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The Next Economy
US Court Approves Social Carbon Price; Canada, Mexico to Test Their Own Carbon Pricing

A unanimous decision from the U.S. Court of Appeals has upheld the government’s right to use a social carbon price to inform policymaking. The verdict rejected an industry-backed litigation that challenged the Department of Energy (DOE)’s use of a $36/metric ton estimated social cost of carbon (SCC) in its decision-making on the premise that the figure is not based on “real-world” data. The federal court determined that being “limited or imperfect” is not a reason to dismiss the pricing model, saying that the “DOE’s determination of SCC was neither arbitrary nor capricious.”

“This is an exciting development, for a federal court to confirm that they can rely on the social cost of carbon,” Sue Reid, vice president of climate and energy programmes at investor-backed advocacy body Ceres, told Responsible Investor. She described the decision as having “enormous implications” and being “a significant move towards comprehensively putting a price on carbon.”

This was the first time a court has considered the legality of the Obama administration’s accounting of the costs of greenhouse gas emissions. All three judges were Republican appointees.

The case specifically considered new energy efficiency rules for commercial refrigeration equipment. The trade association Air-Conditioning, Heating & Refrigeration Institute (AHRI) and Wisconsin-based Zero Zone, Inc. petitioned for a court review shortly after the Obama administration implemented the SCC accounting rule in 2014, claiming that the rules were unfair and that the DOE had not followed the proper protocols in adopting the SCC. The Chicago-based U.S. Court of Appeals for the Seventh Circuit, however, ruled that the DOE “acted within its authority and did not violate any regulatory or statutory provisions,” and that a pricing model would only be remanded if it “bears no rational relationship to the reality it purports to represent or if the agency fails to provide a full analytical defense.”

The social cost of carbon was formed by a working group of federal agencies, with a last revised estimate of $36 per metric ton of carbon dioxide in 2015. That cost will rise to $50 a metric ton in 2030 and $69 a metric ton in 2050. Both sides of the climate change debate have criticised the model, with some claiming it is too low an estimate. For instance, climate economist Lord Stern puts the cost closer to $200.

“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,” Reid explained. She suggests that it could result in improved opportunities in renewables investment and energy efficiency programs, while sending a negative signal to investors buying into high-carbon opportunities.

Meanwhile, the neighbors to both the north and south are considering carbon pricing schemes of their own. Canada’s Prime Minister Justin Trudeau intends to unveil a national program this fall that will require big polluters to pay for their carbon emissions, and Mexico will launch a year-long trial of its cap-and-trade program in November.

“We’re going to make sure there is a strong price on carbon right across the country and we’re hoping that the provinces are going to be able to do that in a way for themselves,” Trudeau said in a TV interview with CBC.

Four of Canada’s ten provinces either already have a carbon pricing scheme in place, or are in the process of introducing one. Not only are there concerns about a national carbon price or tax clashing with the regional jurisdictions’ schemes that are already in place, but some regions without them would rather continue to live without. The Atlantic provinces, for example, already have high electricity costs and are looking into alternatives to a carbon tax in order to reduce energy consumption and carbon emissions. Canada’s three territories – its Northernmost communities – buy many goods from jurisdictions such as British Columbia (B.C.) and Québec, which already have carbon pricing in place.

“We need to find an approach that meets needs of each jurisdiction,” Yukon territory Premier Darrell Pasloski said. “We want to meet our goals, but in a way that doesn't put unnecessary burdens on families and that makes business less competitive.”

Similar criticism was made when B.C. launched its carbon tax in 2008, but a study from researchers at Duke University and the University of Ottawa that looked at the effect of the province’s carbon tax on its overall economy concluded that it had “little net impact.”

Canadian businesses also seem more willing than ever to participate. In July, nearly twenty Canadian companies including Canada’s largest bank joined the Carbon Pricing Leadership Coalition (CPLC), a group focused on addressing key challenges to successful carbon pricing implementation. The move marked the largest number of companies to join the CPLC at one time, and was praised by CPLC co-chair Feike Sijbesma.

“Canada has been a true leader in our coalition,” said Sijbesma, who is also the CEO of Royal DSM. The country has done a remarkable job at the levels of the Federal Government, the provinces, and individual companies to focus on carbon pricing. It helps sets a standard for others to emulate and expand on.”

Mexico is also demonstrating leadership, with its national carbon market expected to roll out in 2018. It’s upcoming year-long pilot program will involve the voluntary participation of up to 60 companies.

As with other cap-and-trade systems, the government will impose limits on companies’ greenhouse gas emissions. Firms that produce emissions below their cap will be able to sell their excess allowances to other businesses polluting above their limit. For the pilot, the MEXICO2 platform will oversee the trade of these carbon credits.

The Mexican government is still working to establish the cap and flesh out its regulatory framework, but it is expected to be a central part of how the country will reach its 22 percent reduction target for 2030 under the Paris Climate Agreement.

Mexico, the U.S. and Canada also all recently agreed to generate 50 percent of their energy from clean sources by 2025, in addition to other clean economy commitments.