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August 30, 2013

NRDC in damage control mode on the social cost of carbon

August 30, 2013
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The environmental group, NRDC, is engaged in full-scale damage control because they don’t like the fact that the public is learning the truth about the computer models used by the Obama Administration to justify its estimates of the “social cost of carbon.”

Recently, Robert Murphy wrote  an article explaining that Professor Robert S. Pindyck of MIT has been very critical of the estimates of the “social cost of carbon.” Here’s how Murphy started his piece:

In my previous post, I summarized Robert S. Pindyck’s scathing paper on the computer models used by the Obama Administration for its estimates of the “social cost of carbon.” Pindyck’s critique is all the more compelling because he is a professor of economics and finance at MIT, with several decades’ experience publishing articles and books dealing with energy, and he is actually a proponent of a carbon tax. [emphasis added]

The fact that Pindyck is a proponent of a carbon tax and is critical of the estimates of the social cost of carbon is a point that Murphy thought so was important that he put it in the second sentence of the piece. (In his original post Murphy also made it crystal clear that Pindyck supported a global carbon tax, once again in the second sentence of the post, so nobody ought to have missed it.)

But Laurie Johnson, writing at the NRDC’s Swtichboard blog, apparently failed to read what Murphy actually wrote, before writing an 800+ word blog post arguing why Murphy is wrong. She also failed to link to Murphy’s posts, denying her readers the possibility of discovering her error. This is the second paragraph of Johnson’s piece:

Ironically, by latching on to the author’s strong words of the SCC as “close to useless,” opponents have unwittingly set themselves up for a pyrrhic victory. Had they bothered to read the paper, they might have discovered that the author believes a carbon tax starting at the administration’s SCC would make sense; that the author viewed denying the need for a carbon price as a sign of ignorance and perhaps irresponsibility; and that the author’s critique suggests a higher SCC might be needed

Uh yeah. We know that Pindyck supports a carbon tax. (And yes, we did read Pindyck’s paper—in fact Murphy’s two posts largely consisted of lengthy block quotations from Pindyck’s paper.) That is one of the reasons why his critique of the social cost of carbon is useful. So let’s review what Pindyck actually wrote about the social cost of carbon in his recent paper.

When assessing climate sensitivity, we at least have scientific results to rely on, and can argue coherently about the probability distribution that is most consistent with those results. When it comes to the damage function, however, we know almost nothing, so developers of IAMs [Integrated Assessment Models] can do little more than make up functional forms and corresponding parameter values. And that is pretty much what they have done. [Pindyck p. 11, bold added.]

This is a direct quote from Pindyck’s recent paper—and it’s a quote that Murphy previously pointed out. Pindyck believes that the social cost of carbon might be higher, but logic dictates that is not necessarily so. The social cost of carbon might be higher, but it might also be lower—or even negative.

Johnson quotes an email that Pindyck wrote her arguing:

  • “The problem is not that the [model] developers were negligent and ignored economic theory. There is no economic theory that can tell us what [extreme] damages look like.”
  • So…“Given the limited available information the [administration] did the best it could…”

Murphy never said that the model developers were negligent or ignored economic theory. Murphy merely quoted Pindyck. Here’s another quote from Pindyck:

Most IAMs (including the three that were used by the Interagency Working Group to estimate the SCC) relate the temperature increase T to GDP through a “loss function” L(T), with L(0) = 1 and L’(T ) < 0. For example, the Nordhaus (2008) DICE model uses [an] inverse-quadratic loss function…

Weitzman (2009) suggested the exponential-quadratic loss function…which allows for greater losses when T is large. But remember that neither of these loss functions is based on any economic (or other) theory. Nor are the loss functions that appear in other IAMs. They are just arbitrary functions, made up to describe how GDP goes down when T goes up.

The loss functions in PAGE and FUND, the other two models used by the Interagency Working Group, are more complex but equally arbitrary…[T]here is no pretense that the equations are based on any theory.[Pindyck p. 11, bold added.]

It’s fine to argue that the administration did the best they could, but the numbers are still “arbitrary” in Pindyck’s words and there “is no pretense that the equations are based on any theory.” Those are Pindyck’s words, not ours.

Johnson concludes her blog post with this:

Hopefully the irony of the opposition’s attack on Pindyck won’t be missed. Rather than abandoning the administration’s SCC altogether, the author thinks it makes sense to use it in the absence of a better measure, one that would ideally include catastrophic damages. This is a story that can’t end well for the opponents.

It’s a real irony that Johnson fails to point out anything truly ironic in Murphy’s piece. It is truly ironic that she says that accurately quoting Pindcyk is an “attack on” Pindyck.  We merely pointed out what Pindyck has written and the logical implications. Professor Pindyck can believe the social cost of carbon is too low, but given the fact that the damage functions are “arbitrary” and not “based on any economic (or other) theory” they may be too high.

Let us end with a quote from the final paragraph of Murphy’s first post on this matter. You can decide whether we were distorting the context of Pindyck’s paper. Here’s what Murphy wrote:

Now it’s true, Pindyck still thinks there is a strong case for federal intervention to curb emissions of greenhouse gases, and on that score he and I part ways. Yet when it comes to the Obama Administration’s official rationale for its anti-carbon policies, even Pindyck the MIT expert agrees with me: these computer models are close to useless.

If Johnson wants to say we are misrepresenting Pindyck, it won’t end well from her, since “close to useless” is the exact phrase that Pindyck used to describe the models used by the Obama Administration in estimating the social cost of carbon. Pindyck’s paper is obviously causing some angst in the pro-regulation community, but as one commentator has said, there are inconvenient truths in this debate.

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