I can’t remember mentioning this here at Free Advice so…
In a recent IER post I walk through the results when a programmer at the Heritage Foundation’s ran Richard Tol’s FUND model to calculate the “social cost of carbon” (SCC) using a 7% discount rate.
A 7% discount rate is one of the required parameters for federal cost/benefit analyses, which the Obama Administration’s Working Group on the SCC failed to include in its report. When I testified to the Senate on this last summer, I speculated that at a 7% rate, the SCC would be close to zero or even negative. Well, the FUND model was one of the three computer models in the literature chosen by the Working Group, and look at this:
So to reiterate: The Office of Management and Budget (OMB) had a long-standing rule that whenever federal agencies conduct cost/benefit analyses, they present their results at both 3% and 7% discount rates. In a later issue, OMB acknowledged that in certain cases (for example involving intergenerational impacts of a policy) a much lower discount rate might be appropriate and so could be included too, but in addition to the 3% and 7% rates.
Yet, despite this clear guidance, the Working Group simply did not run their models at the 7 percent rate. It led to the absurdity of federal agencies having to report their “7%” analyses while plugging in the wrong value of the SCC, and then explaining in a footnote why they had to do it like that.
From the table above, can anyone come up with a hypothesis as to why the Obama Administration Working Group on the Social Cost of Carbon didn’t compute the figures at a 7% discount rate?
(To be clear, the overall estimate of the SCC might not be negative, because they averaged the results of the FUND, DICE, and PAGE models. Just the FUND model would yield negative numbers, I believe. But even so, the averaged result would be pretty close to $0 for the next couple of decades, at 7%, keeping everything else the way they ran the models “officially.”)