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Concerns over the Social Cost of Carbon

Posted By Nicolas Loris On September 16, 2013 @ 6:11 pm In Capitol Hill,Energy | Comments Disabled

Department of Energy [1]

The following comment was submitted to the Department of Energy by Nicolas Loris.

U.S. Department of Energy, Building Technologies Program
Mailstop EE-2J, Room 1J-018
1000 Independence Avenue SW
Washington, DC 20585-0121

EERE-BT-PET-0043

Kathleen B. Hogan,

Deputy Assistant Secretary for Energy Efficiency, Energy Efficiency and Renewable Energy.

I am writing out of serious concern regarding the lack of transparency, lack of scientific credibility, and fundamentally flawed analysis in the United States government’s Interagency Working Group on Social Cost of Carbon. Moving forward with the social cost of carbon (SCC) sets a dangerous precedent for how this Administration and future Administrations calculate cost-benefit analysis and use flawed models to achieve the results they desire. The Department of Energy (DOE) should not only reconsider its final rule of Energy Conservation Standards for Standby Mode and Off Mode for Microwave Ovens, Docket No. EERE-2011-BT-STD-0048, RIN 1904-AC07, 78 FR 36316; DOE should also refrain from using any SCC number for any cost-benefit analysis.

Several problems exist with the Administration’s recent increase in SCC from $22 per ton to $36 per ton. Most troubling is the use of integrated assessment models (IAM) that rely on a loss function in which temperature increases result in losses in gross domestic product. The most valuable critique of these models comes from Massachusetts Institute of Technology economist Robert Pindyck. Pindyck is a firm believer that increased manmade carbon dioxide and other greenhouse gas (GHG) emissions will result in climate change that imposes economic harm on future generations and that the United States should implement a carbon tax. Yet, in a forthcoming article in the Journal of Economic Literature, Pindyck concludes:

These models have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g. the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models’ descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading.

In a paper published in Cato’s Regulation, Pindyck says that “there is no economic theory behind the loss function; it is simply made up.”

Increasing the social cost of carbon would artificially boost the benefits in agency cost-benefit analyses on everything from GHG regulations on new and existing power plants to the Keystone XL pipeline to kitchen appliances. Exaggerating environmental benefits has been a serious problem with past cost-benefit tests. For instance, the Environmental Protection Agency (EPA) claims that the mercury air and toxics rule would produce $53 billion to $140 billion in annual benefits. The EPA overstates the environmental benefits by including estimated benefits from reducing particulates already covered by existing regulations. Those co-benefits account for 99.996 percent of the agency’s estimated benefits. Not including these particulates lowers the projected benefit to only $6 million.

Boosting the SCC figure to $33 per ton would only exacerbate the problem of exaggerated benefits in order to sell a rule to the public. If the Administration’s goal is to write effective regulations—in which the benefits truly outweigh the costs—this is far from the way to do it.

Reviews of the cost-benefit analyses of fuel efficiency and other appliance regulations have shown that these regulations are not motivated by a desire to reduce carbon dioxide and other greenhouse gas emissions. A 2012 study from Brookings Institution senior fellow Ted Gayer and Vanderbilt economics professor W. Kip Viscusi found that the overwhelming majority (87 percent) of the benefits that the government calculates from a host of efficiency regulations come from “correcting consumer irrationality.” In other words, using the government’s own estimation, the vast majority of the benefits come from the government telling families and business how to best use their money.

The actual environmental benefits Americans will enjoy as a result of reducing GHGs total a paltry 2 percent of all projected benefits. The other environmental benefits (11 percent) would come from international reductions in GHGs and increased energy security. Raising the price of carbon would give the impression of augmented benefits from greenhouse gas reduction but it would do so with no credible scientific or empirical credibility to validate them.

Also of concern is the way in which the Administration changed SCC from $22 to $36 per ton. The change was made with little transparency, something Members of Congress and individuals across the political spectrum criticized. The Administration made no public announcement nor did it welcome a comment period. It was only until the DOE granted the Landmark Legal Foundation’s petition for reconsideration that the Administration opened the change to a comment period. Such a drastic change should be accountable to Americans and go through the proper rulemaking process.

Further, President Obama repeatedly said he would bring transparency to the White House. To slip a change in an efficiency rule for microwaves on stand-by mode that can have economy-wide effects and strengthen the regulatory onslaught is far from transparent. The change in SCC yields nearly an additional half a billion dollars in benefits—for a relatively small microwave standby efficiency rule. The alleged additional benefits from this change for bigger projects like the Keystone XL pipeline and power plant regulations would be unjustifiably enormous and would provide false justification to move forward with regulations that raise the price of energy and take decisions away from families.

As stated in the interagency working group’s technical support document on SCC, Executive Order 13563 obligates the Administration to proceed with regulations “based on the best available science.” It is clear that the best available science is fatally flawed and the modeling used to justify SCC is almost pure speculation and arbitrarily defined. No agency should be permitted to use any SCC number in calculating cost-benefit analyses for new rules and regulations. Congress recognized this when the House of Representatives, in a bipartisan vote, passed an amendment to the Energy Consumers Relief Act (H.R. 1582) that would require congressional authorization for the EPA to use its SCC estimate. The Administration should refrain from using this SCC estimate when conducting cost-benefit-analyses.


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