Social Cost of Carbon: Origin and Prospects

 

The Obama administration has been fighting climate change with a rogue wave of regulations whose legality comes from a very small base: The Social Cost of Carbon.

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 impact cumulative global emissions. 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. From the Technical Support Document: -Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis -Under Executive Order 12866

A recent Bloomberg article informs on how the SCC notion was invented, its importance and how it might change under the Trump administration.
How Climate Rules Might Fade Away; Obama used an arcane number to craft his regulations. Trump could use it to undo them. (here)

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In February 2009, a month after Barack Obama took office, two academics sat across from each other in the White House mess hall. Over a club sandwich, Michael Greenstone, a White House economist, and Cass Sunstein, Obama’s top regulatory officer, decided that the executive branch needed to figure out how to estimate the economic damage from climate change. With the recession in full swing, they were rightly skeptical about the chances that Congress would pass a nationwide cap-and-trade bill. Greenstone and Sunstein knew they needed a Plan B: a way to regulate carbon emissions without going through Congress.

Over the next year, a team of economists, scientists, and lawyers from across the federal government convened to come up with a dollar amount for the economic cost of carbon emissions. Whatever value they hit upon would be used to determine the scope of regulations aimed at reducing the damage from climate change. The bigger the estimate, the more costly the rules meant to address it could be. After a year of modeling different scenarios, the team came up with a central estimate of $21 per metric ton, which is to say that by their calculations, every ton of carbon emitted into the atmosphere imposed $21 of economic cost. It has since been raised to around $40 a ton.

Trump can’t undo the SCC by fiat. There is established case law requiring the government to account for the impact of carbon, and if he just repealed it, environmentalists would almost certainly sue.

There are other ways for Trump to undercut the SCC. By tweaking some of the assumptions and calculations that are baked into its model, the Trump administration could pretty much render it irrelevant, or even skew it to the point that carbon emissions come out as a benefit instead of a cost.

The SCC models rely on a “discount rate” to state the harm from global warming in today’s dollars. The higher the discount rate, the lower the estimate of harm. That’s because the costs incurred by burning carbon lie mostly in the distant future, while the benefits (heat, electricity, etc.) are enjoyed today. A high discount rate shrinks the estimates of future costs but doesn’t affect present-day benefits. The team put together by Greenstone and Sunstein used a discount rate of 3 percent to come up with its central estimate of $21 a ton for damage inflicted by carbon. But changing that discount just slightly produces big swings in the overall cost of carbon, turning a number that’s pushing broad changes in everything from appliances to coal leasing decisions into one that would have little or no impact on policy.

According to a 2013 government update on the SCC, by applying a discount rate of 5 percent, the cost of carbon in 2020 comes out to $12 a ton; using a 2.5 percent rate, it’s $65. A 7 percent discount rate, which has been used by the EPA for other regulatory analysis, could actually lead to a negative carbon cost, which would seem to imply that carbon emissions are beneficial. “Once you start to dig into how the numbers are constructed, I cannot fathom how anyone could think it has any basis in reality,” says Daniel Simmons, vice president for policy at the American Energy Alliance and a member of the Trump transition team focusing on the Energy Department.

David Kreutzer, a senior research fellow in energy economics and climate change at Heritage and a member of Trump’s EPA transition team, laid out one of the primary arguments against the SCC. “Believe it or not, these models look out to the year 2300. That’s like effectively asking, ‘If you turn your light switch on today, how much damage will that do in 2300?’ That’s way beyond when any macroeconomic model can be trusted.”

Another issue for those who question the Obama administration’s SCC: It estimates the global costs and benefits of carbon emissions, rather than just focusing on the impact to the U.S. Critics argue that this pushes the cost of carbon much higher and that the calculation should instead be limited to the U.S.; that would lower the cost by more than 70 percent, says the CEI’s Mario Lewis.

Still, by narrowing the calculation to the U.S., Trump could certainly produce a lower cost of carbon. Asked in an e-mail whether the new administration would raise the discount rate or narrow the scope of the SCC to the U.S., one person shaping Trump energy and environmental policy replied, “What prevents us from doing both?”

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8 comments

  1. Pethefin · December 16

    Trump only needs to introduce a balancing measure: Social Benefit of Carbon (SBC) that balances the alarmist pet story with the real-life empirical data concerning the benefits in terms of greening of the globe etc. due to current CO2-levels.

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  2. manicbeancounter · December 16

    Ron,
    You point to another excellent article in an area of climate that I am interested in. However, like many criticisms of the costs of climate change, I find it is fairly shallow. Whilst the discount rate is important for determining the final answer, it is the make-up of the costs before discounts that are most important. The simplest approach is to use a cost curve that relates projected costs to a temperature rise. Yale Economics Professor William Nordhaus in 1991 speculated that the cost curve was a quadratic function. This implies that if so far there has been a 0.8C rise in global average temperatures, and there will be a 4.0C rise in temperatures by the end of the century, then the costs of that rise will be 5×5 =25 times anything so far observed. His current DICE model uses an exponent of 2.6, implying costs by the end of the century of 66 times that observed. I estimated that the Stern Review implied a quartic function, implying end of century costs 625 times that currently observed.
    This gives a problem of verification. The cost so far is a global aggregate of the net balance of all the costs and benefits compared to if there had been no human-caused warming at all. The specific costs arise from the direct warming itself and its consequences such as more extreme and unpredictable weather and rising sea levels. These have to be pretty accurate to determine the form that the cost function will take well beyond the realm of current experience.

    There are at least three paradoxes that arise from this issue.

    First is that the steeper the form of the cost function, the smaller will be any actual costs at the present time. That is bigger the future problem, the more indiscernible the effects will be from the normal economic data. But also the greater the power of the true climate costs function, the less distinguishable the currently revealed cost function will be from a linear cost function. The paradox is only resolved at a phenomenal level of accuracy in the empirical specification of the cost function.

    Second, in actually specifying the make-up of the projected costs of warming by identifying the types, extent, timing and locations of the adverse impacts of global warming, economic actors can make allowances in their long-range planning. Knowledge means that actual costs will become less due to adaptation to the physical elements of climate change. If the climatologists and alarmist economists fail to apply their skills to accurately modelling the components of the aggregate cost make-up then the likely costs will be far greater than if they show demonstrable expertise.

    Third comes out of the second paradox. If the climatologists are true experts scientists who understand the real truth of the potential global extent of climate catastrophism from the climate models, but cannot give any specifics at all as to the where, when and magnitude due to the real uncertainties, then what they say about their field could be indiscernible from a bunch of blinkered intellectual ideologues. There are other ways help distinguish between the true experts and ideologues – a starting point is by recognizing some fundamental issues – but the evidence seems to fall on towards the latter rather than the former.

    Liked by 1 person

    • Ron Clutz · December 16

      manic, thanks for adding context and depth to this issue. As you say, the linked article focused on how a single assumption, discount rate, skews the result enlarging regulatory impacts, as desired by the instigators. You correctly point to a whole bunch of other speculative choices that go into estimating the costs themselves, and projecting them into the future. The whole thing reminds of GCMs with their tunable parameters. It means there are many degrees of freedom for climatist or skeptic to generate a number for SCC.

      Our Canadian PM is so derivative of US climate “experts” that he proposed a carbon tax starting at 20$ a ton rising to 50$ a ton, no doubt intending to defend it by comparison with the hypothetical SCC number.

      Liked by 1 person

  3. oiltranslator · December 17

    To heck with the benefits of having electricity instead of blackouts, or a life expectancy augmented by access to energy. Far better to go to “the Great Disappointment” with Misanthropomorphic Millerite fanatics, no?

    Like

  4. Mark · December 17

    Afternoon Ron,

    A recent post over at the Carbon Brief discusses cost and benefits over time in the UK on this subject:
    https://www.carbonbrief.org/uk-climate-change-act-costs-benefits

    I found this question from the post: …”In any case, what is affordable?”….. to be rather appropriate as I am trying to figure out how much it will cost my wife and I to keep warm the rest of this winter. My excel spreadsheet needs some updating as our rate schedule has changed a bunch over the last year.

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    • Ron Clutz · December 17

      Hello Mark, that post at carbon brief seems to presume the necessity for UK to reduce emissions because it was put into law in 2008. The discussion is around how much it will actually cost the citizenry. SCC has a different objective: it attempts to estimate the benefit in dollar terms of achieving emission reductions, thereby avoiding damages that would otherwise arise. Those benefits create an upper limit for the costs of regulations aimed at fossil fuels. As you can see, it is hypothetical piled on top of hypothetical, with multiple coin flips and rolls of the dice to generate numbers.

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  5. gallopingcamel · January 2

    The main problem with the SCC is its bias. It quantifies the COST of CO2 at $21 rising to $40 per tonne while ignoring the benefits that may be much greater if only someone would take the time to quantify them. Furthermore the BENEFIT of CO2 are felt mostly felt in the near term so they don’t need mathematical tricks (discount rates) to puff them up:
    https://wattsupwiththat.files.wordpress.com/2015/10/benefits-of-co2.pdf

    Indur Goklany is an electrical engineer but before you think that disqualifies him take a look at the people who oversee the Global Warming Policy Foundation. How many Nobel prize winners is enough?

    Liked by 1 person

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