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December 17, 2015

IER Comment on the “Social Cost of Methane”

December 17, 2015
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Earlier this month, the Institute for Energy Research (IER) submitted a formal comment on proposed federal emission standards for new and modified sources in the oil and gas sector. The novelty of the government’s cost/benefit assessment of the rules was their use of the “social cost of methane,” which is analogous to the more familiar “social cost of carbon” but, of course, applied to a different greenhouse gas. We at IER have tirelessly documented the problems with the “social cost of carbon” as a tool for federal policymakers, and yet the “social cost of methane” is even more dubious.

The Devil’s in the Discount Rates

As with the social cost of carbon (SCC), the social cost of methane (SCM) seeks to quantify the present dollar value of the string of future climate change damages accruing from an additional ton of methane. To calculate such an estimate, analysts use the same “integrated assessment models” (IAMs), which are computer simulations over centuries to model the global climate and economy.

Among other problems, a huge issue here is that the discount rate chosen to turn those hypothetical future damage projections into present dollar figures is critical. This one decision can drive the entire analysis. The following table summarizes some of the estimates of the SCM varying by changing the discount rate:

TABLE 1: “SOCIAL COST OF METHANE” FOR VARIOUS YEARS, DISCOUNT RATES

Discount Rate: 5.0% 3.0% 2.5%
Year
2015 $490 $1,100 $1,500
2020 $580 $1,300 $1,700
2050 $1,400 $2,700 $3,300

Source: Marten et al. (2014)[1]

As the table indicates, the discount rate has an enormous impact on the estimated SCM. As we have stressed repeatedly here at IER, the discount rate used in such analyses is not an objective fact of the world that can be measured in the same way as, say, the speed of light or the calories in a Big Mac.

Rather, many analysts want to use “ethical” considerations to pick the discount rate, rather than market-based interest rates. (See the discussion of “ethical” discount rates in a recent survey of economists working in this area.) Whether one agrees with the approach or not, surely it is clear that policymakers are given free rein with regulations when the “benefits” of reducing methane emissions can be manipulated so drastically just by adjusting the discount rate dial.

What is even more troubling is that the federal government’s analysis did not include estimates of the SCM at a 7 percent discount rate, even though this is a standard Office of Management and Budget guideline for cost/benefit analyses.

We can understand why: By using the (OMB-required) 7 percent rate, the SCM would fall even further. The Heritage Foundation was able to obtain the code used for one of the computer models (namely, the DICE model) that generated the new SCM estimates. Armed with the code, the Heritage researchers could calculate the SCM—holding the other assumptions constant—using a 7 percent rate. The table below shows the stark contrast between a 3 percent a 7 percent rate.

TABLE 2: IMPACT OF EXCLUSION OF 7 PERCENT DISCOUNT RATE FOR SCM

Year 3% Discount Rate 7% Discount Rate
2015 $792 $212
2020 $922 $259
2030 $1,218 $369
2040 $1,593 $514
2050 $2,051 $700

Source: Heritage Foundation[2]

Again, we see in the table the enormous impact that the discount rate has on the estimated SCM. Failure to include the 7 percent calculations—despite being required by OMB guidelines—suggests that the enterprise was not a neutral scientific inquiry, but performed to justify desired federal regulations.

Relatively Little Research on Methane

All of the problems with using the SCC for federal cost/benefit analysis apply to the SCM and the “social cost” of other greenhouse gases. However, as bad as the SCC is, the case for using an SCM is even weaker.

First, there is a paucity of research in this area; there are far more studies looking at carbon dioxide, rather than methane. As a pioneering paper in the SCM literature explains:

Many estimates of the social cost of CO2 emissions (SCCO2) can be found in the climate economics literature. However, to date far fewer estimates of the social costs of other greenhouse gases have been published, and many of those that are available are not directly comparable to current estimates of the SCCO2.[3]

Methane Shorter-Lived Than Carbon Dioxide

Another important difference between carbon dioxide and methane is that the latter has a shorter atmospheric life. Indeed as Marten and Newbold explain: “the relatively short lifespan of CH4 causes the temperature impact of a perturbation in 2010 to drop from its peak level by nearly an order of magnitude by 2100, while an analogous effect for a CO2 perturbation does not occur before the end of the 300 year time horizon” (p. 14).

Given the large uncertainties of our current understanding of methane, the fact that it is relatively short-lived is an additional reason to defer the use of “the social cost of methane” in federal regulatory analysis. To put the argument differently: If proponents of a carbon tax and other regulations want to stress the longevity of carbon dioxide in the atmosphere as reasons for immediate action—and they do—then by consistency they should admit that humans have more flexibility when it comes to methane. Although it is a more powerful greenhouse gas (as measured by its Global Warming Potential), changes in future policy regarding methane emissions will be more effective than analogous policies regarding carbon dioxide.

Conclusion

All of the problems plaguing the use of “social cost of carbon” in federal policymaking likewise apply to the more novel “social cost of methane,” but on top of these the SCM is even more dubious because it has received less research attention and because it is shorter-lived in the atmosphere than carbon dioxide. It is particularly inappropriate to use such an amorphous concept when justifying regulations that could impose billions of dollars of compliance costs on the U.S. economy.


[1] Marten, A.L., E.A. Kopits, C.W. Griffiths, S.C. Newbold & A. Wolverton (2014, online publication; 2015, print publication). Incremental CH4 and N2O mitigation benefits consistent with the U.S. Government’s SC-CO2 estimates, Climate Policy, DOI: 10.1080/14693062.2014.912981.

[2] David Kreutzer and Kevin Dayaratna, “Another Useless EPA Regulation That’ll Cost Americans More Money,” Daily Signal, December 3, 2015, available at: http://dailysignal.com/2015/12/03/another-useless-epa-regulation-thatll-cost-americansmore-money/.

[3] Marten and Newbold, “Estimating the Social Cost of Non-CO2 GHG Emissions: Methane and Nitrous Oxide,” February 2012 update.

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