24 Feb 2014

Heritage Confirms My Intuition on “Social Cost of Carbon” Calcs

Climate Change, Economics, Shameless Self-Promotion 13 Comments

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.”)

13 Responses to “Heritage Confirms My Intuition on “Social Cost of Carbon” Calcs”

  1. Andrew' says:

    No idea, but I would also bring your attention to these new technologies called 4, 5, and 6 as well as the thoroughly proven 1, 2, and 8.

  2. Cosmo Kramer says:

    Every time I mention Heritage Foundation work, it is immediately written off because of their evil bias or because they were supposedly caught lying before. Of course, I then ask for the non-evil and correct numbers. Then things get quiet. Go figure.

    How do you argue or debate with bigots?

    RPM couldn’t even get Sen. Boxer to acknowledge what his topic was even about.

    • Major_Freedom says:

      To get the average politician’s attention, you have to speak in a way that suggests their politically self-interested actions are the solution to some problem, imaginary or otherwise.

    • Dyspeptic says:

      “RPM couldn’t even get Sen. Boxer to acknowledge what his topic was even about.”

      You have to understand something about Barbara Boxer. Her mouth, which usually operates in over-drive, is only intermittently connected to a tragically limited cerebral hemisphere. She probably just didn’t understand the topic because it involved, you know, numbers and stuff like that.

      • Cosmo Kramer says:

        Thanks for the laugh.

  3. Harold says:

    In another comment you said “Even after the OMB explicitly discussed the work of Weitzman, it said an agency could use a lower discount rate if it wanted, in addition to the 3% and 7% figures. You can say they should NOT have written that, but it’s what in fact they wrote.”

    Circular 4 discusses intergenerational discounting, and concludes that a lower rate is more appropriate, but still requires 3% and 7% to be calculated at least in part to show sensitivity to discounting rate. “If your rule will have important intergenerational benefits or costs you might consider a further sensitivity analysis using a lower but positive discount rate in addition to calculating net benefits using discount rates of 3 and 7 percent.”

    They DID indeed write that 7% should be calculated in all cases, but they did not say that the case must be made on the 7% rate, just that it must be calculated for sensitivity analysis.

    You also say “I said that if the Working Group had followed OMB’s guidelines, it very well could have come up with social cost of carbon estimates near zero, or even negative—meaning the entire case for regulating carbon dioxide emissions would collapse”

    I think you have over-extended your argument here. There seems to be widespread agreement – or at least a very strong case- that the 7% figure is not the most appropriate appropriate to use for assessing cost / beneifts of carbon emission reductions, but it IS required the regulation. The entire case for regulating carbon dioxide would not collapse, but it may wrongly appear much weaker due to compulsory inappropriate use of the wrong discount rate.

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

      So what’s your point? That the government should be able to ignore its own regulatory guidelines whenever it feels like it may benefit from doing so?

      Kind of defeats the purpose of having regulatory guidelines at all, doesn’t it?

      It’s pretty clear that the purpose of always calculating a 7% discount rate is there to provide some consistency and comparability across cases. If, in a particular case, the 7% discount rate is not appropriate, then the onus is on them to provide it anyway, but explain why it isn’t being used for the projections. Not to just ignore the guidelines and, whenever someone asks why you ignored the guidelines (as Murphy did in Congress), yell at them and accuse them of being a shill for big oil.

      • Harold says:

        I did not say anything about whether they should have included the figure. I merely pointed out that even if the 7% discount rate is zero or negative it does not mean “the entire case for regulating carbon dioxide emissions would collapse.” Do you agree?

        It seems to me that if the case would collapse through inclusion of this figure, then it would be collapsing for spurious reasons, since this is not the most appropriate rate.

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

          Depends. If the social cost of carbon is in fact negative or zero, then yes, the argument for regulation would collapse.

          However, the mere inclusion of such a figure would not cause the argument to collapse if it was accompanied by some valid reasoning as to why the figure is wrong and cannot be relied upon.

          In either case, I think making the general public aware of the fact that the case for regulating CO2 emissions varies incredibly dramatically based on what discount rate is used (and keep in mind that discount rates are some weird financial mumbo-jumbo to a large portion of the population) would dramatically affect public debate, and presumably not in a way that the alarmists would prefer. Which is obviously why they didn’t calculate it and publish it in the first place.

        • Major_Freedom says:

          If including 7% would have no effect on the case for regulation, why’d they exclude the 7%?

          Obviously it’s because they believed, not without reason, that it would indeed have an effect on the case for regulation.

        • Andrew_FL says:

          Oh, it would collapse for plenty of reasons. Virtually everything about the calculation in question is wrong. This is just a particularly galling example of the shoddy work on this.

          • Major_Freedom says:

            I think Harold meant it wouldn’t collapse the *faith*.

            • Harold says:

              The discussion in Circular 4 concludes that 7% is a very poor discount rate to evaluate cost / benefit of this type of action. Therefore the argument does not stand or fall on the 7% discount rate. The argument stands or falls on the costs/benefits, which can be best evaluated using the appropriate discount rate.

              So, no MF, I mean it wouldn’t collapse the argument, although it might well affect peoples perception. Matt M says “and keep in mind that discount rates are some weird financial mumbo-jumbo to a large portion of the population”. If the 7% figure were included, it may appear to the public that the argument had collapsed, when it had not. Especially if some people were to draw attention to it without adequate explanation.

              To draw a parallel, if an evolution denier were to point to rock strata where the older layers were on top of the newer layers, this may seem convincing to some lay members of the public. Whilst it may be persuasive, it would not be correct to say that it collapsed the argument for evolution, which requires older layers to be below new ones when laid down.

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