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Climate Law & Environmental Finance Update

Seventh Circuit Endorses DOE’s Reliance on "Social Cost of Carbon" to Support Appliance Efficiency Rule

September 19, 2016

On August 8, 2016, in Zero Zone, Inc. et al. v. United States Dept. of Energy, the U.S. Court of Appeals for the Seventh Circuit rejected a challenge to the Department of Energy’s (DOE) cost/benefit assessment of the efficiency standards for commercial refrigeration equipment that DOE promulgated under the Energy Policy and Conservation Act (EPCA). Specifically, the Court held that (1) DOE had the authority to factor into its calculation of the rule’s benefits the Social Cost of Carbon (SCC) – essentially an estimate of the present value of the costs of the CO2 emissions that in the absence of the regulation would have occurred; and (2) DOE reasonably determined that the efficiency standard was “economically justified.”

In determining the CO2 costs avoided through the rule, DOE considered many factors including “changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services.”1 Petitioners argued among other things that DOE’s methodology was flawed insofar as DOE inappropriately included as benefits the costs avoided by virtue of the rule, and that DOE’s measurement of the rule’s overall costs and benefits was arbitrary and capricious because by overestimating the rule’s net benefits, it had underestimated the rule’s net costs.

The Court thought otherwise, holding that DOE had the authority to include SCC in its economic analysis because CO2 reduction is an environmental benefit that DOE has authority to consider in determining “the need for national energy conservation” under EPCA.2 And while acknowledging some shortcomings in DOE’s SCC estimates, the Court found that DOE properly compared the global benefits of the rule against its national costs. This was permissible because energy conservation has global effects and petitioners did not point to any alleged global costs from the rule.

The Seventh Circuit’s decision marks the first time a federal court has endorsed a federal agency’s inclusion of SCC measurements in support of a rulemaking.

The decision’s impact remains to be seen. Certainly the Court’s reasoning could support an expansive view of DOE’s authority under EPCA beyond this particular rulemaking on commercial refrigeration equipment. Although there have been few challenges to EPCA rulemakings during the statute’s 40-year history, such challenges could well increase as this administration (and, depending on the outcome of the fall election, the next one too) pushes the outer limits of its existing authority not only under EPCA but under other statutes employed to meet its ambitious climate change goals.3

Zero Zone, if left standing, therefore could have broad implications for both energy and environmental policy. It seems almost certain that as to future rules intended to limit greenhouse gas emissions associated with climate change, the government will seek to measure the social or otherwise avoided costs of carbon, and argue that such costs should be considered in any rulemaking and included in cost/benefit analyses of any proposed regulations. Indeed, the Department of Justice recently brought the Zero Zone decision to the D.C. Circuit’s attention in the pending petition for review of the administration’s Clean Power Plan, calling the decision a “pertinent and significant authorit[y]” that bears on the legality of the centerpiece of President Obama’s climate change policy. Likewise, some states already are relying on estimates of avoided carbon costs to justify their energy regulations. New York, for instance, did so in calculating the cost of zero-emission credits to be paid to nuclear reactors in the state under its Clean Energy Standard program.

If taken to its logical conclusion, then, the Seventh Circuit decision likely will be seen as a road map for any federal or state agency seeking to justify energy or environmental regulations intended to reduce greenhouse gas emissions, all of which presumably would be more economically justified to the extent they would result in avoided CO2 emissions costs. At a minimum, given the many factors considered in the SCC estimates in Zero Zone, and the Court’s deference to the agency’s decision-making process, estimates of avoided carbon costs likely will weigh heavily in future agency cost/benefit analyses, and will be used by advocates of greenhouse gas regulation in whatever venues such regulations are being considered. By the same token, opponents of such regulations should be expected to redouble their efforts to challenge both the validity and use of avoided carbon costs. Only further decisions (and perhaps legislation) will determine the outcome of this battle.

1 Energy Conservation Program: Energy Conservation Standards for Commercial Refrigeration Equipment, 79 Fed. Reg. 17,726, 17,777 (Mar. 28, 2014).

2 42 U.S.C. § 6295(o)(2)(B)(i)(VI).

3 The U.S. recently committed in an international agreement to cutting greenhouse gas emissions by 26-28 percent below 2005 levels by 2025. Fact Sheet: U.S. Reports its 2025 Emissions Target to the UNFCCC, OFFICE OF THE PRESS SECRETARY, THE WHITE HOUSE (Mar. 31, 2015). See also Chris Mooney, Obama Just Released the Biggest Energy Efficiency Rule in U.S. History, WASHINGTON POST, Dec. 17, 2015 (noting that “it’s hard to interpret this move [to institute an EPCA rule for commercial air conditioners and furnaces] outside of the context of the Paris agreement” and that the “Obama administration has come home and immediately ushered in a big move” to related ends); Timothy Cama, Obama’s Energy Efficiency Rules Will Last, Moniz Says, THE HILL, Mar. 1, 2016 (“President Obama’s aggressive agenda of energy efficiency regulations will survive future administrations . . . .”); Anthony Rocco, New Energy Efficiency Standards for Small Power Adapters Will Make a Big Difference, ENVTL. AND ENERGY STUDY INST., Apr. 11, 2016 (“These EPS standards represent even more progress toward the President’s goal of reducing CO2 emissions by 3 billion metric tons by 2030 through efficiency standards.”).

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