Retire the Phony ‘Social Cost of Carbon’

By Roger Bezdek and Paul Driessen -- February 13, 2017

“As a first priority, the Trump Administration must review, revise, reject or even rescind the SCC, and reduce its values well below what Obama used – perhaps even to zero or negative numbers. Doing so will destroy the justification for many expensive, intrusive, punitive, useless, counterproductive regulations.”

“The benefit estimates … will remain orders of magnitude larger than any reasonable SCC estimates, which means the B-C ratios will also remain very high.”

The Obama Administration aggressively used a Social Cost of Carbon (SCC) scheme to justify federal regulations pertaining to carbon-based fuels, carbon dioxide and methane emissions, coal mine and pipeline permit denials, energy development foreign aid, and many other actions.

While “SCC” may sound esoteric or academic, it is a critical concept. Without the artificial and inflated SCC estimates, many recent energy and environmental regulations could not have been justified or promulgated.

As a first priority, the Trump Administration must review, revise, reject or even rescind the SCC, and reduce its values well below what Obama used – perhaps even to zero or negative numbers. Doing so will destroy the justification for many expensive, intrusive, punitive, useless, counterproductive regulations.

Under President Clinton’s 1993 Executive Order 12866, Federal agencies are required “to assess both the costs and benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” [1] The order was never rescinded, and thus remains in force.

And yet, in February 2010, a 12-agency Federal Interagency Working Group (IWG) developed SCC estimates of about $22 per ton of carbon dioxide (CO₂) released by burning fossil fuels. This approach evaluates only the asserted costs of using carbon-based energy, but pays no attention to the clear benefits of those energy sources. In May 2013, the IWG revised its SCC estimates upward to about $36/ton.[2]

In simplest terms, the SCC is an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year. It is meant to be a comprehensive estimate of climate change damages and of how much society would supposedly gain by slashing fossil fuel use and CO₂ emissions.[3]

The purpose of the SCC estimates is to allow agencies to incorporate the social benefits of reducing CO₂ emissions into benefit-cost analyses of regulatory actions. The Environmental Protection Agency and other federal agencies use the SCC to estimate the asserted climate benefits of their rulemakings.

The new, higher SCC estimates were used for the first time in a June 2013 rule on efficiency standards for microwave ovens.[4]  These SCC estimates, prepared with little publicity, debate, or public input, have ominous implications for the U.S. economy, consumers, and especially its manufacturing sectors.

Fundamental SCC Problems

Using this social cost of carbon format in benefit-cost analysis and proposed rulemakings entails at least three major deficiencies.

First, and most fundamentally, the SCC is based on the thesis, assertion, or alleged “consensus” that manmade carbon dioxide is the primary force controlling global warming and climate change – and that solar, cosmic ray, oceanic, and other powerful forces now play only minor, inconsequential roles.

In reality, as climatologist Judith Curry notes, within the scientific community there are still “MASSIVE uncertainties” about the climate system, including the degree to which a doubling of atmospheric CO₂ levels will affect global temperatures; how the overall carbon cycle works; the complex interplay of numerous natural forces; the degree to which human activities and energy use affect these processes (locally, regionally and globally); and the notable inability thus far of climate models to predict global temperatures, extreme weather events, regional climate changes, and sea level rise.[5]

Second, the methodology used by the IWG in developing the SCC estimates is not rigorous; indeed, it is flexible enough to produce almost any estimates and outcomes the IWG or its agency members might desire, especially over the three-century period (!) for which they are claiming to forecast.

Third, and more serious, no attempt is made to estimate (or even acknowledge the existence of) the many benefits, or positive externalities, of using carbon-based fuels and emitting carbon dioxide.

Parameters of Benefit-Cost Analysis

Since the development of rigorous benefit-cost (B-C) analysis by the U.S. Army Corps of Engineers and Bureau of Reclamation in the 1950s, such analyses have sought to assess both the costs and benefits of a proposed initiative, program, or regulation, to determine if the benefits exceed the costs.

It is thus a self-evident truism that a valid B-C analysis must include both costs and benefits. Indeed, as noted, Executive Order 12866 requires that agencies “assess both the costs and the benefits of the intended regulation.” [6]

It is thus inexcusable that the IWG process hypothesizes almost every conceivable carbon “cost” – including costs to agriculture, forestry, water resources, “forced migration,” human health and disease, coastal cities, ecosystems, wetlands, and so on throughout the world, resulting from U.S. fossil fuel use – but utterly fails to mention or analyze any potential carbon benefits, direct or indirect.[7]

This failure is especially glaring because even the Obama OMB emphasized that careful consideration of both costs and benefits is important in determining whether a regulation will improve social welfare … and to assess whether it is worth implementing at all.[8]

There are two types of carbon benefits that must be identified, analyzed and, to the degree possible, quantified: direct benefits and indirect benefits.

The major direct carbon benefit – or more accurately, the direct carbon dioxide benefit – is to increase agricultural productivity. In addition to increasing the quantity of food available for human consumption, the rising atmospheric CO₂ concentration is also improving the quality of our foods, the speed at which crops grow, their ability to withstand prolonged arid or drought conditions, and even their ability to resist disease. Similar benefits accrue to natural habitats: forests, grasslands, and phytoplankton.[9]

Even more important, the indirect benefits of carbon include the immense value to modern economies and societies of affordable, reliable energy produced by carbon-based fuels. These fuels have literally created modern technological societies worldwide, improved living standards for billions of people on the planet, increased life spans by decades, and over the past 20 years alone lifted over a billion persons out of abject poverty. They are simply invaluable and irreplaceable, and will remain so for the foreseeable future.

Indirect Benefits of CO₂ and Fossil Fuels

Seminal research has concluded:

• “Ours is a high-energy civilization based largely on combustion of fossil fuels.” [10]
• “The theoretical and empirical evidence indicates that energy use and output are tightly coupled, with energy availability playing a key role in enabling growth.” [11]

The relationship between world Gross Domestic Product (GDP) and carbon dioxide emissions over the past century is illustrated in Figure 1. It vividly depicts a strong relationship between world GDP and the CO₂ emissions from fossil fuels.  It is clear that, at present, fossil fuels – from which CO₂ is an essential byproduct, along with water vapor – are creating $60 – $70 trillion in annual global GDP.

How do these indirect CO₂ benefits compare to the Interagency Working Group’s social cost of carbon estimates?

While the SCC estimates are of questionable validity, Figures 2 and 3 compare the CO₂ costs and benefits (on a per ton basis), based on both the IWG’s 2013 and 2010 “carbon cost” estimates. The benefits clearly outweigh any hypothesized costs, by literally orders of magnitude:  anywhere from 50-to-1 to 500-to-1!

Figure 1:  Relationship between world GDP and CO₂ emissions

Source: U.S. Energy Information Administration, International Energy Agency, U.S. Bureau of Economic Analysis, and Management Information Services, Inc.

Normally, B-C ratios in the range of 2-to-1 or 3-to-1 are considered very favorable.  In other words, the benefits of CO₂ overwhelmingly outweigh the estimated CO₂ costs – no matter which government report or discount rate is used. In fact, any of the government’s asserted social cost of carbon estimates are so small compared to estimated carbon dioxide benefits alone that they are in the statistical noise category.

Instead of bemoaning alleged costs of carbon, the Obama agencies should have been extolling the unprecedented benefits of using fossil fuels and emitting carbon dioxide.

Figure 2:  2010 CO₂ Benefit-Cost Ratios
(Based on 2013 IWG Report)

Source:  U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, U.S. Interagency Working Group, and Management Information Services, Inc.

Figure 3:  2010 CO₂ Benefit-Cost Ratios
(Based on 2010 IWG Report)

Source:  U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, U.S. Interagency Working Group, and Management Information Services, Inc.

MISI Analysis of CO₂ Benefits

Since much of the relevant SCC debate concerns future emissions, future potential costs, and future policies, Management Information Services, Inc. (MISI) analyzed forecasted CO₂ benefits compared to available SCC cost predictions.[12]  Figure 4 shows the forecast relationship between world GDP and CO₂ emissions in the Energy Information Administration reference case through 2040.

Once again, future economic growth – as measured by world GDP – requires fossil fuels, which in turn generate CO₂ emissions.

Thus, according to EIA data and forecasts, fossil fuels are essential for world economic growth. Therefore, significant CO₂ emissions reductions will be associated with significant reductions in economic growth – as well as in food crop and wildlife habitat growth (forests, grasslands and phytoplankton), and human nutrition, health, living standards and life spans.

 Figure 4:  Forecast relationship between world GDP and CO₂ emissions

(EIA Reference Case)

Source:  U.S. Energy Information Administration, International Energy Agency, U.S. Bureau of Economic Analysis, and Management Information Services, Inc.

MISI utilized the information shown in Figure 4, in combination with the forecast IWG SCC estimates, to develop estimated future CO₂ benefit-cost ratios: Figure 5. This figure indicates that the CO₂ B-C ratios remain extremely high through 2040, ranging from about 50-to-1 to 250-to-1.

 Figure 5:  Forecast Reference Case CO₂ Benefit-Cost Ratios

(Based on 2013 IWG Report)

Source:  U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, U.S. Interagency Working Group, and Management Information Services, Inc.

The reference case estimates are shown for the three 2010 IWG report discount rates in Figure 6. This figure indicates that, using the government’s 2010 SCC estimates, the CO₂ B-C ratios are even higher through 2040 under each of the three discount rates, ranging from about 80-to-1 to about 500-to-1.

Figure 6:  2010 and Forecast Reference Case CO₂ Benefit-Cost Ratios

(Based on 2010 IWG Report)

Source:  U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, U.S. Interagency Working Group, and Management Information Services, Inc.

Actually, Figures 5 and 6 may be somewhat misleading, because they basically indicate the average CO₂ B-C ratio for each year. To compare marginal CO₂ benefits to marginal costs, we computed the marginal CO₂-related change in world GDP, 2010-2011, and compared this with the SCC estimates from the 2013 and 2010 IWG reports: Figure 7. These “marginal” B-C ratios are even larger than the average ratios, and the marginal B-C ratios range from about 170-to-1 to about 1,260-to-1.

Figure 7:  2010-2011 Reference Case Marginal CO₂ Benefit-Cost Ratios

(Based on 2010 and 2013 IWG Reports)

Source:  U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, U.S. Interagency Working Group, and Management Information Services, Inc.

Projected Fossil Fuel Use through 2040

Of course, not all of the world’s energy is derived from fossil fuels. In 2010, “only” about 81 percent of world energy was derived from fossil fuels, while forecasts indicate that in 2040 somewhere between 75 percent and 80 percent of world energy will be comprised of fossil fuels.[13]  To determine how taking this into consideration may affect the B-C estimates, MISI developed a scenario where the portion of world energy comprised of fossil fuels decreased gradually from 80 percent in 2010 to 75 percent in 2040.

The results of this simulation are shown in Figure 8, based on the SCC estimates from the IWG 2013 report, and in Figure 9, based on the SCC estimates from the IWG 2010 report. These figures indicate that, while the scaling of CO₂ benefit estimates somewhat decreases the B-C ratios, the ratios nevertheless remain very high, ranging from about 40-to-1 to about 280-to-1.

Figure 8:  2010 and Forecast 2040 Reference Case Scaled CO₂ B-C Ratios

(Based on 2013 IWG Report)

Source:  U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, U.S. Interagency Working Group, and Management Information Services, Inc.

 Figure 9:  2010 and Forecast 2040 Reference Case Scaled CO₂ B-C Ratios

(Based on 2010 IWG Report)

   Source:  U.S. Energy Information Administration, U.S. Bureau of Economic Analysis, U.S. Interagency Working Group, and Management Information Services, Inc.

Caveats and Implications

How viable are these estimates? Our extensive experience in these areas convinces us that the benefit estimates are, if anything, more understandable and far more credible and robust than the cost estimates.

From our perspective, the SSC estimates are questionable, because they are based on highly speculative assumptions, forecasts, model simulations, damage functions, discount rates – and the inclusion of every conceivable cost across the entire world from the United States’s using fossil fuels and emitting carbon dioxide.

Independent assessments concluded that these estimates suffer from uncertainty, speculation and lack of information about critical variables, that they “raise serious questions of science, economics and ethics,” and that they are “close to useless” as tools for policy analysis.” [14]

The benefit estimates developed here are simple, straightforward, logical, understandable, and based on two centuries of historical facts. The CO₂ benefits are almost entirely indirect: they derive from fossil fuels, which produce carbon dioxide.

There is also extensive literature verifying the critical role of fossil fuels in creating and sustaining current technology, wealth, agricultural systems, improved nutrition, and high standards of living.[15]  It is a truism, a statement of fact. Further, this relationship will remain well into the foreseeable future.

The benefit estimates derived here are extremely large compared to the questionable Interagency Working Group estimates for social cost of carbon. The B-C ratios are therefore very high.

The benefit estimates can be modified: they can be scaled, adjusted, forecast, expressed as average or marginal values, converted to different base-year dollars, and estimated for past, current or future years. Nevertheless, they will remain orders of magnitude larger than any reasonable SCC estimates, which means the B-C ratios will also remain very high.

Obama SCC: More Problems

Government SCC modelers claim they can accurately forecast global temperature and climate, weather, human population, technological advances, economic development, living standards – and damages to the world’s civilizations and ecosystems from U.S. carbon dioxide emissions – for the next 300 years!

Even without considering the numerous uncertainties over natural and manmade climate change during the coming centuries, or the preceding analysis, it is clear that this claim is ridiculous and indefensible.

The ExxonMobil report 2017 Outlook for Energy: A view to 2040 (and analyses by the IEA and other experts) anticipate a global population growth of nearly 2 billion people, a doubling of worldwide economic output, a doubling of middle classes in emerging economies to 5 billion more people, a 30% rise in electricity use per household – and a need for far more water, food, cars and raw energy to meet these needs. Indeed, they say, even in 2040, fossil fuels will still supply 80% of global energy demand.[16]

Those population and other increases mean total fossil fuel energy demand will be at least 25% higher than today. Barring significant developments in “carbon capture” technology, that means CO₂ emissions will also be 25% higher. Reiterating our central point, this energy and CO₂ growth translates into major direct and indirect benefits to humanity and planet – dwarfing any IWG “social cost of carbon” estimates.

The Outlook for Energy predictions cover a short 23-year span, but are far from certain. The low value of IWG social cost of carbon forecasts for the coming centuries can be ascertained by going back in time three centuries.

The pace of change then was minuscule, as it had been for centuries and millennia before. No one living in 1717 could have foreseen even steam engines or ironclad warships 150 years later. Just 125 years back in time, Wisconsin’s Hearthstone House became the world’s first home lit by hydroelectric power – and nary a soul could have predicted the scope of household or business reliance on electrical power today.

Just 70 years ago, at the end of World War II, computers, plastics, jet airplanes, air travel, nuclear power and even telephones were in their infancy – and no one could foresee how far they would advance by 2017. A mere 35 years ago, laptop computers, the internet, digital photography, cell phones, fracking and other technologies so commonplace today did not exist, and not one IWG modeler could have envisioned them.

Today the pace of change is exponential. And yet government SCC modelers claim they can prophesy technologies and carbon/carbon dioxide costs to humanity and planet over the next 300 years – while still not considering the incredible benefits of fossil fuels and plant-fertilizing CO₂ emissions. Even more preposterous, they insist that their soothsaying should be the basis for today’s energy and economic policies and laws, which would put the entire U.S. economy under the control of regulators, pressure groups and crony corporate interests that would profit from their decisions, subsidies and mandates.

This is junk science, Garbage In-Garbage Out modeling, phony forecasting, and calculated deception perhaps bordering on fraud. Obama-era social cost of carbon must not be a foundation for policymaking.

Conclusions

As already noted, regardless of how they may be modified, the benefit estimates presented here will remain orders of magnitude larger than any reasonable social cost of carbon estimates. The benefits resoundingly outweigh any real or imagined costs. That means B-C ratios will also remain very high.

Under Executive Order 12866, agencies are required to assess both costs and benefits of a proposed regulation and “proceed only on the basis of a reasoned determination that the benefits justify the costs.” During the Obama years, they clearly did not do so.

The implications of our research for honest, accurate assessments of social costs and benefits of carbon-based fuel use and carbon dioxide emissions – and thus for Trump Administration, congressional and state policies, programs, laws, regulations and international agreements – should be obvious.

What specifically should the White House and Congress do?

1) Reframe and revise the social cost of carbon process, by demonstrating the absurdity and falsity of what the Obama Interagency Working Group and its agency members attempted to do.

2) Emphasize the demonstrable, observable, incredible benefits of carbon-based fuels and increased atmospheric carbon dioxide – and explain how those benefits clearly outweigh any hypothesized costs by 50:1, 500:1 or more, now and for at least the next several decades.

3) Revise, rescind, and defund policies and regulations that were based on the old SCC analysis, beginning with the “endangerment” rule, Clean Power Plan, Climate Action Plan, and all domestic and overseas use of the SCC and “dangerous manmade climate change” to justify decisions on oil, natural gas, coal, fracking, methane leakage, pipelines, renewable energy programs and subsidies, foreign aid, the Paris climate agreement, and many other actions.[17]

4) Drastically reduce or terminate any U.S. financial contributions to the UN Framework Convention on Climate Change (UNFCCC), Intergovernmental Panel on Climate Change, Green Climate Fund, and similar programs – at least until they are dramatically reformed in accord with the emerging and growing recognition that we still know very little about the causes, implications and possible adaptive measures for climate change, or the totality of costs and benefits or carbon fuels and carbon dioxide emissions.

5) Finally, extricate the United States from the terms, obligations, and impediments of the Paris Climate Agreement, by presenting it to the U.S. Senate under the Constitution’s “advice and consent” clause, on the ground that it is clearly and legally a treaty requiring two-thirds ratification, and does not qualify as a mere agreement or presidential executive order. Alternatively, do so by withdrawing the United States from the original 1992 UN Framework Convention on Climate Change, thereby absolving the USA from any further energy, economic or financial commitments under international climate treaties.

These actions will help establish honest and defensible benefit-cost analyses for the nation’s deliberative process – and restore sound, replicable science to the global warming and climate change debate. Equally important, they will help ensure that America’s policies, laws and regulations recognize the critical importance and benefits of carbon-based fuels to the nation’s economic growth and job creation (and of carbon dioxide for its agriculture and ecosystems) for decades to come.

_____________

Roger Bezdek is an internationally recognized energy analyst and president of Management Information Services, Inc. (www.MISI-net.com). Paul Driessen is senior policy analyst for the Committee For A Constructive Tomorrow (www.CFACT.org), and author of Eco-Imperialism: Green power – Black death.

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REFERENCES

[1] “Regulatory Planning and Review, Executive Order 12866 of September 30, 1993,” Federal Register, Vol. 58, No. 190, Monday, October 4, 1993.

[2] Interagency “Working Group on Social Cost of Carbon, United States Government, “Technical Support Document:  Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866,” May 2013; Interagency Working Group on Social Cost of Carbon, United States Government, “Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866,” February 2010.

[3] Ibid.

[4] U.S. Department of Energy, “Energy Conservation Program:  Energy Conservation Standards for Standby Mode and Off Mode for Microwave Ovens,” 10 CFR Parts 429 and 430.

[5] Judith Curry, “Rethinking the Social Cost of Carbon: The social cost of carbon is emerging as a major source of contention in the Trump Administration,” JudithCurry.com, January 17, 2017, https://judithcurry.com/2017/01/17/rethinking-the-social-cost-of-carbon/

[6] “Regulatory Planning and Review, Executive Order 12866 of September 30, 1993,” op. cit.

[7] This alone should invalidate the IWG methodology and disqualify the use of the SCC estimates in any Federal rulemaking or cost-benefit analysis. Vividly illustrating the absurdity of these claims and calculations, a recent “news” article actually asserted that American fossil fuel use “disproportionately” caused a prolonged drought in southern Africa, which led to crop failures, which caused “acute malnutrition,” which resulted in the deaths of thousands of African children. Nicolas Kristof, “As Donald Trump denies climate change, these kids die of it,” New York Times, January 6, 2017.

Other activists – including climate and environmental pressure groups, alarmist scientists, and business groups seeking to increase their subsidies and customer base – work to keep the discussion centered on “the cost of climate change denial” to the U.S. and world economies, supposedly resulting from government “failure to support future initiatives focused on curbing global warming.” (MVF Global press advisory of January 12, 2017)

[8] U.S. Office of Management and Budget, “2013 Draft Report to Congress on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates Reform Act,” www.whitehouse.gov/sites/default/files/omb/inforeg/2013_cb/ draft_2013_cost_benefit_report.pdf.

[9] See Paul Driessen, Miracle Molecule: Carbon dioxide, gas of life (foreword by Dr. Roy Spencer), a CFACT eBook available through Amazon.com and BarnesAndNoble.com (2014).

[10] Vaclav Smil, Energy at the Crossroads:  Global Perspectives and Uncertainties, MIT Press, 2005.

[11] Robert U. Ayres, Jeroen C.J.M. van don Bergh, Dietmar Lindenberger and Benjamin Warr, “The Underestimated Contribution of Energy to Economic Growth,” lNSEAD, Fontainebleau, France, 2013.

[12] Roger H. Bezdek, “Carbon Dioxide:  Social Cost or Social Benefit?” presented at the U.S. Energy Association, Washington, D.C., December 15, 2014.

[13] BP Energy Outlook, 2017 Edition, https://www.bp.com/content/dam/bp/pdf/energy-economics/energy-outlook-2017/bp-energy-outlook-2017.pdf.

[14] Robert S. Pindyck, “Climate Change Policy:  What Do The Models Tell Us?” National Bureau of Economic Research, Working Paper 19244, July 2013.

[15] For example, in addition to Smil (op. cit.) and Ayres, van don Bergh, Lindenberger, and Warr (op. cit.), see James H. Brown, William R. Burnside, Ana D. Davidson, et al., “Energetic Limits to Economic Growth,” BioScience, January 2011, Vol. 61, No. 1; David I. Stern, “The Role of Energy in Economic Growth,” The United States Association for Energy Economics and the International Association for Energy Economics, USAEE-IAEE WP 10-055, November 2010; Robert U. Ayres and Benjamin Warr, The Economic Growth Engine:  How Energy and Work Drive Material Prosperity, Northampton, MA:  Edward Elgar. 2009; and Gail Tverberg, “An Energy/GDP Forecast to 2050.”

[16] ExxonMobil Corporation press release and report, Outlook for Energy: A View to0 2040 (December 16, 2016).

[17] For scholarly articles on climate change rulings, see Timothy Benson, The Heartland Institute, “Comments, petitions and testimony opposing EPA’s CO2 endangerment finding (January 18, 2017).