The EPA’s “social cost of carbon” and the tricky business of putting a dollar value on a human life

On Friday, November 11, the Environmental Protection Agency posted a PDF with a title seemingly designed to be weapons-grade boring:

Supplementary Material for the Regulatory Impact Analysis for the Supplemental Proposed Rulemaking, “Standards of Performance for New, Reconstructed, and Modified Sources and Emissions Guidelines for Existing Sources: Oil and Natural Gas Sector Climate Review”

But the 131-page document is not as dry as it sounds. It’s where the EPA, and the whole Biden administration, lays out an estimate of how bad carbon emissions are for the world. It estimates the “social cost of carbon,” a key variable in climate policy that could affect everything from power plant emissions to fuel economy standards.

The paper estimates that under typical assumptions, a ton of carbon emitted in 2020 costs the world about $190. This calculation is, after adjusting for inflation, dramatically higher than the $1 to $7.50 per ton cost the Trump administration had estimated, and significantly higher than the $51.50 per ton cost the Obama administration estimated in 2016 (and which the Biden administration has reverted to using until the new draft estimate is finalized).

That’s good news for people who want tough EPA rules reducing greenhouse gas emissions — a higher figure would justify more dramatic action to curb carbon emissions. Even the much lower Obama estimate justified that administration’s sweeping Clean Power Plan, and a higher value could justify even more significant action than that.

But there’s an unusual choice buried in the new EPA estimate. Much of the harm of climate change comes from the fact that it literally kills people. Usually, when regulators consider risks of deaths, they put the same value on all lives. But the social cost of carbon is not a normal rule. It is the only federal rule of its kind that explicitly puts a value on the lives of non-Americans, and considers the benefits to them of abating climate change. In doing so, however, the rule does not weigh lives equally.

The draft proposal translates lost lives into dollars, which is standard practice in government rulemaking. But, according to the report, a lost life in Haiti represents a smaller cost than a lost life in Canada. In fact, a Canadian life saved is worth over 16 times as much as a Haitian life saved in the EPA’s calculus. That’s because the EPA has chosen to weigh the mortality costs of climate change in proportion to per capita income of the country where someone dies, and Canada’s GDP per capita is more than 16 times that of Haiti.

We can keep going. A Qatari life is worth 118 Burundian lives — a Qatari life is worth more than an American life, in fact. A German life is worth 12 Cambodian lives. An Australian life is worth four Indonesian lives. A Russian life is worth two Ukrainian lives. All of these judgments are implicit in the way the EPA is calculating the costs of climate change.

To be sure, the agency is not coming to this conclusion arbitrarily. It’s adapting a standard approach for putting a dollar value on American lives, and trying to use it in an international context. Indeed, by putting any weight on foreign lives, it’s taking a major step beyond where most regulations go. “This is a substantial step forward, at least in my view,” Arden Rowell, a professor of law at the University of Illinois and a leading expert on the valuation of non-American lives in climate regulation, told me. “This stuff is legitimately so hard that even just a little bit of progress is really valuable.”

But this approach has both a political and a technical flaw. The political flaw is that it amounts to the US government stating that some foreign persons’ lives are worth more than others — a divergence from a long history of treating all American lives as equal to each other, and a potential insult to countries the US is counting on as partners in climate efforts.

The technical flaw is that the technique the EPA is using makes sense if you’re willing to treat people differently both within and outside the US. In other words, the EPA isn’t willing to value people in, say, West Virginia less than people in Silicon Valley — how, then, can it justify valuing Belgians over Congolese?

So it’s worth digging into the merits, drawbacks, and implications of the administration’s social cost of carbon — and how to improve upon the work that’s been done.

How the US government weighs life and death

The EPA, in this document and others, insists it is not putting a dollar value on human life, or valuing different humans’ lives differently.

“The EPA does not place a dollar value on individual lives,” it insists in an FAQ on its website. “Rather, when conducting a benefit-cost analysis of new environmental policies, the Agency uses estimates of how much people are willing to pay for small reductions in their risks of dying from adverse health conditions that may be caused by environmental pollution.”

The number these calculations produce is usually called (“inaptly,” the new EPA report opines) the “Value of Statistical Life” or VSL, popularized by Vanderbilt economist W. Kip Viscusi. The number the EPA uses is $10.05 million per life in 2020 dollars.

VSL is calculated for a given group by estimating how much individuals in that group are willing to pay to reduce their risk of dying. This is known as a “revealed preferences” approach; the idea is that people’s actual spending gives a truer sense of their feelings than, say, polling them would.

A 2018 paper by Viscusi, for example, used, among other data sources, Bureau of Labor Statistics Census of Fatal Occupational Injuries to measure how much more, in practice, US workers demand to be paid to take jobs that carry a higher risk of death. So when we say the VSL number is $10.05 million, what that really means is that the government estimates the typical American will pay $10,050 for a 0.1 percent reduction in their risk of death, or $100,500 for a 1 percent reduction, etc.

Having a VSL number at all may seem ghoulish, but it’s quite useful in considering the costs and benefits of regulation. Lowering all car speed limits to 10 miles per hour would save many lives, for instance, but at an enormous economic cost that would dramatically reduce many other people’s quality of life; tools like VSL let regulators weigh the trade-offs between those economic costs and public health benefits.

That said, VSL as a tool must be applied carefully. Revealed preferences approaches relying on actual spending decisions usually imply that the value of a statistical life is greater for rich people than poor people, because they have more money to spend on extending their lives. A recent study by Viscusi and Clayton Masterman estimated that for every additional dollar in income an American earns, their VSL goes up between 50 and 70 cents. That implies that if the US were to use different VSLs for different states, people in Massachusetts should count for significantly more than people in West Virginia.

The US does not do that, and did not do that even before West Virginia’s own Joe Manchin became one of the most powerful men in Washington. Cass Sunstein, a legal scholar who has written extensively on cost-benefit analysis and oversaw its implementation in the first Obama term, once noted, “No agency values the lives of poor people less than the lives of rich people. No agency distinguishes between whites and African Americans or between men and women. … With respect to cost-benefit analysis, much is disputed. But on the idea of a uniform value per life saved, there is a solid consensus, at least in terms of regulatory practice.”

Sunstein tried to challenge that consensus (indeed sometimes arguing that VSLs for poor people should be higher than for rich people), but it did not budge.

Weighing lives when people abroad count

Before the climate regulations of the Obama administration, cost-benefit analyses in the US looked exclusively at costs and benefits within the US itself, never beyond its borders. Rowell told me she knows of no rule besides the social cost of carbon that considers the value of foreign lives.

The formulators of the cost of carbon rule, in both the Obama and Biden administrations, have thus had to operate without much precedent. These are, by and large, technical economists asked to operate objectively and by the book.

But in doing so, they are forced to make decisions that carry significant ethical implications. They have defaulted to estimating VSLs for different countries based on their different income levels, and using these as the estimated harm of death to people in those countries.

Just as richer people have higher VSLs than poorer people, richer countries have higher VSLs than poorer countries. Suppose the government of Haiti is considering car safety rules that would ban cars without 360-degree cameras. Haitian citizens would enjoy the benefits of that rule, in the form of fewer accidents, but they would also pay the cost: Cars would be more expensive, and transportation would be harder.

“How much are we actually willing to pay for that safety gain?” is a reasonable question for Haitian citizens and policymakers to ask themselves. Money is way more valuable in Haiti than in the US, because money is always more useful for poor people than for richer people; given that, elected officials may not want to pay for expensive safety improvements that officials in the US would be willing to pay for, which implies they’d use a VSL lower than that of the US. “You could end up imposing a policy on a poor population where the costs that they bear exceed the benefits that they receive,” Lisa Robinson, a senior research scientist at Harvard and expert on VSL and cost-benefit analysis, told me.

But, again, that’s for decisions within poor countries. The social cost of carbon regulation is being proposed not by the government of Haiti but by the US government. It’s being used to allocate not the resources of poor nations but the resources of the US government; Haiti is probably not bearing the cost of any regulations the US may impose. Emissions from the US kill people all over the world, and the US is considering how to value those lives for the purpose of its own cost-benefit analysis.

The political problem, and the technical problem

In the past, cost-benefit analyses where some people’s lives count for more than others have been the topic of major controversy.

In 1995, a report by the Intergovernmental Panel on Climate Change used a similar willingness-to-pay approach to estimate the mortality costs of climate change, which prompted an uproar from developing country governments. India’s then-environment minister Kamal Nath called the approach “absurd and discriminatory.”

In 2003, the EPA floated a proposal to value most lives at $3.7 million but the lives of people over 70 at $2.3 million. The idea was to reflect different life expectancies; since the government cannot prevent deaths, only delay them, extending the lives of young people might have more benefits. But critics like the AARP lambasted the plan as a “senior death discount,” and the plan never took effect.

As these reactions suggest, the statement that adopting varying VSLs makes about the relative value of people in different countries may itself be a political reason to junk this approach. “Part of the reason not to do this is the expressive harms,” Daniel Hemel, a law professor at NYU who has studied regulatory issues with valuing life, told me. “The experience with the senior death discount suggests people do feel bad when they feel the government is devaluing them.”

In a recent paper, economists R. Daniel Bressler and Geoffrey Heal outline a number of technical problems with the approach as well. The technical defense the EPA report offers for its approach is that using different values for different countries satisfies what economists call the “Kaldor-Hicks criterion,” by which a policy is efficient if the winners could compensate the losers and leave everyone better off.

Bressler and Heal note that the EPA doesn’t actually follow a Kaldor-Hicks approach fully; that would require using different values for people within the United States based on income, and require using current exchange rates to compare countries, not purchasing-power parity measures. That is, the agency bends Kaldor-Hicks requirements for US residents but not for people overseas. This choice is hard to justify on the merits.

Bressler and Heal argue a better approach would be “welfare weighting,” which adjusts for “diminishing marginal utility”: the fact that a dollar is less valuable to a billionaire than to a low-income person. That approach tends to result in treating all lives equally regardless of income. This is similar to the policy the German government uses in setting its social cost of carbon.

This, however, raises a more basic question: Whose costs and benefits is the EPA adding up? Its normal approach of only considering US lives when looking at regulation has some conceptual clarity to it. It’s adding up the costs of regulation to Americans, and comparing them to the benefits to Americans. By adding in the benefits of climate regulation to non-Americans, the social cost of carbon rule muddies that situation somewhat, not least because other benefits and costs redounding to non-Americans aren’t considered.

“What’s puzzling about the foreign willingness-to-pay approach is — does that actually represent how much Americans are willing to pay?” Rowell points out. “If what we care about is how much Americans are willing to pay, are they willing to pay more to save a Qatari life than an American life? Surely not, right?” Given that the economic costs of the regulation are mostly borne by Americans, focusing on the benefits to Americans seems to make sense.

One possible way to clarify the approach would be to forthrightly state that saving lives abroad is a benefit to Americans as well. Viscusi and Ted Gayer have argued that plainly stating that foreign lives are included because Americans are altruistic and pursuing their altruistic aims is beneficial to them is one possible approach here.

Such an approach would not need to value foreign lives equally to American lives — altruism only goes so far. But it would be consistent with valuing all foreign lives equally, and avoid the potential insult implicit in the current EPA approach as well as some of the technical problems Bressler and Heal identified.

Depending on how altruistic such an approach takes Americans to be, it could result in a higher or lower social cost of carbon. But this is about figuring out the right formula, not the right answer for that formula to spit out. What formula the US picks matters; Canada, for instance, has more or less just copied the numbers and methodology adopted by the US in setting its social cost of carbon. And getting the formula right is much tougher than it looks.

A version of this story was initially published in the Future Perfect newsletter. Sign up here to subscribe!