Observations on the Obama Administration Interagency Analysis of the

Social Cost of Carbon

National Council for Science and the Environment Conference

January 28, 2015

Dr. Benjamin ZycherJohn G. Searle Chair and Resident Scholar

American Enterprise Institute

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Outline of My Comments Today

• Four analytic problems underlying the SCC technical support analysis.

• U.S. policy cannot achieve the global benefits implied by the SCC calculation.– The effects of U.S. “carbon” policies are essentially

unmeasurable under any set of IPCC assumptions about climate sensitivities.

– Also: The 5th percentile/95th percentile dichotomy.

• Absence of evidence that this externality is important.

• A concluding observation on verbiage and policy analytics.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 1: Use of Global Benefit Estimates (1)

• 2010 IWG: Domestic SCC is about 7-23 percent of the global value.– That works out to about $2-7 per ton if we

believe the 2013 IWG $32 estimate.

• The use of the global estimate typically is justified by the global nature of the GHG externality.– This is the CEA argument.

• That is a non sequitur. Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 1: Use of Global Benefit Estimates (2)

• Were the U.S. to adopt policies equating the supposed marginal benefits and costs of GHG reductions, it would be both rational and efficient for the rest of the world to do nothing.

• That outcome is inconsistent with standard externality theory: the equation of the marginal cost of effluent reductions across emitters.

• It is inconsistent also with the current EPA objective under the proposed clean power rule of regionalizing emissions reductions so as to equate marginal costs.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 2: SCC Estimates Conflate GDP and Climate Effects (1)

• In Bill Nordhaus’ DICE model, the scenario with the highest future GDP and a mid-range climate effect has the highest SCC.

• The scenario with the smallest future GDP and the greatest climate change has the smallest SCC.

• Why? In the IAMs, the SCC is a percent decline in assumed GDP, translated into a dollar figure and then divided by total assumed GHG emissions.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 3: The Choice Among Discount Rates (1)

• IWG analyses fail to use a 7 percent discount rate despite the requirement to do so under OMB Circular A-4.– A-4 allows a 3 percent discount rate in addition

to the 7 percent rate if a consumption displacement model is deemed appropriate.

– IWG used 2.5, 3, and 5 percent discount rates.

• But not 7 percent. • Why?

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 3: The Choice Among Discount Rates (2)

• The reason is obvious: At 7 percent, the SCC becomes small or zero or negative.– DICE: SCC declines by 80 percent.– FUND: SCC declines to zero or becomes negative.

• The sensitivity of the SCC calculation to the assumed discount rate is not trivial.– In the 2013 IWG analysis, the 2010 SCC is $11 per

ton at a 5 percent rate, but $52 per ton at a 2.5 percent rate.

– PAGE: SCC is $266 per ton at 1 percent and $122 per ton at 1.5 percent.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 3: The Choice Among Discount Rates (3)

• In the 2013 IWG update, even at a 5 percent rate, more than a fifth of the simulations show a SCC close to zero or negative for 2020.

• Another problem: The IWG analyses simply ignore the larger uncertainty attendant upon the purported benefits of reductions in GHG emissions relative to the costs.– This means that the assumed benefit stream

should be discounted at a rate higher than that applied to the cost stream.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 3: The Choice Among Discount Rates (4)

• At a minimum, the sensitivity of the SCC to the choice among discount rates suggests that great caution is required before adoption of regulations imposing substantial economic costs.

• The bureaucracy is an interest group with incentives to incorporate analytic assumptions yielding a preferred finding, even apart from the effects of political pressures from above.– Its pronouncements are not to be taken at face value.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 4: Ozone and Particulates As Policy Co-Benefits (1)

• The EPA RIA for the clean power rule is explicit: The domestic “climate” net benefits are negative.– This is the real reason that they use a global benefits

approach in the SCC.

• Domestically, they justify the rule by invoking the benefits of associated reductions in other pollutants, especially ozone and fine particulates.– These effects are 94 percent of the purported benefits

in 2030.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Problem 4: Ozone and Particulates As Policy Co-Benefits (2)

• This is deeply problematic.• The CAA is explicit: An endangerment finding

requires EPA to promulgate a NAAQS that “protects the public health” with “an adequate margin of safety.”

• So, either (1) the existing particulate standards fail to satisfy the requirements of the law, or (2) EPA is double-counting benefits for the clean power rule, or (3) it will reduce particulate emissions to a level that is inefficiently low.

• Which is it? Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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What Is the Temperature Effect of U.S. GHG Policy? (1)

• Current administration policy is a reduction in GHG emissions of 17 percent below 2005 levels by 2020.– Under the U.S.-China announcement (November)

this notionally is changed to 26-28 percent by 2025.

• Let us apply the NCAR MAGICC/ SCENGEN model under a climate sensitivity assumption of 4.5° C. (IPCC’s guess: 3° C.)– Using the IPCC midrange emissions path (A1B) as

the baseline.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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What Is the Temperature Effect of U.S. GHG Policy? (2)

Temperature Reduction in 2100

U.S. (current policies) 0.02° C

U.S. (additional 10%) 0.01

China (20%) 0.20

Rest of industrialized world (30%) 0.20

________________________________________

Total 0.43

Note: The standard deviation of the surface temperature record is about 0.11° C.Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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What Is the Temperature Effect of U.S. GHG Policy? (3)

• That is why EPA has never offered an estimate of the actual temperature effect of its GHG policies.– Or of sea-level increases, droughts, tropical storms,

polar bear populations, or any other parameter purported to be affected by increasing GHG concentrations.

• Instead, the IWG claims $31 billion in climate change benefits in 2030.– Even though the SCC is the present value of all the

incremental effects of GHG emissions for 2010 through 2300.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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The 5th Percentile/95th Percentile Issue

• The benefit/cost analysis underlying application of the SCC computations ignores the nontrivial probability of a future exogenous cooling/glaciation dynamic.– The Little Ice Age seems to have ended only in the

mid-19th century.

• This means that a future anthropogenic warming effect might yield significant net benefits.– Analysis should incorporate this effect, however

uncertain, but the SCC framework does not.Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Is This Externality Important? (1)• GHG concentrations have increased from

about 337 ppm in 1979 to about 370 ppm in 2000 to about 399 ppm in 2014.

• The NOAA/RSS satellite data show a temperature anomaly of 0.32° C in December 2014 relative to the 1981-2010 average.– IPCC AR4 mean projection: 0.68° C (2.78° C/

century).

• Simple RSS trend data show no land-ocean warming since October 1996.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Is This Externality Important? (2)

• There has been no trend in the frequency of F3-F5 tornadoes in the U.S. since 1950.

• The 2013 and 2014 Atlantic hurricane seasons were the least active in 40 years.

• There has been no trend in the frequency or intensity of tropical cyclones.

• Tropical cyclone energy is near its lowest level since satellite measurements began in the 1970s.

• Satellite measurements of sea levels show constant increases 1992-2004, and declining increases since 2004 despite increasing GHG concentrations.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Is This Externality Important? (3)

• The 2014 Arctic ice cover does not differ from the 1981-2010 average by a statistically-significant amount.– Satellite measurements began at the outset of the latest

warming period, roughly 1980-1998.

• The 2014 Antarctic ice cover exceeds the 1981-2010 average by two standard deviations.

• The Palmer Drought Severity Index shows no trend since 1895.

• U.S. flooding shows no correlation with increases in GHG concentrations over the last century.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Concluding Observation

• The phrase “carbon pollution” is political propaganda.– Carbon dioxide is not “carbon,” and it is not a pollutant.– For actual pollutants, less is better, but costly to achieve.– Less is not necessarily better for carbon dioxide.

• “Greenhouse gases” has the virtue of scientific accuracy without implicitly assuming the answer to the underlying policy question.

• I urge all of us to examine our assumptions---the hidden ones in particular---and to constrain our conclusions in light of the actual body of (evolving) evidence.

Benjamin Zycher AEI

Observations: Social Cost of Carbon NCSE Conference January 28, 2015

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Thank You!

benjamin.zycher@aei.org

202-862-4883

Benjamin Zycher AEI