administration’s attempt to substantially increase the SCC figures. In September of 2022, the EPA issued a supplemental document that proposed increasing the SCC dollar figure from $51 per metric ton of CO2 to $190. 

Federal courts have not shied away from rejecting the federal government’s choices and methods related to considering costs in agency decision-making. Most notably, in Michigan v. EPA, the Supreme Court invalidated an EPA rule regulating power plants because the agency had failed to consider costs. Writing for a 5 – 4 majority, Justice Scalia noted that the Clean Air Act required that the EPA “must consider cost — including, most importantly, cost of compliance — before deciding whether regulation is appropriate and necessary.” (See Michigan v. E.P.A., 576 U.S. 743 (2015).)

Whether federal courts will ultimately reject future agency actions that rely on the SCC remains to be seen. The court’s ruling in Michigan, however, signals that an agency’s justification that the benefits of a proposed action, derived in part from increased SCC values, outweigh the costs of compliance may be greeted with skepticism because while the SCC is permitted by the executive order, factoring in compliance costs is often required by statute.

The Biden administration has already resumed consideration of the SCC in agency decision-making, potentially teeing up new legal challenges on this exact question. The EPA referenced the SCC in describing the potential benefits associated with its newly proposed medium and light-duty vehicle emission standards, which the agency projects could lead to 60% of new passenger vehicles in the United States being electric by 2030. Auto industry groups have questioned the newly proposed standards, citing high costs of compliance and potential infeasibility.

Conclusion

While the Fifth Circuit’s ruling permits the agency to use and further develop the SCC, questions remain about its implementation. Pillsbury attorneys will continue to monitor the consequences of this decision both in the environmental law arena and as they spread to other agencies and subject matters.

The authors would like to thank law clerk Steve Brenner for his contributions to this client alert.