The Social Cost of Carbon
By Frank Schwamborn
For as long as I can remember, economists have described pollution and environmental destruction as economic externalities that cannot be easily priced. Thus, many determined it was reasonable for a business to ignore environmental damage (at least as much as legally possible) in order to boost their bottom line.
Today, I don’t go a day without mentioning the social cost of carbon to our building owners and developer teams. Verdical Group makes a point to view design decisions through a carbon cost lens, and we encourage the design teams that we work with to use similar tools to start internalizing the cost of carbon emissions.
The social cost of carbon is not just a concept to tug on the heartstrings of individuals. In fact, the U.S. government has now identified a dollar value for emitting carbon into the atmosphere. In February of 2021, the White House released a technical support document (TSD) as required by Executive Order 13990. The TSD outlines the social cost of carbon, methane, and nitrous oxide in terms of 2020 dollars per metric ton, with varying discount rates. The TSD allows federal agencies to understand the social benefit of reducing emissions (or, in other words, the social cost for emitting them).
As stated in the TSD, “The social costs in the report are the theoretical appropriate values to use in conducting benefit-cost analysis of policies that affect GHG [greenhouse gas] emissions.” The costs of emitted CO2 are shown in Fig.1 below.
Based on the Treasury Department’s monetary policy of low-interest rates over the last decade, it is believed that the maximum discount rate to consider is 2%. The White House has required this TSD to be updated no later than January 2022, when the cost is expected to increase.
Cost is one of the most important criteria when evaluating the performance of a building design. At the end of the day, projects need to be in budget and make financial sense. When projects are over budget, cuts need to be made and the design goes through value engineering. Trust me when I say, sustainability is consistently first on the “value engineering” chopping block.
However, the TSD allows Verdical Group to make a financial argument for which sustainable design elements should remain. The cost of carbon conversation gives sustainability its teeth. We’ve received positive feedback on the concept from the developers we are working with to achieve zero-carbon construction.
The weight of the social cost of carbon is greatest when we examine a life cycle assessment (LCA) of a project. Verdical Group’s LCAs support design teams by helping to determine the total cost of ownership of a building over roughly 50-60 years. A project’s total cost of ownership is no longer just initial capital, operations, and maintenance—now, the cost of carbon is an additional line item for our clients to visualize in their budgets.
Verdical Group conducts embodied and operational carbon calculations in order to estimate the amount of carbon dioxide (CO2) emitted by the construction and operation of a particular project. Much like we estimate the changing value of money over time, we can price carbon spent today and carbon spent tomorrow.
Our clients now consider installing a heat pump (hybrid-electric) water heater instead of a carbon costly gas water heater. They explore the option of a heat recovery chiller for hot water that is fossil-fuel-free rather than connecting a new building to a boiler central plant. All are paths to lower carbon costs.
Many organizations are looking to reach zero carbon or carbon-neutral operations (at least) by 2050. Pricing carbon will make sustainable strategies financially familiar so those organizations can reduce their emissions or determine the capital required to offset carbon emissions in the future.
I ask that you, too, consider determining the carbon emitted in your projects and the social cost of that carbon. That step will make a zero-carbon future more obtainable as we race to mitigate the damages of climate change.
Please feel free to contact me, Frank Schwamborn, Senior Energy Engineer & Project Manager, at firstname.lastname@example.org, or Drew Shula, CEO, at email@example.com for follow up questions.