Obama's EPA Carbon Rationing Plan: Cost Effective or Just Costly?

Back in 2009 at the Copenhagen UN climate change conference President Barack Obama promised to cut by 2020 U.S. planet-warming carbon dioxide emissions by 17 percent below the level emitted in 2005. Today, the Environmental Protection Agency has announced the president's Clean Power Plan that aims to cut carbon dioxide emissions by 2030 at existing electric power generation plants by 30 percent overall. Each state will be given a specific goal and be responsible for figuring out how to achieve its mandated reduction goal using a mixture of policies that include switching from coal to natural gas, building more wind and solar power, and/or pricing emissions in carbon markets.

The EPA has crunched the numbers and assures the American public that benefits of implementing this program will hugely outweigh its costs. In its regulatory impact analysis, the EPA calculates the global climate benefits using the social cost of carbon derived from a controversial Interagency Working Group report. That analysis found that social cost of carbon in 2020 ranged over $13, $46, $68, and $137 per metric ton of CO2 emissions (2011 dollars) depending on the discount rate picked by the analysts. The discount rates used were 5, 3, and 2.5 percent. The Working Group derived a high-end figure of $137 per ton in 2020 by looking at the worst 5 percent of the distribution, i.e., the less likely but possibly catastrophic damages using a 3 percent discount rate. 

With regard to deriving a social cost of carbon, the EPA's regulatory impact analysis does caution that …

…any assessment will suffer from uncertainty, speculation, and lack of information about (1) future emissions of greenhouse gases, (2) the effects of past and future emissions on the climate system, (3) the impact of changes in climate on the physical and biological environment, and (4) the translation of these environmental impacts into economic damages.

Other than that, everything is evidently OK.

Depending on the discount rate selected, the global climate benefits (not the climate benefits to the U.S.) from implementing this 30 percent reduction in power plant carbon dioxide emissions in 2020 will amount to $4.9 billion, $18 billion, $26 billion, or $52 billion. By 2030, the global benefits would rise to $9.5 billion, $31 billion, $44 billion, or $94 billion. These are just the benefits from lowering future increases in global average temperatures. The vast majority of the benefits have nothing directly to do with cutting carbon dioxide emissions by 30 percent.

The real bang for the buck comes in the form of health co-benefits arising from cuts in air pollutants like sulfur dioxide, ozone, mercury, and particulates. In fact, more than 70 percent of the health co-benefits apparently result from reductions in sulfur dioxide emissions.

The EPA calculates that the maximum cost for implementing the new regulations amounts to $7.5 billion in 2020, while the maximum net climate and health benefits range from $27 to $50 billion at a 3 percent discount rate or $26 to $46 billion at a 7 percent dicount rate. On it's face, that sounds like a pretty good deal. But as I reported last August in my article, "The Social Cost of Carbon: Garbage In, Garbage Out," anyone can pretty much conjure whatever number one wants when it comes to cranking out the social cost of carbon through integrated assessment models that combine econometric and climate prognostications.

Another interesting feature is that the Obama administration's social cost of carbon estimate is for global benefits, although the rules from the regulatory oversight agency, the Office of Management and Budget specify that benefits and damages of proposed regulations should be reported in terms of domestic impacts, with global impacts being optional. The domestic social cost of carbon would likely hover around $2 per metric ton which suggests that the domestic climate benefits from the proposed EPA regulations could actually amount in 2020 to as little as $700 million up to a worst case of $7.8 billion. Compare those benefits with an estimated cost of $7.5 billion to implement them.

Finally, as the New York Times helpfully points out today, the goal of the new EPA mandates is not to save the climate but to "reclaim leadership on climate change."

More analysis of the impacts of the new Clean Power Plan to come.