In honor of climate denier and fossil fuel industry stooge Scott Pruitt being confirmed as the new Administrator of the US Environmental Protection Agency (EPA), I thought a little about how I would roll back EPA’s climate regulations. It isn’t simply a matter of deciding not to regulate greenhouse gas emissions; the agency is required to do so under the Clean Air Act as they have published findings determining that GHG emissions pose a danger to public health. There are a variety of ways to slow down enforcement of this that Pruitt will likely pursue. He can work with Congress to slash agency budgets. He can defer more to states to set targets and rules (or not set them). He can make sure that the defense of controversial rules in court by the agency are halfhearted – he sued EPA several times as Oklahoma’s Attorney General, so he should be familiar with this approach.
But I want to focus on the wonkier option that poses a longer-term threat: the social cost of carbon (SCC). This is the externality price that is associated with releasing a ton of carbon dioxide into the atmosphere, and it is used as a justification for setting important climate rules like the Clean Power Plan and vehicle emissions standards. I first realized that last December when a leaked memo from the Trump Administration Transition Team said that a goal was to “End the use of the social cost of carbon in federal rulemakings.” It claimed that “if the SCC were subjected to the latest science, it would certainly be much lower than what the Obama administration has been using.” That statement, by the way, is almost certainly false. If anything, the current SCC of $36/ton is much too low, but there are ways to make it lower. Typically, the SCC is calculated every 5 years by a group of relevant federal agencies, and the next time it is set to be reviewed is 2020. However, the guidelines for the review come from an executive order, suggesting that an expedited review could be mandated. Even if that happens, there are only certain parts of the SCC that can be controlled. Let’s consider how the number is calculated. First, agencies use the three major models of projected damages from climate change, known as Integrated Assessment Models (IAMs). These sophisticated models integrate climate and economic data, model their interaction, and project that interaction into the future to arrive at estimates for damages from climate change. The three major models, which are broadly similar but structurally a little different, are known as DICE, PAGE, and FUND. Because these models originate in academia, it would be very difficult to manipulate them for the purposes of changing the SCC. (I should also note that most climate economists believe that the SCC calculated by these models and the government is too low.) The interagency group determining the SCC runs a number of simulations with the three models, making slightly different assumptions about things like future economic growth rates or technology levels, and the output is an overall level of damage from climate change in the future. However, there are two key questions that must be answered at this point to determine the SCC, and these are the ripe points for manipulation. How much should we pay now to prevent damage from climate change in the future? And should we, in the United States, be willing to pay to prevent climate damage regardless of where it occurs on the planet? Starting with the second question, current approaches to calculating the SCC consider a dollar of damage from climate change to be the same, regardless of where it occurs. However, science tells us that a disproportionate share of the damage from climate change will happen in poor countries and near the poles. Given Trump’s proclamation of an “America First” energy policy, one could easily imagine a reevaluation making the case that only climate damages to the United States should be considered. That would shrink the overall damage number considerably and result in a much lower SCC. Given that poor countries that would receive a disproportionate share of damage have done little to create the problem of global climate change, there is an ethical argument to be made in favor of giving their damage more weight than damage in rich countries. The other element to be considered, our rate of time preference, can be similarly manipulated. The discount rate is a number used to quantify how much one is willing to spend now to gain a certain amount of money in the future. For example, using a 3% discount rate, I would conclude that avoiding $100 worth of damage in 50 years is worth $22.81 now. Using a 5% discount rate, however, I value the future less, so I would only be willing to pay $8.72 now to avoid $100 in 50 years. The current SCC evaluations consider a 2.5%, 3%, and 5% discount rate, but they use 3% as the primary estimate. If a 5% discount rate were used instead of a 3% discount rate, the current SCC would be $11/ton instead of $36/ton. Further, some economists argue for using a higher discount rate because this more closely matches rates of return in financial markets, which they argue represent people’s time preference. There are, however, a host of problems with that logic – namely, private markets may measure the time preference of individual rich investors, but that is probably a poor indication of group time preference or inter-generational time preference. The Stern Review, one of the most famous studies on the damages from climate change, used a discount rate of 1.4%. In the end, however, there is no “correct” discount rate – the question is essentially an ethical one about how much we should consider the well-being of future generations. Advocates of a high discount rate are effectively saying that they care little whether future generations are able to survive and thrive on the planet. Advocates of limiting damage considerations to the United States are going beyond a so-called “America First” philosophy to an “America Only” one. This would probably not lead to the end of all federal action on climate change, as new rules on regulating GHG emissions from power plants and vehicles would have to be written that take the new, lower social cost of carbon into account. But it is possible to manipulate that number in such a way that the government concludes that it is worth doing little to nothing now to prevent damages from climate change in the future. Doing so would be a gross negligence of our duty to both future and current generations, around the world and in the United States.
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AuthorEconomist. Professor. Environmentalist. Archives
July 2017
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