EPA-CARBON/TAX (ANALYSIS):ANALYSIS-Foes of Obama climate policy prepare battle over cost of carbon

By Valerie Volcovici

WASHINGTON, Aug 20 (Reuters) - Three months ago, the Obama administration made a little-noticed but potentially pivotal move in the stepped-up fight against climate change: it boosted the U.S. government's official estimate of the future economic damage caused by carbon pollution.

After its first review, a panel of technical experts from 11 government agencies raised the so-called "social cost of carbon," known as SCC. The measure is used by many arms of the U.S. government to determine the financial benefits of new regulations since 2010.

The new 2020 forecast of $43 a ton was a 58 percent jump from the previous estimate, made in 2010. The issue is to be reviewed biannually.

The move should make it much easier for the Environmental Protection Agency and other federal bureaus to enact tougher measures to crack down on emissions by showing that the greater benefits of such measures will justify their costs.

But the change, both made and announced quietly, has drawn intensifying scrutiny.

Opponents of President Obama's newly invigorated climate change strategy are targeting the SCC in Congress -- and possibly in court -- in their efforts to knock back more rules. They argue that the method and methodology for calculating the SCC is opaque.

"This has all the characteristics of a stealth approach toward making a greenhouse gas rule more justifiable by exaggerating the social benefits," said Luke Popovich, a spokesman for the National Mining Association.

Even some supporters of greenhouse gas regulations or the use of carbon taxes have found fault in the opaque process in which the SCC was revised and the economic models used.

"These models have crucial flaws that make them close to useless as tools for policy analysis," wrote Robert Pindyck, an MIT economist, in an article that will appear in the September issue of the Journal of Economic Literature. He said certain "arbitrary" inputs could have a "huge" effect on the figure.

Attacks against the SCC are expected to intensify as Obama launches the next steps of his Climate Action Plan, which relies heavily on executive action to combat pollution from power plants, the biggest source of U.S. carbon emissions.

The EPA is to publish its new standard for carbon emissions from newly constructed power plants on September 20 -- likely relying on higher SCC figures to justify the cost. New standards for existing power plants are due by June 2014.

The revised SCC may also have an impact on major fossil fuel initiatives, such as the Canada-to-U.S. Keystone XL pipeline, if the administration decides to factor it into its decision on approving the project. A new calculation could mean that the project's societal costs outweigh its benefits.

The Republican-led House of Representatives, just before members left Washington, on August 1 passed a measure introduced by Rep. Tim Murphy (R-Pa.) that would prevent the EPA from using the SCC in rulemaking without congressional approval. Last week a conservative legal group filed a petition to the Energy Department to reconsider its use.

A PANEL OF EXPERTS

The SCC is a notional figure used in rule-making that estimates the economic damages associated with a rise in carbon emissions. It accounts for the effect of climate change in such areas as agricultural productivity and property damage from increased flood risk.

That naturally makes it a contentious figure, all the more so due to the lack of transparency around how SCC is calculated.

A panel of experts from nearly a dozen agencies, including the EPA, Energy Department, Department of Treasury and Office of Management and Budget determines the so-called cost of carbon.

The group used three different academic models to develop its estimates that "combine climate processes, economic growth, and interactions between the climate and the global economy into a single modeling framework," Howard Shelanski, head of the Office of Information and Regulatory Affairs, or OIRA, testified to Congress last month.

Patrick Traylor, an environmental litigation specialist at Washington law firm Hogan Lovells, says he expects opponents to attack the rules because the SCC "have not been subject to normal peer-reviewed scientific rigor".

Critics were also angered with the way that the SCC figure was released: in a late-May blog post by Obama's energy and climate adviser, Heather Zichal, to announce the roll out-of new Department of Energy efficiency standards for microwave ovens. She said the new standards would result in $4.6 billion in net benefits, based on the revised SCC figure.

Ari Isaacman Astles, a spokesman for the White House Office of Management and Budget, said the reason the figure was released then was because it only "became available during interagency review of the final rule."

Opponents also said they had not been given time to provide input or respond to the new figure before it was implemented.

OIRA's Shelanski defended the transparency of the inter-agency process in his congressional testimony, saying: "Agencies using the SCC values in rulemakings received extensive public comments."

'NONSENSICAL' METHODOLOGY

Oil refiner Tesoro Corp. and coal company Peabody are among fossil-fuel based firms that have lobbied lawmakers and administration officials on the issue, according to second-quarter filings to the government.

Stephen Brown, head of government affairs for Tesoro, said in an interview that companies and some industry groups may seek petitions to change the calculation, file direct legal challenges to the SCC or file an indirect legal challenge by suing the EPA for rules using "unvetted" SCC figures.

Frank Ackerman, a senior economist at research firm Synapse Energy Economics who supports strong climate regulations, said the "anonymous task force" that calculated the first SCC in 2010 using three criticized economic models and scenarios failed to improve the process.

"The bad news is that behind the veil of secrecy, the same nonsensical methodology was used both times," he said.

Rachel Cleetus, a senior climate economist at the Union of Concerned Scientists, agreed that the models used by the interagency group were not perfect. But she said there are ways to improve the process for making the estimates.

She said the government could set up a transparent external expert review process that would allow for public comments.

"While the economic models we use to examine climate change and its impacts and costs will keep being updated, it would be a mistake to throw the baby out with the bath water," she said.

(Reporting by Valerie Volcovici; Editing by Dan Grebler)

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