20 Jul 2013

Yes Daniel, the OMB Did Have Climate Change in Mind When They Still Insisted on a 7 Percent Discount Rate

Climate Change 16 Comments

In the context of my recent Senate testimony on the “social cost of carbon,” my favorite Keynesian grad student said that for all we know, the OMB guidelines (which require reporting CBA in terms of a 7% discount rate, as well as 3% and others that might be appropriate to the situation) was just a general framework, and that they didn’t have climate change in mind.

I was stunned that Daniel could suggest this, since I had shown that the OMB in its 2011 primer specifically cited Martin Weitzman, who is probably Earth’s leading proponent of using very low discount rates in climate change analysis. Still, Daniel was not moved beyond a reasonable doubt.

OK Daniel here is the second paragraph of Weitzman article, “Just Keep Discounting, But…” that comes from Discounting and Intergenerational Equity (Portney and Weyant eds., Resources for the Future), which the OMB primer cited in footnote 9:

The seemingly arcane issue concerns how to discount events that come to pass in what I shall call the “deep future”–meaning they will happen many generations, even centuries, from now, long after we and everyone we know have passed away. At first thought it might seem that such projects are of limited practical importance. Maybe that was true once, but increasingly today we are being asked to analyze projects whose effects will be spread out over hundreds of years. The most prominent single example of this is the mother of environmental catastrophes–global warming. [Bold added.]

Now to refresh everyone’s memory, after the 2011 primary cited the above paper from Weitzman in its discussion of choosing a discount rate on regulations that will have intergenerational effects, it went on to say:

If the regulatory action will have important intergenerational benefits or costs, the agency might consider a sensitivity analysis using a lower but positive discount rate, ranging from 1 to 3 percent, in addition to calculating net benefits using discount rates of 3 percent and 7 percent. [“Regulatory Impact Analysis: A Primer,” p. 12, bold added.]

OK, so there are no ifs, ands, or buts about it: By failing to report the “social cost of carbon” using a 7 percent discount rate, the Obama Administration’s Working Group ignored the Executive Branch’s own rules for how to conduct regulatory analysis.

Now why would they do that? My strong suspicion is that it’s because releasing a range of social cost of carbon estimates that hits $0 or even negative–meaning carbon dioxide emissions confer “positive externalities”–would make it really hard for Senators Boxer, Whitehouse, and Sanders to compare me to tobacco executives when I “deny the obvious and immediate damages of climate change all around us” (not an exact quote but very much in the spirit of what they said to me earlier this week).

16 Responses to “Yes Daniel, the OMB Did Have Climate Change in Mind When They Still Insisted on a 7 Percent Discount Rate”

  1. Daniel Kuehn says:

    OK slow down there buddy. I was asking whether the reg was for CBAs broadly or for climate change. I said things like “another question I had…” and “that’s what I’m trying to understand”.

    And I thought you had clarified for me it was just a general reg. After all you responded “They are providing a general framework, yes.”

    So don’t act like I’m being unreasonable here. I was asking you (and the commenter I was talking with) because YOU’RE the one that has plowed through all the OMB material.

    I know Weitzman writes about climate change, but Weitzman didn’t write the damn primer!!!

  2. Daniel Kuehn says:

    The passage you quoted answered my question just fine – this was not just a generic short run reg guidance – it was guidance that mentioned the problem of considering long-run issues like climate change too.

    That was my question.

    • Bob Murphy says:

      The passage you quoted answered my question just fine – this was not just a generic short run reg guidance – it was guidance that mentioned the problem of considering long-run issues like climate change too.

      OK, but that passage was in my original testimony. Then I repeated it again in the blog comments when you asked about it.

      And then, after reading that same passage, you said you did a search for “climate change” and didn’t find it.

      So you can at least understand why I made this post?

      • Daniel Kuehn says:

        I don’t understand at all why you acted like I was doing anything more than asking a question – ya I thought of this two days after I read your testimony. Didn’t memorize the whole thing. That’s why I asked.

  3. Daniel Kuehn says:

    You’ve gotta remember, Bob, when people read your written testimony almost none of us are as familiar with these regulations and guidances as you are.

    • Daniel Kuehn says:

      (which is kind of the whole point of you testifying about them and not us!)

      • Ken B says:

        So Daniel now that you agree Bob was right and that the 7% was for climate change calculations explicitly, do you draw any inference from their failure to provide either the 7% or the data needed to do it oneself?

        • Bob Murphy says:

          Clearly they need better funding. Someone should look into that.

        • Daniel Kuehn says:

          Well, for long run calculations .

          I always had agreed with Bob on the failure to provide the 7%.

  4. Tel says:

    This all comes down to how confident you feel about your predictions of the future. In effect, a 7% discount rate is equivalent to imposing a “half life” of approx 10 years on all predictions that you make. That is: after 10 years, half of what I think will happen actually does happen; after 20 years only one quarter of my predictions are still correct; after 30 years only one eighth, and so on.

    If your ability to make accurate predictions is weak, then this imposes a hard limit on how low you can make your discount rate. In order to construct scenarios going out 100 years or 150 years into the future, it is necessary to have both a low discount rate, and a highly accurate method of predicting the future.

    I might point out that in terms of “social cost” the prediction attempts to consider not only what the climate will do, but also what people will do in response to that, and how new technology will adapt. If you read science fiction from 100 years ago, none of them predicted we would have train loads of people all twiddling with iPhones. We have no idea how far we are going to get with bio-tech in the next 100 years or what the repercussions of that will be.

  5. Tel says:

    By the way, is it fair to say that Austrian economics does not strictly believe that “social cost” exists at all?

    It is after all, a rather ill-defined concept, how do you ask society what it is willing to pay for something?

    • Major_Freedom says:

      Sometimes you have to sink to lower levels in order to effectively communicate a higher level argument.

    • Matt M. (Dude Where's My Freedom) says:

      “Society” doesn’t act. Therefore it *can’t* pay for something. Taxes are not “society paying for things” but rather individuals having their money confiscated by the state.

      • Major_Freedom says:

        I think Tel understands “society” to mean individuals.

        Not everyone who uses “society” thinks like a liberal.

  6. gold price says:

    This survey is sometimes cited as evidence that the social cost of carbon is low, and thus not really worth worrying about. However, that conclusion conflates costs (the stream of material climate damages) with a value judgment (the weight assigned to damages in different times and places). The conflation is necessary if one wants to reduce a stream of damages across time and space to a single number, but the value judgment is a major component of the outcome. For a study with a century time scale, the 3% pure rate of time preference (PRTP) above equates to a 95% discount, i.e. that one unit of welfare today would be adequate compensation for the loss of twenty units at the end of the century. Offsetting choices make the ultimate difference to SCC less dramatic (unless one considers scenarios with low or no GDP growth), but still the SCC for studies with 0% PRTP is more than 5x that for studies with 3% PRTP (which you can demonstrate for yourself in the Exhibit ).

  7. Gold Price says:

    While calculating the social cost of carbon can be a valuable tool, the uncertainty around climate change could slow down the policymaking process rather than help it, said Ruth Greenspan Bell, a senior fellow at the World Resources Institute. Bell co-authored the policy brief “More than Meets the Eye: The Social Cost of Carbon in U.S. Climate Policy, in Plain English” with Dianne Callan of the Environmental Law Institute.

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