The Trump Administration has ordered federal agencies to use a “social cost of carbon” that only takes into account domestic consequences of climate change, writes Meredith Fowlie, Assistant Professor of Agriculture and Resource Economics at the University of California at Berkeley. That translates into a cost of $1-$6 per ton, instead of the $45 per ton that was under the Obama Administration. Fowlie explains the reasoning behind the policy change and argues that it is misguided. Article courtesy Energy Institute Blog, Energy Institute at Haas School of Business.
The unraveling of federal environmental protection under the Trump administration is well underway. Over the past several months we’ve seen moves to axe, roll back, suspend, delay, halt, deny, and postpone environmental protection and health-based standards. Last month, the EPA initiated a repeal of the Clean Power Plan (CPP), the centerpiece of Obama’s climate change legacy.
Under the Obama administration, you might remember that projected net benefits of the CPP were on the order of $67 billion (by 2030). In sharp contrast, Trump’s EPA has concluded that we should scrap the Clean Power Plan because estimated costs exceed the benefits.
Sources: Obama RIA (Tables ES-7 and ES-19); Trump RIA (Table 1-3 and 1-8); Percentages indicate discount rate used.
There are a number of accounting changes and questionable assumptions that explain the striking change in these cost-benefit estimates from one administration to the next. (If you are wondering about the “efficiency benefits” grey area, this is an accounting shell game described here.)
One of these accounting changes has particularly important and far-reaching policy implications. Whereas the Obama White House directed agencies to consider global climate change impacts when assessing the benefits of GHG reductions, the Trump administration has adopted a narrow definition of domestic damages for accounting purposes. This helps explain why you can barely see the Trump administration’s revised estimates of climate change benefits (blue bar) in the graph above.
This narrowing of focus to consider only direct U.S. impacts may seem like a pro-America policy position. But in climate change policy, as in other critical areas (trade agreements, nuclear proliferation, alliance commitments, cybersecurity, to name a few), Trump’s brand of “America First” is crude and misguided. A recent paper by our colleague Matt Kotchen helps to drive this point home in a carbon context. Before digging into these details, let’s introduce the numbers that are at the crux of this debate.
The Social Cost of Carbon
The “social cost of carbon” (SCC) is a policy-critical number. It aims to measure, in dollar terms, how much damage is caused over the long run by one metric ton of CO2 emissions in a given year.
Back in 2009, economist Michael Greenstone and legal scholar Cass Sunstein convened an Interagency Working Group (IWG) tasked with quantifying the social cost of carbon for the United States government. Because the health, environment, and economic damages caused by climate change are felt globally, they drew from the latest research in science and economics to account for the full global impact. The central global cost estimate reaches $45/ton of CO2 by 2020.
Given the inherent complexity and uncertainty surrounding climate change damages, this IWG effort may seem like an exercise in futility. But given the potentially devastating consequences of making policy decisions that entirely ignore climate change damages, this is an exercise worth pursuing. It’s really important to uncover the best possible (albeit imperfect) estimates of climate change damages to guide policy actions that directly and indirectly affect GHG emissions. Many of our colleagues have been working hard to refine and improve this process.
In March, Trump issued an executive order that disbanded the working group and dismissed the global SCC estimates as “no longer representative of government policy”. The order paved the way for a “domestication” of the SCC where only damages that directly impact the United States are used to steer policy decisions. Trump’s EPA uses a domestic SCC (aka DSCC) in the range of $1-$6/ton. This accounting change helps explain why climate-related benefits practically disappear from the Trump balance sheet above.
Source: Not much bite in a $2 DSCC.
The CPP repeal effort is stoking the debate over which (if any) social cost of carbon should be used to guide policy. As I see it, most opinions can be grouped into four camps:
There are some who argue that the SCC should not be used at all. If you don’t believe that climate change is happening, there are no damages to worry about (let alone measure). Fortunately, the courts have upheld the scientific finding that greenhouse gases endanger public health or welfare, and ruled that agencies are acting arbitrarily if they assume an SCC of zero. These rulings make it difficult to eradicate or ignore the SCC.
Key arguments in favor of using the global SCC (GSCC) estimates often appeal to reciprocity and altruism. To solve the global climate change problem, all countries will need to account for the global damages of their emissions. If every country considers only the direct effect on itself, we will make little progress. And if Americans care about people beyond our borders, our policy actions should reflect that altruism.
These arguments resonate with me. I’m sold. But if a majority of Americans do not share this cooperative and moral imperative, where does that leave us? We certainly cannot bank on these global-spirited arguments prevailing under this administration…
Although the Trump administration may have had “America First” motives in mind when the executive order invalidating the global approach to estimating the SCC was issued, on paper the order cites only precedent and standard practice.
Legal scholars have advanced similar arguments. In this review, for example, Ted Gayer and Kip Viscusi survey the history of regulatory impact assessments (a more compelling read than you might think) and argue that the use of global benefits in policy analysis runs boldly counter to standard cost-benefit practice.
It’s true that accounting for global damages in domestic policy decisions departs from historical precedent and standard application of statutory guidance. But climate change presents an unprecedented and non-standard policy challenge. Past precedent makes sense for local and regional environmental problems where the majority of costs and benefits accrue here at home. In contrast, GHGs emitted anywhere mix globally in the atmosphere and have global impacts. The response to global climate change requires international cooperation, foreign relations, and diplomacy.
I see no reason to confine our domestic policy response to the narrow scope of standard regulatory impact analysis in the name of historical precedent and standard procedure. Particularly when a more global perspective will better serve the U.S. interest in the long run. This leads us to the fourth perspective on the social cost of carbon…
The Trump administration’s decision to focus on the DSCC is the right strategy in a textbook prisoners’ dilemma model where (1) each country chooses its policy actions based on narrowly defined self-interest and (2) the policy choices that one country makes has no influence or bearing on the choices made by other countries.
Of course, this naïve model ignores the critical role of international relations, diplomacy, and the potential to influence other countries with our policy leadership. Strategic policy design choices can look very different when countries recognize that their domestic policy choices can induce a favorable policy response from other countries. We have seen clear evidence of this already. For example, after the Obama administration adopted the global SCC for use in domestic policymaking, our neighbors to the north and south (Canada and Mexico) adopted our global SCC numbers with only minor adjustments.
Our colleague and friend Matt Kotchen has been thinking a lot about what this kind of reciprocity implies for how we should choose an SCC, also recognizing that policy interactions are a repeated game. In this important paper, he shows how it can be individually rational for countries to internalize more than just the direct domestic damages from GHG emissions. So long as increased domestic policy commitment makes it more likely that other countries will reciprocate, all countries have an incentive to choose a social cost of carbon that exceeds their direct domestic damages.
Which SCC puts America first?
Last week, 13 federal agencies released an exhaustive scientific report affirming that climate change is driven almost entirely by human activity and warning of devastating impacts ahead. This is not fake news. And these risks will only intensify without aggressive action.
To solve this global commons problem, there is one right SCC number and that number is global. To establish a norm where all countries fully internalize this global SCC requires leadership. I understand that President Trump is unlikely to be swayed by the moral imperative to lead on this one. But his administration is misled by its own “America First” rhetoric when it adopts a DSCC that is practically $0. Given our powerful global position, the United States has a strong strategic reason to account for global benefits when defining domestic climate change policies. Our current failure to do so is reckless and self-defeating.
This article was first published on Energy Institute Blog, Energy Institute at Haas School of Business and on our sister publication The Energy Collective and is republished here with permission.