Climate change returns to the Supreme Court. On Monday, the United States Supreme Court heard opening arguments for the case of Utility Air Regulatory Group v. Environmental Protection Agency (EPA) to determine the extent to which the EPA can regulate greenhouse gasses (GHGs). I'll let the lawyers fight out the legal details in the Supreme Court, but it did make me think that if the EPA is going to regulate carbon, how is it going to determine the costs of carbon emissions?
In spite of the efforts by the Office of Management and Budget (2013) or the EPA's collaborative report, it's tricky to discern the social cost of carbon (SCC), which is the projected future marginal cost of emitting an extra metric ton of carbon. Why is that? First, much like any other service the government provides, the government is incapable of adequately providing a value of its output, which is something I blogged about when criticizing the carbon tax about a year ago.
The second reason has to do with the nature of carbon. Carbon dioxide stays in the atmosphere for a century, which is a long time away. It is difficult to determine the effects because modeling the various impacts of climate change is imprecise. How is one supposed to accurately estimate environmental and economic impacts a century from now and tie them directly to current carbon output? Especially from a technological standpoint, but also politically and economically, so much can occur between now and then. Technology, especially technology emitting carbon to improve our lives, is the key to providing us with the ability to adapt to our environment, which is essentially impossible to predict. Also, how do you accurately blame mass migration, civil wars, extreme weather events, or economic cycles, all of which are already difficult to predict, on carbon emissions?!
Much of determining the value of the SCC is based on the computer modeling, also known as integrated assessment models (IAMs) of climate change scenarios, a process that makes me skeptical. Even economist Robert S. Pindyck, who is not a climate change skeptic by any means, points out how useless IAMs are (see here). IAM simulates economic activity in conjunction with our attempt to control carbon, which results in the extent to which we directly cause damage. What's more is that according to the IPCC's 5th Assessment Report (p. 16), its equilibrium climate sensitivity is likely between 1.5° and 4.5°C, which is lower than what the IPCC has predicted in the past. In spite of the lower estimated climate sensitivity (which is important because lower estimations means more time to find solutions to the problem), the SCC estimates just keep increasing. Go figure!
Let's not forget that the OMB is not reporting the global effects separately from the national ones (OMB Guidelines, 6.a.3), which has bearing in the sense that the United States should not go on the futile task of trying to unilaterally stop climate change. They call it "global warming" for a reason. Even with the United States' decrease in carbon emissions, in no small part due to increased natural gas production, there is not much the United States can do if China, the world's largest carbon emitter, does not cooperate.
One also has to contend with the issues behind the discount rate. The discount rate is a reflection of how much one is willing to pay now to avoid future damages. The higher the discount rate, the less significant the future costs. The discount rate captures three important assumptions: "humans prefer to receive benefits in the present rather than the future, that future generations will be richer and a dollar [will be] worth less less to them as a result, and the opportunity cost of capital (that there are a variety of investment options for any given sum)." According to federal guidelines (Section 8), cost-benefit analyses are supposed to include a discount rate of 7 percent, which the OMB forgot to do in the aforementioned 2013 report (the OMB only included 2.5, 3, and 5 percent [Figure 1]). It makes me wonder what the SCC would look like if the 7 percent calculations were included, although I could tell you they would either be negligible or possibly even negative. Given the assumptions made with the discount rate, we should not be so ready to dismiss the 7 percent discount rate as a possibility simply because its consideration has the plausibility of diminishing the SCC.
If the SCC were merely an argument over economic theory, I would consider this a nice, little academic exercise in polemics. However, the Obama administration is using the SCC to determine the extent to which it uses its discretion to regulate carbon emissions. Not only does production become more expensive, but the government is using the SCC to provide itself a carte blanche to regulate virtually any aspect of our lives. If we overprice carbon and it turns out the risk associated with increased carbon output is manageable, then the "War on Carbon" will be for naught.
This is not an argument about the veracity of ACC. It's about the importance of proper risk management and assessment. Especially given the long timeframe and complexity of the variables in the modeling, we need to realize that we cannot prevent every low-probability, high-damage scenario, whether that is downright nuclear war, another terrorist attack, or that ACC will cause such turbulent weather patterns that it will wipe out humanity. Before coming up with solutions and scratching the itch to regulate everything that emits carbon, we should realize the complexities and limitations of IAMs and factor that into policy-making decisions before jumping into climate change policy that could do more harm than good.