How Does One Justify One of the Most Expensive Regulations in American History?

In an effort to justify its massive global warming regulations, the Obama Administration had to estimate how much global warming would cost, and therefore how much money their plans would “save.” This is called the “social cost of carbon” (SCC). Calculating the SCC requires knowledge of how much it will warm as well as the net effects of that warming. Needless to say, the more it warms, the more it costs, justifying the greatest regulations. 

Obviously this is a gargantuan task requiring expertise a large number of agencies and cabinet departments. Consequently, the Administration cobbled a large “Interagency Working Group” (IWG) that ran three combination climate and economic models. A reliable cost estimate requires a confident understanding of both future climate and economic conditions. The Obama Administration decided it could calculate this to the year 2300, a complete fantasy when it comes to the way the world produces and consumes energy. It’s an easy demonstration that we have a hard enough time getting the next 15 years right, let alone the next 300.

Consider the case of domestic natural gas. In 2001, everyone knew that we were running out. A person who opined that we actually would soon be able to exploit hundreds of years’ worth, simply by smashing rocks underlying vast areas of the country, would have been laughed out of polite company. But the previous Administration thought it could tell us the energy technology of 2300. As a thought experiment, could anyone in 1717 foresee cars (maybe), nuclear fission (nope), or the internet (never)? 

On the climate side alone, there’s obviously some range of expected warming, often expressed as the probabilities surrounding some “equilibrium climate sensitivity” (ECS), or the mean amount of warming ultimately predicted for a doubling of atmospheric carbon dioxide. In the UN’s last (2013) climate compendium, their 100+ computer runs calculated an average of 3.2°C (5.8°F). A rough rule of thumb would be that this is also an estimate of the total temperature change predicted from the late 20th century to the year 2100.

That forecast is simply not working out. Since 1979, when global temperature-sensing satellites became operational, both satellite and weather balloon data show that the lower atmosphere is warming at about half the rate that was predicted. And in the area that is supposed to show the most integrated warming, in the tropics from about 15,000 to 45,000 feet, there’s two to three times less warming being observed than would be “forecast” by the UN’s models if they are run backwards from today. At the top of the active weather zone there, the forecast warming is a stunning seven times more than has been observed.

Since around the time that the last UN report was being written, a spate of scientific papers has been published showing that the ECS is quite a bit lower than the UN’s number, by 40-60 percent, depending upon the study.

It seems like there’s quite a conspiracy of nature when it comes to observed versus predicted warming, with various measures all telling us that we’re seeing about half as much warming as we are supposed to in the bulk atmosphere. Further, the Obama Administration assumed a distribution of possible warming that was way to hot at the extreme end, 7. 1°C or 12.9°F, a number that Science magazine recently said was “implausibly high” in a different model.

On the economic side, how much something will cost by the year 2300 requires some estimate of economic growth between now and then. It’s called the discount rate, and there are actually guidelines for how to do this put out in 2003 by the Office of Management and Budget. The higher the discount rate, the less that warming costs that far out into the future. OMB says that “you should provide estimates of net benefits using both 3 percent and 7 percent.”

(Understanding discount rates: Imagine someone is going to give you $100 today (which you can invest), or a year from now, when that original $100 hasn’t been able to “work” for a year. If you’re OK either with $100 today, or $105 a year from now, your discount rate is 5 percent; you’re really expecting that much macroeconomic growth in a year. Over the long haul, average inflation-adjusted returns on equity investments are around the OMB’s 7 percent.)

The latter figure drove the cost of warming down too far for the Obama Administration’s liking, and the cost actually went below zero assuming 7 percent and an ECS not far from what may be the most realistic value. That means it could be a net benefit, something the Netherlands’s Richard Tol has been saying for decades, as long as it doesn’t warm too much. The Administration wouldn’t go near that, so, in contravention of the OMB guidance, they simply did not use the 7 percent rate, as Kevin Dayaratna of the Heritage Foundation notes.  

For more information on the social cost of carbon, take a look at my testimony from earlier this week before the House subcommittees on the environment and on oversight. A lot came to light in the hearing, which will go a long way towards an EPA justification to cease and desist on its onerous Clean Power Plan and other Obama Administration climate regulations.