Why the Social Cost of Carbon is a Dubious Policymaking Tool

This week Rep. Evan Jenkins (R-WV) introduced HR 5668, the “Transparency and Honesty in Energy Regulations Act of 2016,” a bill which would “prohibit the Secretary of Energy and the Administrator of the Environmental Protection Agency from taking the social cost of carbon or the social cost of methane into account” when issuing and enforcing government policy. We at IER have written extensively on the issues of the social cost of carbon (and methane), and since these are such technical matters it is important for the public to understand the basic issues.

Definition

Formally, the “social cost of carbon” is the present-value of projected future net damages from emitting an additional unit of carbon into the atmosphere. In US policy circles, the social cost of carbon (abbreviated SCC) is usually expressed as a dollar figure per tons of carbon dioxide. For example, the press might report that in a recent estimate, the EPA estimated the SCC in the year 2015 at $36 per metric ton of CO₂ (where that figure is in 2007 dollars). This works out to about 32 cents per gallon of conventional gasoline in 2007 dollars, or about 37 cents in today’s dollars.

Similarly, the so-called social cost of methane (SCM) is supposed to represent the present-value of projected future net damages from emitting another unit of methane.

The overarching purpose of issuing estimates of the SCC and SCM is to give policymakers actual numbers to plug into cost/benefit analyses of proposed federal rules, in light of the alleged “negative externalities” from human-induced climate change. For example, if the EPA issues new restrictions on emissions from coal-fired power plants, this obviously reduces conventional economic growth, and makes electricity more expensive for consumers. In order to justify such a measure, then, there have to be benefits that outweigh these obvious costs. The Obama Administration currently can point to the reductions in carbon-intensive emissions and put a dollar figure on them, using its estimates of the SCC, as one of the benefits of such a policy.

Why Should Regular People Care About the Social Cost of Carbon?

Although it sounds like an obscure technical issue, the “social cost of carbon” (and the related “social cost of methane”) is actually quite important, because it is a very dubious concept that is nonetheless playing a large role in shaping current and future energy policy.

Regular people probably assume that the “social cost of carbon” is an empirical fact of the world that scientists in white lab coats go out and measure, just like they can measure (say) the charge on an electron or the speed of light.

However, the social cost of carbon is not a “fact of the world” that’s out there, waiting to be measured. Instead, it is estimated on the basis of computer simulations (which run centuries into the future). Even worse, because the very concept of a “social cost of carbon” involves dollar-value estimates of climate change damages that won’t occur for hundreds of years, the number itself is very sensitive to slight changes in the “discount rate” that we use to turn those future dollars into present dollars.

For example, the EPA’s own table shows just how malleable the “social cost of carbon” is, based on the discount rate we choose for our analysis:

Table. Social Cost of Carbon Estimates, 2007 US$ per metric ton CO₂, Various Discount Rates

Source: Adapted from EPA.

As the table above shows, the government’s own figures reveal why use of the SCC in policymaking is extremely dubious. Simply by quibbling over which discount rate to use—which is a philosophical/ethical question, not something that technical science can answer—analysts can make the apparent impact of carbon dioxide emissions quintuple in dollar terms. For example, in the year 2020, the estimated SCC is a mere $12 using a 5% discount rate, but a whopping $62 using a 2.5% rate.

Now, some observers might think that we are focusing on a bit of minutia, and that surely we can trust experts in the federal government to pick an appropriate rate. And yet, it is quite clear in the Office of Management and Budget (OMB) guidelines that all cost/benefit analyses are to be scored using both a 3% and a 7% discount rate. Despite this clear directive, the Obama Administration’s task force on the Social Cost of Carbon did not bother running the computer simulations with this setting, leading to an absurd situation where federal reports must include an asterisk and explain why they do not include a 7% figure for their reported values involving climate change.

Looking again at the table above, it should be crystal clear why the Obama Administration did not follow OMB guidelines when it came to the social cost of carbon: The resulting figure would be too low to justify drastic intervention in the energy sector, which is what they wanted to do. For example, the climate policy economics experts and programmers at the Heritage Foundation have found that the FUND model (one of the three used by the Obama Administration) shows net benefits from carbon dioxide emissions through the year 2030, using a 7% discount rate. You can imagine how awkward it would be in the climate change debate, if one of the Obama Administration’s own chosen computer models, using a discount rate required by OMB, spit out a number suggesting that coal power plants benefited humanity over and above the electricity because of enhanced fertilization, fewer winter deaths among the elderly, and so forth, and therefore ought to be subsidized by taxpayers. Consequently, it was easier just to ignore the OMB’s clear guideline and not publish the SCC estimates when using a 7% discount rate.

Now to be sure, the Obama Administration has issued reports trying to explain away these contradictions. The interested reader can see my analysis, taking them apart. As I concluded at one point: “It would be like someone robbing a bank and then arguing, “My actions were consistent with the bank’s published policies, because a sign said, ‘Have a nice day!’”

Conclusion

In the interest of brevity, I have focused on only one (but major) problem with the “social cost of carbon” as a concept guiding federal energy policy. There are several more problems, as outlined in IER’s formal Comment. Furthermore, everything that is wrong with the SCC likewise applies to the social cost of methane, with additional problems on top. For these reasons, we at IER have warned that these concepts are poor tools in federal policymaking, because they can be crafted to suit whatever answer the analyst wants on the front end.

The American public would be very surprised to learn that the alleged “scientific consensus” when it comes to government policies based on climate change is not very “settled” at all. Indeed, using the mantle of science to stifle dissent and garner support for a carbon tax and other interventions is itself evidence that the case for such measures is much weaker than the proponents would have you believe.