A Closer Look at the Government’s Determination of the Social Costs of Carbon

Global Science Report is a weekly feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

 

We and our apparently few friends tend to shriek with horror when governments try to centrally plan economies because, of course, planning places arbitrary prices on things and dictates how much of what will be made during the next five years.  But we should be equally horrified when government tries to invent costs and then impose them upon us.

Such is the case with the “social cost of carbon” (SCC), a completely mis-named concept which purports to accurately estimate damages associated with global warming caused by pernicious fossil fuel-fired economic activity.

First of all, “carbon” has nothing to do with global warming. In its purest crystalline form, a gram will set you back about $50,000—a.k.a. a 5-carat diamond. Other allotropes include graphite and buckyballs–geodesic-dome like molecules composed of 60 carbon atoms. Combusted (oxidized) carbon-containing compounds are the materials that produce carbon dioxide (CO2). Uncombusted methane (CH4) along with carbon dioxide can slightly enhance the earth’s natural greenhouse effect. 

Further, there are two sides to the industrial coin, not just negativity (i.e., social costs). It’s obvious that the combustion of carbon-containing compounds has driven a lot of civilization—a byproduct is the fact that you aren’t dead yet (life expectancy, pre-industrial revolution in Europe was around 35) and the fact that—in real dollars—you’re about ten times richer than your great-grandparents were.

So, what the government (e.g., the EPA) is really talking about is “The One-Tailed Effect of Oxidizing Carbon-Containing Compounds,” acronymed OTEOCCC, which just isn’t as catchy as SCC, which sounds like a Division I Football conference.

Currently, there are several proposed legislative amendments floating around Congress that are aimed to limit how the EPA can use the government’s assessment of the social costs of carbon.

Limiting the EPA’s use of the SCC in considering regulations would be a wise move since the government’s SCC calculations are incomplete, subjective, and seriously lagging the science of climate change.

The government’s Interagency Working Group on the Social Costs of Carbon, back in 2010, defines the social costs of carbon this way:

The SCC is an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year. It is intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services due to climate change.

Its determination of the SCC has significant ramifications, as the Interagency Working Group is quick to point out:

Under Executive Order 12866, agencies are required, to the extent permitted by law, “to assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” The purpose of the “social cost of carbon” (SCC) estimates presented here is to allow agencies to incorporate the social benefits of reducing carbon dioxide (CO2) emissions into cost-benefit analyses of regulatory actions that have small, or “marginal,” impacts on cumulative global emissions. The estimates are presented with an acknowledgement of the many uncertainties involved and with a clear understanding that they should be updated over time to reflect increasing knowledge of the science and economics of climate impacts.

Recently, the Interagency Working Group reconvened and made good on its promise to update their 2010 findings. In doing so, they increased their estimate of the SCC by about 40 percent.

Increased!? How on earth, you may wonder, could they have increased their SCC estimates since 2010 when paper after scientific paper shows that the equilibrium climate sensitivity—that is, how much global warming will result from a doubling of the atmospheric carbon dioxide concentration—is much lower than most pre-2010 determinations?  The  Interagency Working Group even recognizes that the climate sensitivity “is a key input parameter” to their SCC models.

Simple: The updated SCC calculations are made without “revisit[ing] other assumptions with regard to the discount rate, reference case socioeconomic and emission scenarios, or equilibrium climate sensitivity” [emphasis added].

How convenient is that? The updated SCC, which the White House requires to be used in the cost/benefit analyses of new regulations, completely ignores progress made in the basic science of climate change—progress which suggests that the future impacts from climate change are overestimated by some 50 percent.

And if failing to keep up with the science of a “key input parameter” to their calculation isn’t enough, the Interagency Working Groups makes several other egregious decisions in arriving at their SCC determination.

These other missteps were the subject of testimony of economist Robert Murphy from the Institute for Energy Research before the Senate Committee on Environment and Public Works a couple of weeks back.

Murphy’s testimony focused on two main areas (more details here and here): 

1) The arbitrary (and improper) selection of the discount rate.

2) The government’s use of its assessment of the global costs rather than the domestic costs of carbon emissions.

The discount rate is basically how much one is willing to pay now to avert future damages. The lower the discount rate, the more costly (in today’s dollars) future damages become. The SCC is very sensitive to the discount rate used in the SCC models. The Interagency Working Group assessed the SCC under assumptions of a discount rate of 2.5 percent, 3 percent and 5 percent. The SCC is about 5 times greater using a 2.5 percent rate than a 5 percent rate. Murphy argues that by federal guidelines (OMB Circular A-4), the Interagency Working Group should also have considered the SCC under a 7 percent discount rate. And had they done so, they very likely would have found the SCC to be negative (i.e., that carbon emissions conferred a net benefit to society). But that would have been an inconvenient result, so the Interagency Working Group ignored that federal guideline.

They also dismissed the directive to report the costs and benefits from a domestic perspective, where costs are only considered to be a fraction of the total global costs (according to the Interagency Working Group, between 7 percent and 23 percent). Considering a 7 percent discount rate and the new science indicating a lower climate sensitivity and almost assuredly, the domestic costs would approach zero (if not, in fact, be negative).

This gives rise to a situation where the EPA regulations on carbon dioxide emissions would lead to net costs to the United States and benefits to the rest of the world.

This is called “foreign assistance,” but seems to be absent in government accountings of such. So much for transparency.

But regardless of what you call it, the government’s determination and use of the social cost of carbon is simply a bad idea. The extreme sensitivity to its input parameters means that the final answer is easily molded to be whatever the user desires it to be. And since the current government user desires a limit on carbon dioxide emissions, the SCC is positive and has gotten larger just in time for the new round of proposed regulations and executive actions—ignoring new climate science in the process. 

Further, if they are going to speak about global costs, they had better note that the poor and developing world is seeing large increases in life expectancy and wealth as fossil fuel-generated electricity finally reaches the poor, just as happened here in the first half of the 20th century.

We think the blunders the Obama administration has committed in setting their “price” of carbon dioxide and methane (as opposed to the silly “carbon”) may be actionable, action we’d be happy to contribute to.

References:

Interagency Working Group on the Social Costs of Carbon, 2010. Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866, http://www.epa.gov/otaq/climate/regulations/scc-tsd.pdf

Interagency Working Group on the Social Costs of Carbon, 2013. Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866, http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf

Knappenberger, P.C., and P.J. Michaels, 2013. Policy Implications of Climate Models on the Verge of Failure. American Geophysical Union Science Policy Conference, Washington DC, June 24-26, 2013, Paper CC-15.