Republican hearing calls for a lower carbon pollution price. It should be much higher

Posted on 1 March 2017 by dana1981

The ‘social cost of carbon’ is an estimate of how much carbon pollution costs society via climate damages, and can also be considered the optimal carbon tax price. The US federal estimate ($37 per ton of carbon dioxide pollution) underpins at least 150 regulations across various federal agencies, and has thus become a prime target in the Trump administration’s efforts to roll back Obama’s climate policies.

Yesterday, the House Subcommittees on Environment and Oversight held a hearing on the social cost of carbon. The Republican Congressmen and their witnesses argued the federal estimate is too high, but a majority of economists think it’s too low. Not surprisingly, the Republican witnesses have been heavily funded by the fossil fuel industry. They made two main arguments: 1) that the $37 estimate should be based on domestic, not global climate impacts, and 2) that the government should have used a higher discount rate, which would result in a lower estimate.

Both arguments are entirely backwards.

Carbon pollution causes expensive global climate damages

The first argument, articulated by Chairman Andy Biggs (R-AZ), is an immoral one:

It is simply not right for Americans to be bearing the brunt of costs when the majority of benefits will be conferred away from home.

The “benefits” other countries would reap are effects like reducing the decimation of their crops by climate-fueled droughts. An accurate rephrasing of this statement would read: ‘It is simply not right for Americans pay for their carbon pollution when the majority of the costs and damages will be borne by poor people in third world countries.’ When framed accurately, it’s a completely unethical argument.

Moreover, those long-term global climate damages make a clear case for a higher carbon pollution cost. According to a recent paper by William Nordhaus – one of the world’s foremost climate economists – if we want to stay below 2.5°C warming above pre-industrial temperatures (let alone 2°C), the social cost of carbon today is between $100 and $200 per ton of carbon dioxide pollution, and rises by about $10 per year. This conclusion is consistent with several recent studies estimating the carbon cost around $100 to $200 per ton or more.

Avoiding dangerous climate change will require a much higher carbon pollution price than the federal estimate, but Republicans think a lower price is better for the economy. Nordhaus’ recent paper also presented an “optimal” cost-benefit scenario that would put a carbon tax today around $30 per ton and result in over 3.5°C global warming above pre-industrial temperatures. So what’s going on there?

On climate and energy, determining what’s ‘optimal’ is impossible

I spoke with Jonathan Koomey, who’s published several papers on this subject, including a 2013 paper arguing that we should move beyond a cost-benefit approach on climate change toward a strategy he calls “working forward toward a goal.” As Koomey explained:

It’s impossible to calculate optimal outcomes decades hence, and that makes the benefit-cost approach problematic. One reason why it’s impossible is because we can’t predict the exact timing and consequences of pivotal events (like 9/11 or Pearl Harbor) or of technological breakthroughs. Another important reason is that economic and social systems do not exhibit structural constancy like physical systems do.

For example, the costs of wind turbines, solar panels, and other mass produced technologies have reliably dropped in price 10-20% for every doubling of production experience. Most economic models ignore these increasing returns because they imply that there is no optimal path; just many possible paths with similar costs. Economic modelers have recoiled in horror from this implication for decades.

One study published in 2000 looked at many possible scenarios regarding the evolution of our energy systems. Among those, about 10% were very close to “least-cost” scenario, but they varied widely in their mix of fossil fuels and low-carbon technologies and their consequent carbon pollution:

The underlying scenarios include futures that range from an increasing dependence on fossil energy sources to a complete transition to alternative energy sources and nuclear energy. Thus, one of the results of the analysis is that different structures of energy system emerge with similar overall costs … it is not possible to choose a priori “optimal” direction of energy systems development.

Then there’s the discount rate problem

Because savings accrue interest over time, $100 today is more valuable than $100 in the future. To account for this, economists use what’s known as the “discount rate.”

For example, using a fairly standard discount rate of 3%, it would only be worth spending $7 today to avoid $100 of climate damages in the year 2100. In his recent paper, Nordhaus used a discount rate of over 4% - hence his “optimal” economic scenario has a lot of global warming. The idea is to build up interest and use the money to pay for future climate damages.

In yesterday’s hearing, Republicans argued that the government should consider an even higher discount rate of 7%, based on Office of Management and Budget (OMB) policy. However, OMB says that if the policy will have “important intergenerational benefits or costs,” a lower discount rate should also be considered. That’s certainly the case for climate change – many economists and scientists argue the discount rate should be much lower - even zero - when dealing with risks big enough to imperil human civilization.

One problem is that climate change might disrupt the global economy and hamper economic growth, which would prevent future generations from actually being richer, as higher discount rates assume. For example, in the more than 3°C warming that would result in Nordhaus’ “optimal” scenario (and from Republican climate policies, and lower carbon prices), we would experience widespread coral mortality resulting in a collapse of many marine ecosystems, glacier retreats threatening water supplies for millions of people, sea level rise of over 1 meter by 2100 and much more thereafter, etc. It’s a potentially catastrophic scenario that would make it impossible to maintain the GDP growth implied in the typical business-as-usual economic modeling scenario.

There’s another problem the economic models and Republicans aren’t accounting for: money isn’t everything. For example, would you be happier if somebody handed you $500,000 in exchange for a hurricane destroying your house and its contents, valued at $490,000? You’ve lost your home and all your belongings, but you’re richer! Economic models can’t value things like suffering or biodiversity – what dollar value do we put on a species that’s gone extinct? How about mass extinctions? These are moral questions that economic models can’t account for, that the Republicans ignored in this congressional hearing.

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