Cost-benefit analysis: the coming battle between the Trump team and economists over the true cost of climate change

 22 December 2016 cross-posted from The Washington Post


In this Jan. 20, 2015 photo, a plume of steam billows from the coal-fired Merrimack Station in Bow, N.H. (AP Photo/Jim Cole)

This story has been updated.As we learn more and more about the tenor of the Trump transition, a key part of its regulatory rollback strategy on climate change is coming into focus.

It seems increasingly likely that the Trump administration would either alter, or attempt to stop using entirely, an Obama-era metric known as the “social cost of carbon” in its federal rule-making processes. And that could have have major effects on the way environmental policies are written (or unwritten) in the coming years.

A recent, highly controversial questionnaire the transition team sent to the Department of Energy requested a list of all “employees or contractors who have attended any Interagency Working Group on the Social Cost of Carbon meetings,” as well as emails and other materials associated with those meetings. It also asked a variety of questions about the assumptions that went into calculating the social cost of carbon.

Meanwhile, a document written last month by Department of Energy transition leader Thomas Pyle and recently obtained by the Center for Media and Democracy, suggested that “during the Trump Administration the will likely be reviewed and the latest science brought to bear. If the  were subjected to the latest science, it would certainly be much lower than what the Obama administration has been using.”

But experts have countered that attacking the social cost of carbon may not hold up under scientific, or even legal, standards. If anything, many scientists believe that its monetary value should be set even higher.

The cost of climate change 

Scientists agree that climate change could cause a wide variety of damages to human communities, including natural disasters, harm to human health, reduced agricultural output and lower economic productivity, all of which result in monetary costs to society. The social cost of carbon, then, refers to the cost of emitting one ton of carbon dioxide into the atmosphere.  

A U.S. government working group first convened in 2009 to develop a method for quantifying the social cost of carbon, and the value has since been used to help create a variety of federal environmental regulations, including the Clean Power Plan. The cost is currently set at about $36 per ton of carbon dioxide.

For an administration that has promised to reduce regulations on oil and gas operations and revive the coal industry, doing away with — or at least reducing — the social cost of carbon is an obvious priority. The higher the cost is set, the more harm the government assumes will be caused by greenhouse gas emissions, which would generally justify more, rather than less, stringent regulation of the fossil fuel industry.

Yet many climate experts now believe the social cost of carbon should actually be even higher than the current estimate. The old models used to calculate the value rely on dated research, they’ve argued, and there are certain climate-related damages that may not be adequately factored in.

“When the U.S. government issued the social cost of carbon first in 2009 or 2010, it was a very good job of summarizing the literature as it stood,” said Michael Greenstone, an economist at the University of Chicago and former chief economist for President Obama’s Council of Economic Advisers, who helped convene the first federal working group to address the social cost of carbon. “What has emerged since then has been an explosion of research to estimate the likely damages from climate change.”

One 2015 paper argued that the models don’t do enough to account for the effect of higher temperatures on GDP. Once the authors factored it in, they found that the social cost of carbon skyrocketed up to about $220 per ton of carbon dioxide.

The lead author of that paper, Frances Moore of the University of California Davis, is now working on new research that addresses the impacts of climate change on agricultural output, and how those effects can radiate through the economy.

“The representation of those impacts in the agricultural sector is pretty dated in the models,” Moore said. “When we update those…we  find the social cost of carbon goes up substantially.”

Other recent research suggests that a majority of climate-focused economists would agree that the social cost of carbon could be set higher. One 2015 study surveyed experts who’d published a climate change-related article in a leading economics or environmental economics journal in the past two decades. The survey, which asked a variety of questions about climate change, found that more than half the respondents thought the current estimate of the social cost of carbon was too low. Eighteen percent thought it was about right, while just eight percent thought it should be even lower.

The same survey also found respondents generally predicted higher economic impacts from future climate change than past surveys have indicated, which may illustrate our evolving understanding of how climate change will affect human societies.

The future of the social cost of carbon  

As Greenstone and his colleague Cass Sunstein of Harvard Law School point out in a recent New York Times op-ed, it would legally be difficult or even impossible for the Trump administration to do away with the metric entirely. One of the reasons the standard was developed in the first place is because a 2008 federal court of appeals ruling specified that federal regulations must take climate change impacts into account. A more recent legal challenge to the use of the social cost of carbon was rejected in court.

“Any effort to eliminate the social cost of carbon would reflect a neglect of science and economics — and it would be quickly struck down in court,” Greenstone and Sunstein write.

But there are other potential ways to dull the metric’s bite, so to speak, by making its value smaller. One way would be to reconsider the calculations known as the “discount rate.” This is a kind of interest rate which can be thought of as a way to address how much the present generation is willing to pay to prevent climate-related damage in the future.

A higher discount rate results in a lower social cost of carbon. Currently, the federal government uses a rate of 3 percent with a value of $36 for the social cost of carbon — but according to the Environmental Protection Agency, a discount rate of 2.5 percent would bring the cost up to $56 per ton of carbon dioxide, while a rate of 5 percent would lower it to $11 per ton.

In fact, the same questionnaire that requested the names of Energy Department employees who’d worked on the social cost of carbon also asked for information on the models and discount rates used to calculate the value. And at least one member of the Trump transition team has already argued for a higher discount rate. David Kreutzer, a member of the Environmental Protection Agency transition team who has previously questioned the science of anthropogenic climate change, published an essay earlier this year suggesting that a 7 percent discount rate, rather than 3 percent, would be more appropriate for use in regulatory policy.

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The new administration almost certainly couldn’t make any major changes without providing adequate scientific and economic justification, said Richard Revesz, a law professor and dean emeritus of the New York University School of Law. Otherwise, the move would also likely be struck down in court as “arbitrary and capricious,” he argued.

In fact, he added, the National Academy of Sciences has assembled a committee of experts to review the way economic aspects of climate change are modeled. Their findings are expected to be published in a report early next year, which will help inform any future revisions to the social cost of carbon.

“Interestingly, the economic consensus is actually moving in the direction that suggests the Obama discount rate is too high, not too low,” Revesz said. It’s likely the academy’s report will reflect this movement, or at least continue to support the value that’s been used by the Obama administration.

“Once that report is out there, if the Trump administration wants to take a very different approach, it will have to explain…why it decided to disregard a consensus report of a very highly distinguished panel and what support it has for doing that,” Revesz said.

So despite the leaked memo’s suggestion, there will likely be many hurdles the new administration would have to overcome to tackle the social cost of carbon, which is now a staple of environmental regulatory policy.

“At the end of the day, climate change poses a very difficult challenge to society because neither of the choices are great — we can pay more today for energy and have less climate damage in the future, or we can pay less today and expose ourselves to greater climate risk in the future,” Greenstone said. “It’s a balancing act to find the right tradeoff between costs today and costs tomorrow.”

But, he added, “wishing those costs did not exist does not make it so.”