In the Matter of the Further Investigation into Environmental and Socioeconomic Costs (MN)

In the Matter of the Further Investigation into Environmental and Socioeconomic Costs Under Minnesota Statutes Section 216B.2422, Subdivision 3, OAH 80-2500-31888, MPUC E-999/CI-14-643, Minn. Office of Admin. Hearings.

[Note: This decision is only a recommendation that the MPUC is not obligated to follow.]

Under Minnesota state law, the Public Utilities Commission (PUC) is required to “quantify and establish a range of environmental costs associated with each method of electricity generation,” and utilities are required to use those costs “when evaluating and selecting resource options in all proceedings before the [PUC], including resource planning and certificate of need proceedings.”  In 1997, the PUC established final environmental cost values, after a contested case proceeding (first Externalities case).  In 2013, environmental organizations filed a motion requesting the PUC to update the cost values for carbon dioxide (CO₂) and recommended that the PUC adopt the federal government’s Social Cost of Carbon (FSCC), developed by an interagency working group (IWG) pursuant to Executive Order 12866, as the cost value for C O₂.

Because the PUC determined that a contested case proceeding was necessary to adequately consider the proposed CO2 cost values, the PUC filed a Notice and Order for Hearing (Notice and Order) with Minnesota’s Office of Administrative Hearings, which set the scope of the reopened Externalities investigation and asked an administrative law judge to determine whether the FSCC is reasonable and the best available measure to determine the environmental cost of CO2 and, if not, what measure is better supported by the evidence.

The Administrative Law Judge (ALJ) in the proceeding made fourteen conclusions of law and two recommendations for the PUC.  We highlight four of these here:

First, regarding the appropriateness of models for calculating costs of CO2, the ALJ concluded that the PUC’s Notice and Order required parties in the proceeding to evaluate the costs using a damage-cost approach (as opposed to market-based or cost-of-control approaches, for example), and that the models used to calculate the FSCC is a damage-cost approach consistent with the PUC’s Notice and Order.  However, the ALJ also concluded that, based on unreported and underreported health and environmental impacts, along with the IWG’s acknowledgement that the FSCC is not based on the most current research, the preponderance of the evidence demonstrates that the FSCC understates the full environmental cost of CO₂.

Second, regarding the geographic scope of damages resulting from CO₂ emissions, the ALJ explained that Minnesota’s statutory framework and the PUC’s requirement that the parties use a damage-cost approach “compel that the question of the geographic scope of damages be viewed in terms of the source of the CO₂ emissions and all their damaging impacts, wherever they are experienced.”  Thus, the ALJ concluded that a global scope for damages is required.

Third, regarding uncertainty in the calculation of the costs of CO₂ emissions, the ALJ explained that “predicting the SCC is highly uncertain, because it is an exercise in predicting impacts of CO2 emissions many years into the future,” and “the IWG partially accounts for uncertainty in the FSCC[.]”  Thus, the ALJ concluded that, “given the increased scientific certainty of the link between CO₂ emissions and climate change, uncertainties such as the potential danger of a “tipping point” catastrophe reasonably require an initially high SCC until more is known about such uncertainties.”

Finally, the ALJ concluded that “the Federal Social Cost of Carbon is reasonable and the best available measure to determine the environmental cost of CO2, with the exceptions described in these findings regarding the 95th percentile and the time modeling horizon.”

Based on these and the other conclusions, the ALJ made the following recommendations:

First, the ALJ recommended that the PUC “adopt the Federal Social Cost of Carbon as reasonable and the best available measure to determine the environmental cost of CO2, establishing a range of values including the 2.5 percent, 3.0 percent, and 5 percent discount rates, with the following amendments:

a. The FSCC values will be re-calculated to reflect a shortened time horizon extending to the year 2200.

b. The Commission will exclude the value derived from the 95th percentile at a 3 percent discount rate value from the range of values.”

Additionally, in her Memorandum that followed her Recommendations, the ALJ included the following additional recommendation:  “While estimating damages, particularly far into the future, remains a difficult problem full of uncertainty, there is now undeniable evidence that CO₂ emissions are already having a dramatic impact on the Earth and its climate. A modern proverb graphically illustrates the dichotomy of conservatism in the face of climate change: ‘When the last tree is cut down, the last fish eaten, and the last stream poisoned, you will realize that you cannot eat money.’ In establishing cost values in this proceeding, the Administrative Law Judge respectfully recommends that the Commission consider applying conservative values to the well-being of future generations and the planet needed to sustain them, rather than primarily to the financial cost of providing that well-being.” (footnotes omitted)

Note that the ALJ acknowledged the non-binding nature in its Report: the PUC “may, at its own discretion, accept, modify, or reject the Administrative Law Judge’s recommendations.  The recommendations of the Administrative Law Judge have no legal effect unless expressly adopted by the Commission as its final order.”