Carbon Dioxide

The Social Cost of Carbon Calculation Debate*

Fatally flawed metric or the most important number that you've never heard of?

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Carbon Tax Center

"The social cost of carbon is the most important number that you've never heard of," according to University of Chicago economist Michael Greenstone. Greenstone led the interagency working group that devised this metric during the Obama administration. Since it was first calculated in 2010, the social cost of carbon has been used to justify 80 different federal regulations that purportedly provide Americans with over a trillion dollars' worth of benefits.

"The social cost of carbon is nothing but a political tool lacking scientific integrity and transparency conceived and utilized by an administration pushing a green agenda to the detriment of the American taxpayers," insisted Rep. Darin LaHood (R-Il.), chair of the Oversight Subcommittee of the House Committee on Science, Space and Technology. LaHood's remarks were made as he opened a hearing called "At What Cost? Examining the Social Cost of Carbon" earlier this week.

"This metric did not simply materialize out of thin, and dirty, air," countered Rep. Don Beyer (D-Va). Beyer argued that the social cost of carbon (SCC) metric was devised by the Obama administration through a process that "was transparent, has been open to public comment, has been validated over the years and, much like our climate, is not static and changes over time in response to updated inputs."

So what are these politicians fighting about? The social cost of carbon is a measure, in dollars, of the long-term damage done by a ton of carbon dioxide emissions in a given year. Most of the carbon dioxide that people add to the atmosphere comes from burning coal, oil, and natural gas. The Obama administration's interagency working group calculated that the SCC was about $36 per ton (in 2007 dollars). This figure was determined by cranking damage estimates through three different integrated assessment models that try to link long-term climate change with econometric projections. Notionally speaking, imposing a tax equal to the SCC would encourage people to reduce their carbon dioxide emissions while yielding revenues that could be used to offset the estimated damage, e.g., by building higher sea walls or developing heat-resistant crops.

Can citizens take that $36-a-ton estimate to the bank? Not really.

First, consider that integrated assessment models are trying to forecast how extra carbon dioxide will impact climate and economic growth over the course of this century and beyond. One of the critical variables is climate sensitivity, conventionally defined as how much warming can be expected from doubling the amount of carbon dioxide in the atmosphere. The working group calculating the SCC also used various discount rates. (One way to think of discount rates is to consider how much interest you'd require to put off getting a dollar for 10 years.) Finally, instead of focusing on domestic harms, the working group included the global damages in calculating the SCC.

Republicans, who convened the subcommittee hearing, argue that the SCC is bogus and therefore many of the regulations aimed at cutting the emissions of carbon dioxide by restricting burning of fossil fuels are too. In his 2013 analysis of the IAMs relied upon by the Obama administration's interagency working group, Massachusetts Institute of Technology economist Robert Pindyck concluded that all three models "have crucial flaws that make them close to useless as tools for policy analysis." He pointedly added, "These models can be used to obtain almost any result one desires." In other words: Garbage In, Garbage Out.

Having tossed the models aside, Pindyck earnestly sought another method for establishing a plausible SCC. In November, he published a new study in which he asked selected economists and climate scientists to provide their best guess of what the SCC should be, assuming the possibility of a climate-induced reduction in global economic output 50 years from now of 20 percent or more. Pindyck reports that his experts converged on an SCC estimate of about $100 per ton of carbon dioxide, which is considerably higher than that the Obama administration's figure.

At the subcommittee hearing this week, the majority of experts who testified agreed that the integrated assessment models are fatally flawed. However, they reached much different conclusion: The Obama administration's SCC is much too high.

Ted Gayer of the Brookings Institution argued that the working group should have followed standard regulatory practice and produced estimates based on the harm to U.S. citizens that could be expected from carbon dioxide emissions. "The difference between global and domestic benefits of greenhouse gas regulations is significant, as the global measure is 4 to 14 times greater than the estimated domestic measure," he testified.

Using the $36 per ton SCC, the Environmental Protection Agency calculated that Obama's Clean Power Plan to cut U.S. electric power plant emissions by 30 percent would yield climate benefits amounting to $30 billion in 2030. "However, estimated domestic climate benefits only amount to $2–$7 billion, which is less than EPA's estimated compliance costs for the rule of $7.3 billion," noted Gayer. "The use of a global social cost of carbon to estimate benefits means that agencies will adopt regulations that could cost Americans more than they receive in climate-related benefits."

In his testimony, Heritage Foundation statistician Kevin Dayaratna looked at how the working group used discounting to calculate its SCC estimate. The first problem he noted is that the working group ran the IAMs using 2.5 percent, 3 percent, and 5 percent discount rates, ignoring the Office of Management and Budget's guidance that specifically stipulates that a 7 percent discount rate be used as well. The 7 percent rate is an estimate of the average before-tax rate of return to private capital in the U.S. economy. The choice of discount rate makes a huge difference. Consider that the present value of $100 in damages in 100 years at 3 percent is $5.20, whereas at 7 percent it falls to just 12 cents. When Dayaratna ran one of the models with the 7 percent rate, the 2020 SCC fell by more than 80 percent from over $32 to just under $6 per ton.

Dayaratna also pointed out that the Obama administration working group relied on a 10-year-old estimate of climate sensitivity that many climate scientists now regard as way too high. Taking the new lower estimates into account dramatically reduces the SCC. Even at the 3 percent discount rate preferred by the working group, the SCC in one model would fall to $16 per ton; at the 7 percent rate, it would amount to a negligible $2.50 per ton. In fact, Dayaratna reports, applying the 7 percent rate to another of the models used by the working group would make the SCC negative, at about $1 per ton. In that outcome, subsidizing carbon dioxide emissions would actually provide extra benefits to consumers.

Michael Greenstone also testified at the hearing. He justified the use of global damages in calculating the SCC by arguing that if the U.S. expects other countries to cut their emissions because they damage Americans, we must take into account the harm that our emissions cause them. He also contended that the lower discount rates are needed to allow for the risks of possibly catastrophic climate change. "The case for using a low discount rate to determine the social cost of carbon is in many respects similar to the case for purchasing life, fire, and other insurance policies that protect against major disruptive events," he argued.

According to a persuasive 2015 analysis by the European Commission statistician Andrea Saltelli and her colleagues, "The uncertainties associated with mathematical models that assess the costs and benefits of climate change policy options are unknowable. Such models can be valuable guides to scientific inquiry, but they should not be used to guide climate policy decisions." Given that man-made global warming could become a significant problem as the century advances, a plausible estimate for possible future damages would be useful. But the Obama administration's SCC calculations do not fulfill that role.

*Harkens back to the "socialist calculation debate" between Ludwig von Mises and Friedrich Hayek who asserted that efficient central planning is impossible and Oskar Lange and Abba Lerner who claimed that market socialism could be more efficient than competitive free markets.

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  1. So basically the SCC takes two of the most debated, complex and unpredictable systems (climate and economy) and combines them? Yeah, that seems it’ll yield solid answers.

    1. What’s the answer? Well, it depends on what you want it to be.

    2. Exxon has all that figured out and they can either share it with the public to prove their SEC filings are not misleading shareholders or they can settle for billion$$ to leftist eco groups in perpetuity.

      1. Who knew Exon solved the Navier?Stokes equations!

        1. Heh, heh,….

    3. Given CO2 is greening the planet, they left off the minus sign.

      Even accepting the hype (and I’m not) that CO2 has/is warming the planet, they still left off the minus sign.

      -$32/ton

      1. Whales are having a FEAST in the Arctic oceans, since spring comes earlier now, there. At about a 40% level, I read! WAY significant! And only 1 in 13 populations of polar bears is showing a decline. Yet you REALLY have to hunt, to find stories about these facts…

    4. It’s the entrails reading of our time. Rather than consult the oracle we consult complex models that are impossible to validate in a real experiment (except in tiny partial ways where they always fail). And if you can’t validate your model is right (speaking as someone who uses math for a living) I guarantee you it is wrong.

      By the way the other big complex unpredictable system is human biology. At least we can do clinical studies to test claims there, and look at the horrible track record. They can’t even decide what you should eat.

      1. Yeah man…

        Also, what about the social costs of worshipping the wrong gods? Shouldn’t someone, somewhere, be studying that?

        (PS, most of ’em, these days, are nominating Government Almighty as the “right” God to worship, but THIS vote of theirs, is held tightly secret!)

  2. Can citizens take that $36-a-ton estimate to the bank? Not really.

    I have not looked at any of the econometric models, does the $36-a-ton net in all of the benefits of climate change (e.g. longer growing seasons, fewer heating expenses and cold-related deaths, new shipping lanes etc.) against all of the costs?

    Coase covered all of this decades ago.

    1. benefits

      No, see, you’re only allowed to count the bad things when you’re trying to influence public policy.

  3. General estimates have placed a can of Coca-Cola to have 2.2 grams of CO2 in a single can. Are Philadelphia politicians going to give a cut of their new tax to the carbon overlords?

    1. No, but you can bet they will add on a carbon tax to soda now that you mention it.
      Also meat too, especially beef, when you figure in the carbon used to make fertilizer for the grain cows eat. Then there is the methane they fart out.

  4. Yes, finally, an accounting of social costs. But there’s more to count than just carbon.

    1. So what is the social cost of all the idiots this fake science has produced?

  5. obviously Exxon has a credible version of the SCC as part of their model of long-term multi-variate models of complex chaotic systems that’s hidden away in their gold-floored profit vault.

    /AGs for Clean Air

    1. #ExxonKnew

  6. The first problem he noted is that the working group ran the IAMs using 2.5 percent, 3 percent, and 5 percent discount rates

    That my be the first problem he noted, but I would have started by pointing out that it is far from certain that CO2 is the primary driver of warming, just as it’s far from certain that the warming will result in “net damage,” or even that it will continue.

    But that should in no way discourage our wise and benevolent leaders from billing us anyway.

    1. Just remember there are no cooling gases thats when you know you are being taken for a ride.

    2. Low discount rates have often been used to justify government policies. Suppose the best scientists found that the net benefit of reducing GHGs was $B per instant in time. Then if you want to calculate the present value of that, use the handy formula PV(B) = B/r, where B is the benefit and r is the discount rate. With r=0.1 (10%), you get PV=10*B. But if you drop r to r=0.01 (1%) you get PV = 100*B. So, yes. The choice of discount rate is crucial.

  7. So how much of my carbon footprint is responsible for the latest methane findings?

    First direct measurements of Pacific seabed sediments reveal strong methane source

    Depending on whom you ask, Methane -which is a far more influential greenhouse gas than CO2- is currently being released from the oceans naturally or as a result of “human induced climate forcing” . However, no one can seem to tie the observed increase in these methane sources to “human induced climate forcing” unless someone has a study showing otherwise that I’m missing?

  8. NOAA lost some (maybe all) of the data for the infamous Karl, et al “Pause Buster” paper…so the study cannot be replicated. Maybe the warmers should concern themselves with some trivial process stuff, rather than debating carbon costs. Sounds like the cart before the horse.

  9. This is hilarious:

    In other words, Greenpeace is admitting that it relies on “non-verifiable statements of subjective opinion,” and because its claims are not meant to be factual, the group believes it cannot be held legally responsible for what it says.

  10. However, none of these projections uses MY model, which shows CO2 levels falling so low that all plant life dies, and then the animals; and the empty earth continues in orbit, with only dead democrats voting every four years.
    Anyone advocating reduction in CO2 should be arrested and tried for crimes against plants. I am surprised the vegans have not been picketing all these climate models.

  11. ‘Massachusetts Institute of Technology economist Robert Pindyck”

    Unfortunate name.

    1. close to useless as tool

  12. The future would be in three words: “Nuclear electrical generation”.

    Modern modular nuclear technology is safe and produces no CO2.

    Windmills and solar panels kill things.

    1. “and produces no CO2.”

      There appear to be parts of the nuclear fuel cycle that haven’t yet made the pleasure of your acquaintance.

      1. No energy source is completely carbon free. But nuclear is as close As It Gets. And yes, that considers the entire cycle

    2. Nuclear, certainly. The future thorium and other liquid nuclear fuel reactors, and other advancing wave type reactors offer heat & power generation with almost none of the runaway dangers of current technology. Operating at lower, or atmospheric pressures, and actually burning cheaper uranium isotopes and previous waste nuclear products too “hot” to store safely this side of Saturn, we should get safe and inexpensive energy with almost no carbon dioxide emissions. Almost zero chance of terrorists stealing and slipping off with dangerous byproducts either. You would think this future should make everybody happy.

      [Also, what about that Navier-Stokes equation from earlier? No one seems to want to tackle that one. Me neither. Maybe this should be the Joule-Thomson Effect? All those scientific two-namers make great tags!]

  13. As long as eco-zealots such as Al Gore unapologetically ignore their own prescriptions for everyone else, I see no reason to consider their complaints about carbon as having validity. Let them stop exhaling carbon dioxide and then we’ll see.

  14. Well, this is the kind of story I asked for, and boy do I regret it! 😉

  15. It’s a method of controlling people though government limitations on industrial activity. Serf….

  16. ” In that outcome, subsidizing carbon dioxide emissions would actually provide extra benefits to consumers.”

    What the hell, it’s worked up to now.

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  18. I can see what your saying… Raymond `s article is surprising, last week I bought a top of the range Acura from making $4608 this-past/month and-a little over, $10,000 this past month . with-out any question its the easiest work I’ve ever had . I began this five months/ago and almost straight away startad bringin in minimum $82 per-hr

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  19. It wiould take billions to pay thousands to implement trillion dollar carbon taxes, and today’ Dems are hard at work on what Al Gore began, witness yesterday’s Harvard pep talk by Hillary Clinton.

    Whatever Croesus greases the skids for the Reason foundation should double down and give Bailey a million or three to add enough staff to cover what establishmentarian greens are up to outside the Beltway- he’s up against a cast of thousands.

  20. “It’s too hard, so let’s not do anything.” Funny, determining the threats to our national security from human sources is hard, too. These may also be non-existent, but that doesn’t seem to keep us from throwing 4% of GDP at it every year.

    1. Iis it unreasonable to wish to avoid creating an annother industry for criminal cronies? Dose it not bother you that there is demonstrated deceptive practices going on and winners and loosers are being selected on that basis?

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  22. The “Social Cost” of anything cannot be the most important number for anything.

  23. First, consider that integrated assessment models are trying to forecast how extra carbon dioxide will impact climate and economic growth over the course of this century and beyond. One of the critical variables is climate sensitivity, conventionally defined as how much warming can be expected from doubling the amount of carbon dioxide in the atmosphere. The working group calculating the SCC also used various ????? ?? ?? ????? ???? discount rates. (One way to think of discount rates is to consider how much interest you’d require to put off getting a dollar for 10 years.) Finally, instead of focusing on domestic harms, the working group included the global damages in calculating the SCC.

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