Conservative Hatred for the Social Cost of Carbon is Infuriating

Conservative reporter Matt Lewis of the Daily Caller was on Fox News this weekend denouncing the Obama Administration’s decision to increase the social cost of carbon (SCC) and also wrote a short post this morning titled, “4 reasons you should be outraged by Obama’s new microwave regs.” Lewis is a thoughtful conservative voice, but he’s overreacting here.

Let’s start with his first reason: this was a unilateral decision by the Obama administration. Well, yes it was. But this isn’t a new law. It’s a measure used in the cost-benefit analysis of regulations. In the microwave rule that Lewis is so furious with, the Energy Department (DOE) also made assumptions about annual energy use, the product cost, product lifetime and forecasted efficiencies. When it’s making rules that estimate costs and benefits for decades, the DOE has to make assumptions. There’s no way around it. Congress is not going to pass a bill for every assumption in every regulation. That would be the end of regulation. Lewis doesn’t like this assumption so he complains that the action was unilateral, but that’s how the DOE (and all federal regulators) operates.

That gets us to reasons number two and three: “it was hidden” and “the price is arbitrary.” Lewis calls the social price of carbon a “guesstimate” and that regulators have lots of autonomy in their decision-making, but this is unfair too. Calling the price a “guesstimate” makes it seem like it came out of thin air. But that’s not true whatsoever. The Department released a 21-page document explaining its reasoning for the change in the social cost of carbon. The first page of it lists 11 different agencies that were involved in the process and the report goes on to cite a number of academic studies. Lewis is right that the social cost of carbon is tough to calculate, but what should we do instead? Just ignore the costs and pretend they don’t exist? That’s a terrible idea. Instead, we should try to calculate them as best we can, using both public and private resources. That’s what the Office of Management and Budget (OMB) did and that’s the number that the DOE used for its microwave regulation.

In addition, if you dig into the final rule, there is a part devoted entirely to explaining the old social cost of carbon and the new one. There is also a paragraph that warns about the uncertainty of the estimate:

It is important to recognize that a number of key uncertainties remain, and that current SCC estimates should be treated as provisional and revisable since they will evolve with improved scientific and economic understanding. The interagency group also recognizes that the existing models are imperfect and incomplete. The National Research Council report mentioned above points out that there is tension between the goal of producing quantified estimates of the economic damages from an incremental ton of carbon and the limits of existing efforts to model these effects. There are a number of concerns and problems that should be addressed by the research community, including research programs housed in many of the Federal agencies participating in the interagency process to estimate the SCC.

Does that sound like an agency trying to cover up a guesstimate? The Obama Administration didn’t announce the change in the SCC with a big press conference or a media blitz, because It’s a change in an assumption used in the cost-benefit analysis of complicated regulations. That’s not to say that Administration didn’t try to downplay it. It is a big (justified) change and the Administration announced it on a Friday afternoon in late May. It was a classic news dump. But they also didn’t try to hide it. In the very brief (five paragraph) press release on it, a full paragraph is devoted to the new estimate. That’s not an attempt to hide a massive regulatory change from the American people.

I actually agree with Lewis’s final reason: “it’s a big deal.” I’m going to quote him at full here:

This could impact the cost of almost everything you consume (including, yes, the cost of microwaves). What is more, the new regulations will impact the projected cost of building and maintaining power plants — and the Keystone XL Pipeline project. (When calculating a cost-benefit analysis, these new regulations will increase the (supposed) cost, making it less likely that new energy projects will be green lit.)

Lewis is exactly right. The SCC has big implications for a number of other projects. Lewis is complaining that this update has far-reaching effects, but that’s exactly why it’s so valuable that we revise it. This isn’t a reason to oppose the regulation. On the contrary, it’s a reason to praise the DOE and other agencies for updating their assumptions. Lewis and other conservatives may dislike the idea of the SCC and oppose any update to it that raises it’s price, but it’s a vital consideration in regulatory policy and should be a pillar of conservative policy. After all, taking into account the SCC is internalizing a negative externality that the market doesn’t take into account. It’s a step closer to a free-market system. Shouldn’t conservative embrace that?

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Ignoring the Social Cost of Carbon is Anti-Capitalistic

The House is currently taking up a bill called the Energy Consumers Relief Act, which looks to put stricter rules on the Environmental Protection Agency (EPA). The bill requires the EPA to report to Congress on any rule that has costs greater than a $1 billion. It also allows the Department of Energy to veto any rule that it believes will cause “significant adverse effects to the economy.” Of course, the vague wording gives the DOE the ability to vacate nearly any rule it wants.

But I want to focus on two similar amendments to it. The first comes from Rep. Tim Murphy (R-PA) and it would prevent the EPA from considering the social cost of carbon (SCC) when it creates rules that have costs greater than $1 billion. The second amendment, from Reps. Duncan Hunter (R-CA) and John Culberson (R-TX), would only allow the agency to take into account the SCC if it put out a separate rule finalizing what the cost would be.

Preventing the EPA to consider the SCC is absurd. Pollution is the quintessential example of a negative externality in every economics class. Basically, companies emit huge amounts of carbon and other chemicals into the air, harming the environment and hurting society, but don’t have to pay for those costs. Since no one “owns the air,” companies can offload pollutants into it without hurting their bottom line. That’s where the EPA comes in. They set regulations to limit this behavior and force companies to pay for the pollutants they emit through regulatory compliance. The SCC is a major way of doing so. It estimates the social costs to society of releasing a ton of carbon dioxide into the air. In May, the Office of Management and Budget (OMB) increased the SCC from $21/ton to $35. That’s a big change.

The SCC takes into account pollution.

The SCC increases the estimated benefits of regulation.

The way this works is that when the EPA creates a rule that will, for example, reduce carbon emissions by 100,000 tons, the social benefit of that regulation would be $3.5 million (100,000 tons*$35/ton). That would then be compared to the costs of the regulation. When the SCC is higher, the total benefits and net benefits will be higher as well. Companies want the SCC to be low – the lower it is, the less chance the EPA’s proposed rules will produce net benefits and the lower the chance the industry will have to comply with them. But economists love the SCC. It internalizes the negative externality of carbon pollution, creating more efficient, fair markets.

But Reps. Murphy, Hunter and Culberson aren’t buying it. The SCC is not an easy number to determine and the EPA and other agencies have tried to estimate it for a while. That means figuring out a final number, such as Reps. Hunter and Culberson want the agency to do, is challenging and will take a while. In the meantime, we shouldn’t just ignore the SCC because we don’t have a final answer. We should use the best numbers we have while continuing to research climate change and develop a more perfect metric. Rep. Murphy, on the other hand, doesn’t even care if the EPA comes up with a final number. He wants to ban the agency from using it altogether (for rules with costs greater than $1 billion).

The OMB’s decision to increase the SCC infuriated conservatives, but the correct response is not to prevent the EPA from using it. If it wants to develop a more accurate number, then increase the agency’s funding so that it can do more research on the social costs of carbon. But these amendments attempt to fix the problem by ignoring the SCC altogether. They do not promote free markets. In fact, they do the opposite. By preventing the EPA from internalizing the negative externality, they allow companies to pollute the environment without facing the costs.

For a party so committed to laissez-faire economics, that’s incredibly anti-capitalistic.