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‘Social Cost’ of Carbon vs. Climate Science

“The determination of the social cost of carbon (SCC) as made by [federal agencies] is discordant with the best scientific literature on the equilibrium climate sensitivity and the fertilization effect of carbon dioxide—two critically important parameters for establishing the net externality of carbon dioxide emissions…. The [federal government] should act not just to revise the current determination of the SCC, but to suspend its use in all federal rulemaking.”

- Patrick Michaels and Chip Knappenberger (Center for the Study of Science, Cato Institute). “Comment on ‘Technical Support Document, Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866’,” January 27, 2014.

Federal legislative attempts to price and regulate carbon dioxide have failed. Cap-and-trade, which passed the House in 2009, died the next year in the Senate. A carbon tax, much discussed, has not gotten the traction to reach a House vote.

However, a back-door energy tax is alive and well in a monetary-damage value assigned to carbon dioxide emissions in regulatory justification. Under federal cost/benefit analysis, for example, an energy efficiency standard can become more onerous by assigning a monetary benefit of reduced CO2 emissions.

The determination of the social cost of carbon by the Interagency Working Group (IWG), detailed in the May 2013 Technical Support Document (updated in November 2013) is worse than highly subjective, thus an arbitrary calculation. It is knowingly improper, inaccurate and misleading. It should be expunged from all federal matters.

What follows are some highlights of our new Cato study, which can be read in its entirety here.

Domestic vs. Global Costs
The IWG only reports the global value of the SCC, which the IWG determines to accrue from continued carbon dioxide emissions in the United States. This is in direct violation of existing OMB guidelines….

Discount Rates
In the same manner, the IWG ignores Office of Management and Budget (OMB) guidelines in its selection of discount rates to use in calculating the SCC. OMB Circular A-4 refers to OMB Circular A-94 which states that “a real discount rate of 7 percent should be used as a base-case for regulatory analysis” and to show the sensitivity of the results to the discount rate assumptions “[f]or regulatory analysis, you should provide estimates of net benefits using both 3 percent and 7 percent.”

Instead, the IWG opted to determine the SCC using discount rates of 2.5, 3, and 5 percent, and did not include results for a 7 percent rate….

Equilibrium Climate Sensitivity
In May 2013, the Interagency Working Group (IWG) produced an updated SCC value by applying updates to the underlying three Integrated Assessment Models (IAMs) used in its initial 2010 SCC determination, but did not update the equilibrium climate sensitivity (ECS) employed in the IAMs. This was not done, despite there having been, since January 1, 2011, at least 11 new studies and 17 experiments (involving more than 44 researchers) examining the ECS, each lowering the best estimate and tightening the error distribution about that estimate….

Agricultural Impacts of Carbon Fertilization
Carbon dioxide is known to have a positive impact on vegetation, with literally thousands of studies in the scientific literature demonstrating that plants (including crops) grow stronger, healthier, and more productive under conditions of increased carbon dioxide concentration.

A recent study (Idso, 2013) reviewed a large collection of such literature as it applies to the world’s 45 most important food crops (making up 95% of the world’s annual agricultural production). Idso (2013) summarized his findings on the increase in biomass of each crop that results from a 300ppm increase in the concentration of carbon dioxide under which the plants were grown. This table is reproduced below, and shows that the typical growth increase exceeds 30% in most crops, including 8 of the world’s top 10 food crops (the increase was 24% and 14% in the other two)….

Conclusion

The social cost of carbon as determined by the Interagency Working Group in their May 2013 Technical Support Document (updated in November 2013) is unsupported by the scientific literature, not in accordance with OMB guidelines, fraught with uncertainty, and thus unsuitable and inappropriate for federal rulemaking. As such, use of the SCC in cost/benefit analyses in proposed federal regulation should be suspended.

It is unlikely, in light of the large uncertainties and low level of understanding in critical economic, scientific, social, etc. factors that are vital to the projections of future climate impacts, that determinations of the SCC will ever become robust enough for use in federal rulemaking. M.I.T. economist Robert Pindyck (2013) recently summed up the situation as it applies to the use of Integrated Assessment Models (IAMs)—the preferred tool used by the IWG in their determination of the SCC:

Given all of the effort that has gone into developing and using IAMs, have they helped us resolve the wide disagreement over the size of the SCC? Is the U.S. government estimate of $21 per ton (or the updated estimate of $33 per ton) a reliable or otherwise useful number? What have these IAMs (and related models) told us? I will argue that the answer is very little. As I discuss below, the models are so deeply flawed as to be close to useless as tools for policy analysis. Worse yet, precision that is simply illusory, and can be highly misleading.

9 comments

1 Ed Reid { 01.31.14 at 4:43 pm }

The history of “monetizing environmental externalities” in the US is a history of “good” intentions and awful results. I have seen estimates for CO2 ranging from significant value to $300 per ton costs. The actual externality value/cost might well lie somewhere within that range, though I doubt we will ever truly know.

The idea of investing $trillions to completely remake the US energy economy based on such unknowns (unknowables?), particularly in the absence of action by the other occupants of the global commons, is mind blowing. It cannot be a reliance on science, but merely a leap of faith.

2 D Jaques { 01.31.14 at 9:25 pm }

Thank you for summarizing these “going on’s” by the U.S. Gov’t; although I am not a climate physicist – only a plant biologist – I do know that my own ranch’s hay crops will yield better results with greater CO2 concentrations, but, darn it! the cooling weather for the past 15+ years has more than compensated for the apparent increases in CO2 (from Mauna Loa measurements) progressing upward since 1958.

I need much higher CO2 (say, about 1200ppmv like in my greenhouses) for my crops to recoup the 500 – 800 lbs/acre reductions in feed hay that has occurred since about 2000! Although this cooling period is not as bad as the one in the 1950′s and 1960′s, it’s still a bother to a poor rancher! Give me a break please – don’t sequester the CO2 that we need. Thanks, if you get the message and act on the knowledge Mr. Obama.

3 Weekly Climate and Energy News Roundup | Watts Up With That? { 02.02.14 at 8:46 pm }
4 Ray { 02.03.14 at 4:43 pm }

This study calls the federal government SCC estimates practically worthless.
http://www.americaspower.org/sites/default/files/Social_Cost_of_Carbon.pdf

5 Jason { 02.06.14 at 6:49 pm }

Thanks for posting that link Ray. I was just going to post it, along with the note that Bezdek’s study on the Social Benefits of Carbon shows that the benefits of using carbon-based fuels outweigh the costs by ratios of 50:1 to 500:1—whole orders of magnitude.

Bezdek’s study is a worthwhile read as it demonstrates the alleged $22/ton social cost of carbon gets lost in the statistical noise when attempting to calculate the benefits associated with using fossil fuels.

6 The Positive Externalities of CO2 | COALBLOG { 02.07.14 at 6:08 pm }

[…] the discussions about the so-called social cost of carbon have been extremely one-sided and the research into that measure has been seriously […]

7 Cooler Heads Digest 31 January 2014 { 02.17.14 at 11:18 am }

[…] Social Cost of Carbon vs. Climate Science Chip Knappenberger, Master Resource, 31 January 2014 […]

8 FullConclusion { 02.27.14 at 7:39 pm }

you fail to mention Pindyck’s conclusion:
My criticism of IAMs should not be taken to imply that because we know so little, nothing should be done about climate change right now, and instead we should wait until we learn more. Quite the contrary. One can think of a GHG abatement policy as a form of insurance: society would be paying for a guarantee that a low-probability catastrophe will
not occur (or is less likely). Some have argued that on precautionary grounds, there is a case for taking the Interagency Working Group’s $21 (or updated $33) number as a rough and politically acceptable starting point and imposing a carbon tax (or equivalent policy) of that amount. This would help to establish that there is a social cost of carbon, and that social cost must be internalized in the prices that consumers and firms pay. (Yes, most economists already understand this, but politicians and the public are a different matter.) Later, as we learn more about the true size of the SCC, the carbon tax could be increased or decreased accordingly.

9 Jan freed { 03.02.14 at 11:55 am }

Why is not the ‘social cost’ of some fossil fuels far higher?

The coal industry already slaps us with a “hidden tax” of $300-$500 billion/year(!), according to a Harvard School of Medicine study of over 70 negative impacts. (primarily health impacts, but others as well). In the N.Y. Acad. Sci.:

http://solar.gwu.edu/index_files/Resources_files/epstein_full%20cost%20of%20coal.pdf

The World Bank cites a similar figure. These hidden costs do not effect coal’s profits. We pay.

The conservative values of “accountability” and “paying your own way” should require this social cost to be imposed on the industry itself, not the average citizen. Coal is not ‘cheap’.

Once an honest price on carbon is set, all fees collected should be rebated to the citizen as a direct payment or lower taxes (as in BC) to compensate for the social costs.

Most important, such bills would reduce emissions and are in Congress. They will be opposed by the ‘fossil tools” in Congress, the WSJ, etc.

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