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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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Comments 1 to 12:

  1. For additional details about the social cost of carbon, see:

    Q&A: The social cost of carbon, Carbon Brief, Feb 14, 2017

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  2. Another aspect of yesterday's hearing is covered in:

    Members of Congress met to discuss the costs of climate change. They ended up debating its existence. by Chelsea Harvey, Energy & Environment, Washington Post, Feb 28, 2017

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  3. About the discount rate I make the following provocative question:

    Given that:

    1) the existence of a positive discount rate assumes positive (per capita?) economic growth

    2) Climate change is potentially catastrophic and will last for millenia 

    3) A catastrophe lasting for millenia leads inevitably to a global, permanent recession, i.e. highly negative economic growth, 

    4) That would not lead to a negative discount rate?

    It would not be advisable to use a range of discount rate, from the highly unlikely economic BAU scenario (unlikely because BAU will almost surely lead to economic collapse) to (in the other extreme) a climatic BAU scenario (with global recession and negative discount rate).

    I am asking myself this question for a while, the answer should be anywhere in the middle.

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  4. This research and similar studies that have come out in the last few years need to be incorporated in to the SCC calculations.

    CO2, at relevant levels, has a direct negative impact impact on human performance and decision-making. From the conclusion:

    "Increases in indoor CO2 concentrations resulting from the injection of ultrapure CO2, with all other factors held constant, were associated with statistically significant and meaningful reductions in decision-making performance. At 1,000 ppm CO2, compared with 600 ppm, performance was significantly diminished on six of nine metrics of decision-making performance. At 2,500 ppm CO2, compared with 600 ppm, performance was significantly reduced in seven of nine metrics of performance, with percentile ranks for some performance metrics decreasing to levels associated with marginal or dysfunctional performance. The direct impacts of CO2 on performance indicated by our findings may be economically important, may disadvantage some individuals, and may limit the extent to which outdoor air supply per person can be reduced in buildings to save energy. Confirmation of these findings is needed."

    If this type of research is confirmed, it will likely contribute enormously to any cost-benefit analysis or social-cost-of-carbon calculation.

    As for the discount rate, it should be low. It is nonsense to have it higher than the government's own cost of borrowing, but even that may be too high. The reasons we have for discounting as individuals do not often translate to intergenerational thinking. I discount because I or my creditor may die tomorrow. Humanity is extremely unlikely to disappear relative to any individual, and thus as a group should discount far less. Additionally, people are just flat out irrational, and that irrationality, while affecting the market rate for debt, should not be reflected in policy.

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  5. The Moral/Ethical/Justified basis for the discussion has to be that "anything that cannot be shown to most likely improve the near and distant future for all of humanity" should no longer be allowed to compete for popularity and profitability.

    Starting from that understanding the discussion of discount rates on future costs goes out the window. Creating costs and challenges to be faced by future generations (others) would simply be unacceptable. The games of competition for popularity and profitability only work well when every person wanting to benefit from an activity faces the full risk and negative consequences. Trying to "set a price to be paid" for creating negative consequences is just another game that is easily rigged to delay the actual required change. And in this case the rigging includes the deception that wealth today will grow to be more future wealth. Only economic activity that can be proven to be lasting improvements of the near and distant future for all of humanity would be likely to "grow future value". So an activity like burning fossil fuels is worse than worthless, it has negative value from the perspective of the future generations.

    The Lost Opportunity or Lost Perception of Prosperity by members of the current generation do not get to be Balanced with risk of challenges and costs imposed on others, especially the impacts on future generations. And the people wanting to benefit today from an activity should definitely not have the freedom to believe whatever they want regarding the potential negative impact their actions will have on others or the future generations. That is understood by the misleading marketing people who are now pushing the propaganda to encourage people to dismiss and dislike explanations from "Experts".

    That clarifies the problem to be solved: The objective is rapidly curtailing the impacts of very popular and profitable damaging activity (striving for a limit on impacts of 1.5 C increase). And that means current day pursuers of benefit (with all of the wealthiest leading by example) would have to prove that they have fully addressed and neutralized the unacceptable impacts of their desired pursuits or stop trying to benefit from them (no matter how much more expensive or less profitable for them the justifiable alternatives are).

    That will mean that many people perceived to be prosperous or having opportunity (or perceived to be Winners) are not as valuable to humanity as their current measure of wealth indicates. And some of them would have a significant Negative value (from the perspective of future generations).

    One battle line has been drawn - The claim that many people have developed expectations and perceptions of prosperity and opportunity that must be "Maintained and Boosted, rather than be Corrected". This is the case in Alberta where a rush to expand the rate of extraction of Bitumen from the sands of Northern Alberta for global burning is being used to claim that the recently increased population and investment attracted by perceptions of opportunity and prosperity must have their damaging delusions defended and even encouraged to become even more powerful damaging delusions (like the claims that new pipelines must be built). Many similar misleading marketing campaigns "excusing and defending understandably unacceptable developed economic activity" are being played around the planet, to the detriment of the future of humanity.

    Some may say that the point I start from is Extreme. However, when dealing with people who think everything is a game and anything can be negotiated it can help to be clear about just how much they stand to lose if helping to improving the future for all of humanity actually becomes the generally accepted judgment basis (rather than just made-up laws that can be changed, are different in different regions, and are subject to gaming and selective enforcement).

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  6. OPOF @5, we do not receive only costs from prior generations.  We receive benefits as well.  In this century, at least in the west, those benefits are substantial.  Acting on a policy that excludes anything that has costs attached will necessarilly exclude also many of those things which provide benefits - often more benefit than cost.  Looking to the future, we need to assess whether the things we do now will provide more benefits than costs, and act accordingly.  To do that on a formal basis requires that we use discount rates.

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  7. I wish to clarify my comment about laws/regulations/rules.

    Legitimate rules, rules that will have a future, are consistent with the objective of helping to improve the near and distant future for all of humanity. Rules, or a lack of rules, because of other objectives eventually get over-ruled as their unacceptability and the harm they do becomes more apparant/better understood.

    And new rules and regulations are constantly required to attempt to discourage activity that has developed to the point of being a significant source of harm and concern. The required change related to pursuits of profit is eliminating the defence of "What was done cannot be proven beyond a reasonable doubt to be against the laws that existed at the time it was gotten away with". The requirement for acceptability of pursuits of profit needs to be that what was/is being done can be proven to not likely be creating negative consequences for others or for future generations based on the 'developed understanding of the time' (not the understanding that was popular - the real understanding). On that basis, pursuits of profit related to fossil fuel burning that were developed after the 1980s would have no valid defence, no matter what made-up laws/regulations/requirements existed.

    This change would result in a correction of perceptions of wealth and opportunity. It would help improve the future of humanity. It would only negatively affect people who have developed a negative value from the perspective of future generations of humanity.

    Of course, a global enforcement of the rule would also be required. That means the end of sovereignty when it comes to economic matters impacting the future of humanity. But multi-national corporations and international trade have already ended economic national sovereignty regardless of the persistence of other perceptions.

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  8. Tom Curtis@6.

    Many things considered to be "benefits" today are only unsustainable perceptions that actually are adding more future costs. Many perceptions of prosperity and wealth are actually without a future. The examples of unsustainable and harmful developed economic activity abound. Until they are cleared from the economy the economy is at future risk of Depression.

    The reality that this is one planet with a tremedously long potential future for humanity, and potentially the only future for humanity, fails to be properly considered.

    Properly considering the real future changes what is perceived to be of value.

    However, if it can be shown, not just speculated, that more burning of fossil fuels actually is very likely to develop a lasting improvement for all of humanity I would accept that rigorous proof. I am however very skeptical that evidence of that sort exists. The same requirement for evidence of helping to improve the future for all of humanity would apply to any other desired economic pursuit.

    All that is being asked for is what an Engineer is required to do. Prove the viability and lack of harm before something gets to compete to be popular and profitable.

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  9. Tom Curtis@6

    My point is requiring the proof that an economic pursuit is very likely to improve the future for all of humanity. A future Net-Benefit evaluation can be the basis for that. However, like structure engineering, the evaluated negative impacts (loads) would need to be magnified to account for the inaccuracy of speculation. And the positive expectations (structure performance) would need to be scaled back. That would be the way to establish reasonable certainty that there was an expected future net benefit.

    Discount rates would be irrelevant. The future costs and benefits are in the future. A discount rate used to compare discounted future costs to current day Lost Opportunity is not an acceptable evaluation for this and many other issues. It would not even be acceptable to do a comparison that reduces current day Lost Opportunity to compare with an increased or amplified future cost. It needs to be understood that it is unacceptable for a current generation, especially only a portion of a current generation, to benefit from creating a net-negative consequence for future generations.

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  10. This is a very good read on discount rate theory applied to climate change;

    I read it purely to get some understanding of how the economics of this issue works. Conventional  discount rates don't make sense over the long term time frames of climate change. The article discusses modified approaches.

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  11. Are we going to keep charging up the centre into the teeth of the maching guns or are we going to outflank them and roll them up from the flank.  Forget the battle to convince any of those worthy gentlemen of the gop (small caps intentional) about climate change.  Get the meme into the head of their boss about how much money America the Great is wasting buying oil overseas, how that money comes back to buy up America the Great and make great Americans tenants in their own country.  Emphasize how some of that money goes to the terrs who attack America the Great and how this could all be solved by a combination of electric cars and lots and lots of solar panels on people's rooves and lots more wind turbines.  Besides, the leading Electric car company of the world is as All American as the New York Yankies.  With all that saved money Trump could rebuild America and get people back to work making him the greatest president America has had since Washington. (using a trowel, not a butter knife)

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  12. William @11, I agree with your sentiments and general goals, but there's an issue over oil.

    You say "Get the meme into the head of their boss about how much money America the Great is wasting buying oil overseas, how that money comes back to buy up America the Great and make great Americans tenants in their own country."

    Unfortunately this reasoning is a nice sentiment, but doesn't work. America's net oil imports are only 25% of total consumption as below. Fracking has almost made Americal self sufficient in oil (for a couple of decades anyway until it runs out).

    But I agree America leads the electric car industry (arguably) and Trump might respond to that and further leadership in renewable energy just to "Make America Great Again".

    I also agree foreign money does buy up a lot of American assets and land, and basically America is a debtor nation in this regard.

    But its not so much due to energy imports or exports and is due to an economic policy of capitalist market forces and open investment flows, and relates to land, manufacturing and financial assets etc. So theres not much governments can do with energy policy that would alter this. It depends more on how much one considers governments should regulate those capital flows, and the standard economic argument is only in emergencies.

    However in my opinion, America should hold onto at least some manufacturing industry (I think thats what you are implying). However I admit economic theory says "it doesn't have to" if other countries do this better, but it seems to me you are creating a very narrow economic base, just reliant on farming and financial services exports, which could create instability, and a narrow selection of job opportunities. And outsourcing manufacture of key military assets is just very high risk, for self evident reasons.

    But tariffs are a very crude way of protecting manufacturing, according to most economists. This that may reduce wealth creation globally, and also in America. It needs a bit more sophisticated thinking.

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