12 Jun 2013

Obama Administration Increases Estimate of “Social Cost of Carbon”

Climate Change, Shameless Self-Promotion 23 Comments

For you wonky types, I walk through the White House’s humongous increase in the estimated “social cost of carbon.” An excerpt:

As the above table illustrates, the latest White House “update” isn’t a minor tweaking of the numbers, polishing off a few decimal places, as it were. No, depending on which framing of “the” social cost of carbon we choose, the increase ranges from 34 percent up to a whopping 120 percent.

Often the climate change activists will tout revisions of this nature as further evidence that the (alleged) emergency is real. “See? We told you things were bad! We should’ve implemented a carbon policy years ago.”

Yet hang on a second. Suppose you were getting ready to take the first manned mission to Mars, which government scientists had been planning for years. Three years ago, they thought the trip would take a certain amount of fuel for the ship and oxygen for the crew, and planned accordingly. Now, they release a new estimate saying, “Whoops, we changed our computer simulation of your trip, and it turns out you’ll need 120 percent more fuel and oxygen than we thought. On this latest simulation, with the old numbers, you and the rest of the crew would suffocate before you even reached Mars.”

With that much volatility in the estimates, how much confidence do you have in these computer simulations? Are you anxious to put your life in the hands of scientists who change their estimate of key variables by 120 percent in a mere three years?

By the same token, the Administration is going to rely on estimates of the “social cost of carbon” to guide regulatory cost/benefit calculations. There are literally trillions of dollars in economic growth (over the coming decades) hanging in the balance on such numbers. The fact that the estimates are so over-the-map should give pause to the entire enterprise of using the SCC in regulatory cost/benefit analysis.

23 Responses to “Obama Administration Increases Estimate of “Social Cost of Carbon””

  1. Daniel Kuehn says:

    OK sorry but this is an awful argument Bob.

    Dispersion matters but so does the point estimate that that dispersion is hovering around. Sure the estimates are inaccurate but the point is there is a big social cost in all cases – we’re just not sure what that cost is. With the exception of David Friedman and probably a few others there are few suggesting the cost is zero or below zero.

    And this is not like a trip to Mars where we may find ourselves halfway if we didn’t load enough fuel. In that case it’s better never to launch than to get it wrong. In this case (assuming you grant the arguments about social cost and the way to deal with it for a second). Even doing a little but not enough (because of imperfect estimates) would still be an improvement.

    The fact that the numbers are all over the map should give pause as to the extent of the regulatory measures we pursue. They should not give pause to “the entire enterprise” as you put it. If zero or negative social costs were included in generally accepted social cost ranges then THAT would give pause about “the entire enterprise”.

    • Scott D says:

      @Daniel Kuehn

      “Even doing a little but not enough (because of imperfect estimates) would still be an improvement. ”

      Doing a little, like converting coal power plants to biomass plants.

      Doing a little, like building inefficient, expensive and impractical wind farms.

      Doing a little, like pushing out costly and immature solar technology.

      Doing a little, like massively subsidising ethanol, which provides us with a fraction of a percent of our fuel needs and, in many estimates, releases more CO2 per unit energy than burning fossil fuels.

      Given the schizophrenic and ineffective, at best, attempts so far made at reducing carbon dioxide emissions, I think that it is rational to question sudden changes in these kinds of estimates. It wouldn’t be the first time that “evidence” demanding immediate action turned out to be politically motivated and based on unlikely, worst-case models.

      Innovation in solar power shows great promise, and if you follow the technology like I do, you realize that breakthroughs in efficiency, output, and cost reduction are happening at a breakneck pace. The storage problem is a significant one, but we’re also experiencing a revolution in that technology space at nearly the same pace. The cost of solar has been on a furious downward trend that shows no signs of stopping. It is my opinion that technological innovation and the market will have made emissions-free electrical power cheaper than coal by 2020, if not sooner. 2030 would be a very pessimistic estimate.

      The way to screw all that up is to meddle in the market. Subsidies encourage the early adoption of inferior technology and promote unsustainable business models. So, rather than doing a little, to the tune of billions of dollars in wasted money, why not do a lot, by getting out of the way of the market?

      • Daniel Kuehn says:

        Scott D –
        You didn’t really directly engage much of what I wrote but I’m getting the impression you are assuming I’m proposing things I’m actually not.

        • Scott D says:

          I’m not saying that you personally propose anything. I’m simply pointing out that, since you seem to support regulation of carbon emissions, you might want to consider the type of feeble and ultimately counter-productive types of efforts that have been made. I think it makes a good argument against the proposition of “we should take action now, any action at all, to reduce carbon emissions.”

          • Daniel Kuehn says:

            Well right but I honestly can’t think of a single person who says “we should take action now, any action at all, to reduce carbon emissions”.

            So I guess my reaction is “of course”.

            • Major_Freedom says:

              Daniel your posts here are just horrible.

              All Murphy said was that due to the fact that SCC estimates are all over the place, we should give PAUSE to the notion that our way of life be largely influenced by such people.

              That’s what he is arguing, and you have the gall to say that this prudent argument is “awful”?

              Get real.

              There is a difference between “doing something” (which of course includes market participant, voluntary activity) to deal with the weather, and giving up this control to some institution whose own estimates vary so much in such a small period of time, and are politically influenced as opposed to purely scientific.

              • Bob Roddis says:

                Did you ever stop and think about the FACT (a stubborn thing) that all three subjects of DK’s panic attacks and inducements for outrageous impairments of liberties are either a) non-existent and/or b)are caused by the Klepto-Keynesian state itself?

                1. “Terrorism”;

                2. Unemployment; and

                3. “Global Warming”.

                Separately, there is the gangbanger phenomenon caused by welfare-ism and the drug war.

                I’m trying to induce a deep sense of guilt in these nanny-staters about their bad acts.

      • Daniel Kuehn says:

        The difference of opinion is not over the market, btw – it’s over the property rights arrangements. Don’t confuse your advocacy of one particular property rights arrangement with some kind of superior dedication to not being meddlesome.

  2. Daniel Kuehn says:

    We are on this trip to the future no matter what happens, so a better analogy – if you want to use the Mars trip – is that we are committed to a trip to Mars (for some unexplained reason) and we don’t know exactly how much food to pack. The estimates vary widely. In that case the solution isn’t to say that we should reconsider whether we should bring any food at all. We know we nee SOME food. We just need to think very carefully about the competing risks if the estimates are uncertain, but we know not bringing any food bears definite costs.

    Similarly we are committed to living into the future. That’s the fate of most people alive today: you’re probably going to live to see tomorrow. Act accordingly because by not doing anything you’re choosing to do something too.

    • Tel says:

      From what I observe in the world at the moment, big government is by far the most dangerous threat to our future existence. Probably the likely scenario is increasing regulatory control until the economy grinds to a halt combined with panic looting from the people with enough power and influence to get away with it, followed by a war to hide the evidence.

      There’s a lot more direct visibility of this process happening than any CO2 problem. We have more government, less employment, more debt, less ability to pay that debt, and the only industries going great are ammunition and surveillance.

      You are right, we should worry about the future.

  3. Bob Murphy says:

    Daniel wrote:

    Sure the estimates are inaccurate but the point is there is a big social cost in all cases – we’re just not sure what that cost is. With the exception of David Friedman and probably a few others there are few suggesting the cost is zero or below zero.

    The fact that the numbers are all over the map should give pause as to the extent of the regulatory measures we pursue. They should not give pause to “the entire enterprise” as you put it. If zero or negative social costs were included in generally accepted social cost ranges then THAT would give pause about “the entire enterprise”.

    Now I know that when the facts change, you change your mind Daniel. But I also don’t want to waste my time because of misunderstanding your hasty comments on a blog post. How many peer-reviewed papers from the climate change literature–which Richard Tol included in a survey article–showing a negative social cost of carbon do you need, for you to suddenly heap praise on my wonderful blog post and Mars analogy? Cuz I think if I show you the articles first, you will say “told you so” even though above you are making it sound like it’s just David Friedman spouting off nonsense on his blog.

    • Daniel Kuehn says:

      Note to David Friedman: I never said you were spouting nonsense. I don’t think that – those are Bob’s words. He likes to amp up things like that sometimes. I do think if “consensus” means anything you are not in it on this, but I wouldn’t call your position nonsense.

      Bob –
      I don’t know what you find “hasty” about it? I thought it was pretty thoughtful.

      I’m not sure what you mean about Tol. I agree 100% with Tol in the conclusion of (a 2011 version of) his review paper when he writes: “This paper argues four things, supported by literature review rather than primary analysis. First, although climate change has positive as well as negative impacts, the negative impacts dominate particularly for that part of climate change that can be influenced by present and future policy. Greenhouse gas emissions are a negative externality, therefore, and should be regulated. Second, the impacts of climate change fall primarily on poorer countries, and poverty is one of the main causes for this disproportionate vulnerability. This implies that a climate policy that negatively affects economic development may well have a perverse impact; and that development policy is a viable alternative to climate policy. Third, the quantified impacts do not justify claims that climate change is the largest problem of humankind or the largest environmental problem of the 21st century. Impact estimates are incomplete. Claims of impending disaster are speculative. Fourth, estimates of the social cost of carbon or the Pigou tax are highly uncertain and very sensitive to attitudes towards the distant future, faraway lands, and remote probabilities. (Nordhaus 1977) was the first to argue the economic case for greenhouse gas emission reduction. More than thirty years later, that case still stands and it is much better substantiated. Although the literature cautions against overly ambitious and misdirected climate policy, there is only soft guidance on what would constitute the right or optimal level of a carbon tax. This paper is therefore a call for both emission reduction and further research.”

      (lots of other good stuff in there but this works).

      I don’t think I’ll ever think your analogy for Mars is good because unlike the Mars launch decision this is never going to be a dichotomous choice. We are never going to be faced with the prospect of launching and then dying in outer space if we guess wrong. Here we are faced with a continuum of policy options and we’re going to be around regardless of what we choose – the question is “what is the best choice?”. You are not refraining from that choice when you advocate zero action – you are making a particular choice, and the question is whether given the distribution of the data points we have that’s the best choice.

    • Daniel Kuehn says:

      Tol, from my understanding. shows that most people overestimate the social costs from what the experts actually think and shows that the IPCC estimate is a big outlier. Is this a misunderstanding on my part?

  4. Daniel Kuehn says:

    Page 25 of this gives Tol’s review of the range of these estimates: http://www.econstor.eu/bitstream/10419/50128/1/65468331X.pdf

    • Daniel Kuehn says:

      (with a 3% discount rate for all of ’em – that’s obviously important to add)

    • Bob Murphy says:

      Hmm the plot thickens. I had just assumed you weren’t aware of the fact that there are several estimates, in the peer-reviewed literature, of a negative SCC, even using way below market interest rates. (This is a century-long thing.) But you ARE aware of these, and yet still made it sound like it was some outliers on blogs who think this.

      I don’t know what to say. I would not have thought you would say that to me about my Martian analogy, in light of that page 25.

      • Daniel Kuehn says:

        OK even if the mean is zero effect and the distribution around the mean were modestly wide it would be a bad analogy.

        The point with the Mars analogy is that error means game over (plus you wonder what else they aren’t sure about if they can’t get fuel needs right). An error on this means “somewhat sub-optimal outcome”.

        Moving back to Tol and other estimates of positive costs of climate change – if you decide not to go to Mars the expected value of that decision is zero. You just go on with your life. If you decide not to do anything about climate change the expected value of that decision is negative. You are trying to pass off a choice with consequences as being some kind of default with no consequences at all.

  5. Yancey Ward says:

    This is a result of the shale gas “revolution” which is putting serious market pressure on the favored alternative energies like wind and solar in addition to putting pressure on coal.

  6. JimS says:

    Sure the numbers are skewed, as there are waaaaaaaay too many variables. What does von Mises say about predictors…?

    Of course the numbers cannot be trusted, but what should be most worrying is the human factor. If I were your typical politician (self consumed, egotistical, money grubbing, all-knowing, socialist leaning) and someone came to me with a preceived problem, real or not, fixable or not, verifiable or not, but it gave me the power to control virtually every aspect of humanity and put everyone at my concession, at the mercy of my authority of what will or will not save us, I’d endorse it whole heartedly. It is a political totalitarian’s, annointed intellectual’s wet dream.

    JimS

  7. Bob Roddis says:

    When are these Keynesians going to be held responsible for artificially stimulating SPRAWL and causing the dreaded Global Warming?

  8. Bob Murphy says:

    Daniel you initially said to me: “If zero or negative social costs were included in generally accepted social cost ranges then THAT would give pause about “the entire enterprise”.”

    Now you are saying that regardless of the range of estimates for the SCC, my analogy is bad.

    OK fine, but do you agree you are changing your critique?

    I don’t have a big problem with Tol’s statement that you quoted, but I don’t take that as ruling out “zero or negative social costs [being] included in generally accepted social cost ranges.” Tol is talking about “the” social cost of carbon, and so he’s not giving a range. I never denied that if one had to guess, based on the literature, then it was positive.

    • Daniel Kuehn says:

      re: “OK fine, but do you agree you are changing your critique?”

      No. The Mars analogy is bad no matter what I think because it’s an all or nothing deal which is not the same sort of choice we’re dealing with in the case of climate change. I didn’t change anything about that critique – I made that point in my very first comment, so what do you think changed?.

      The zero and negative cost estimates give pause to the enterprise itself. If the estimate is actually negative we might not want to tax carbon at all! We might want to subsidize it! But as long as the center of gravity is still a positive cost the best estimate of the optimal tax is not $0, it’s some positive $.

      Is it not clear that those are two different claims that are not mutually exclusive?

      re: “I don’t have a big problem with Tol’s statement that you quoted,”

      Excellent!

      re: “but I don’t take that as ruling out “zero or negative social costs [being] included in generally accepted social cost ranges.”

      I’ll agree to that. It would be better to say that it’s not included in generally accepted estimates of the cost. It is obviously in the range of data points that produced the estimate of that cost, as the Tol chart shows. My mistake.

      re: ” I never denied that if one had to guess, based on the literature, then it was positive.”

      Great – and I didn’t think you were making a declarative statement like some of the Friedman posts on this. But if it is pretty solidly positive even given the range of estimates, then surely this is not like launching to Mars without knowing if you have enough fuel.

  9. Dominique Bender says:

    By the same token, the Administration is going to rely on estimates of the “social cost of carbon” to guide regulatory cost/benefit calculations. There are literally trillions of dollars in economic growth (over the coming decades) hanging in the balance on such numbers. The fact that the estimates are so over-the-map should give pause to the entire enterprise of using the SCC in regulatory cost/benefit analysis. This wild divergence shouldn’t be taken as evidence that the problem is in need of immediate government intervention. This is especially true once we explore further what these various categories from the above tables mean.

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