Cass Sunstein’s Garbage In, Garbage Out on Cost/Benefit Analysis


In a recent NYT op ed, Harvard Law professor and former Obama official Cass Sunstein cited Ronald Reagan, of all figures, as inspiration for more federal regulation on the transportation and energy sectors. Sunstein’s angle was to say that Reagan endorsed the cost/benefit analysis arguing for the US agreement to fight the “ozone hole,” and therefore Sunstein says, today’s conservatives should also support mandates on fuel efficiency and restrictions on greenhouse gas emissions. The problem is, even on a pure cost/benefit basis, Sunstein’s numbers don’t add up.

Here’s Sunstein’s argument:

Recent reports suggest that the economic cost of Hurricane Sandy could reach $50 billion and that in the current quarter, the hurricane could remove as much as half a percentage point from the nation’s economic growth. The cost of that single hurricane may well be more than five times greater than that of a usual full year’s worth of the most expensive regulations…True, scientists cannot attribute any particular hurricane to greenhouse gas emissions, but climate change is increasing the risk of costly harm from hurricanes and other natural disasters. Economists of diverse viewpoints concur that if the international community entered into a sensible agreement to reduce greenhouse gas emissions, the economic benefits would greatly outweigh the costs.

Skeptics have rightly observed that even aggressive regulatory steps by the United States cannot stop climate change. Greenhouse gases stay in the atmosphere for decades, and many nations, especially in the developing world, are contributing growing levels of emissions. For this reason, the unilateral actions of any country will not do what must be done to reduce anticipated warming and the resulting harms. Nonetheless, cost-effective reductions from the United States would help, both in themselves and because they should spur technological changes and regulatory initiatives from other nations.

For the United States, some of the best recent steps serve to save money, promote energy security and reduce air pollution. A good model is provided by rules from the Department of Transportation and the Environmental Protection Agency, widely supported by the automobile industry, which will increase the fuel economy of cars to more than 54 miles per gallon by 2025.

The fuel economy rules will eventually save consumers more than $1.7 trillion, cut United States oil consumption by 12 billion barrels and reduce greenhouse gas emissions by six billion metric tons — more than the total amount of carbon dioxide emitted by the United States in 2010. The monetary benefits of these rules exceed the monetary costs by billions of dollars annually. [Bold added.]

We should be very skeptical when a Harvard law professor tells us that federal regulations on what cars we can buy will save consumers almost $2 trillion. Elsewhere my colleagues and I have explained why such numbers are bogus; they rely on the assumption that consumers need people like Cass Sunstein to force them to save money on gasoline, because they are too ignorant or weak-willed to grab those savings for themselves. Another possibility, ignored by Sunstein and others who champion the tighter fuel economy rules, is that consumers are perfectly capable of spending their own money in ways that benefit them, and if they want to buy, say, an SUV with lower fuel efficiency, perhaps this is because they value passenger safety more than saving money at the gas pump. But Cass Sunstein will override such choices and make their decision for them.

As far as fighting climate change, here is what the EPA itself had to say about the impact of its tighter rules on vehicles:

The results of the analysis demonstrate that relative to the reference case, projected atmospheric CO2 concentrations are estimated by 2100 to be reduced by 3.29 to 3.68 part per million by volume (ppmv), global mean temperature is estimated to be reduced by 0.0076 to 0.0184 °C, and sea-level rise is projected to be reduced by approximately 0.074–0.166 cm, based on a range of climate sensitivities.

That’s not a typo: The EPA estimated that these rules (which will drive up the price of vehicles by thousands of dollars, and/or will make the manufacturers cut back on other areas such as passenger protection in a collision) will, by the year 2100, make the world about one-hundredth of a degree Celsius cooler than it otherwise would be.

Sunstein’s discussion on greenhouse gas restrictions is also misleading. Yes, it is true that many scientists and economist think that a worldwide, modestly calibrated tax on greenhouse gas emissions would deliver more benefits than costs. Yet that by no means proves that a unilateral US tax would itself pass a cost/benefit test. For sure, it would not pass such a test looking just at Americans. This is because Americans would suffer all of the compliance costs, while other areas of the world (particularly regions closer to the equator and with less advanced infrastructures to adapt to changing conditions) would reap the lion’s share of the benefits. Now some would make a moral case that this is the right thing for Americans to do, but Sunstein leads innocent readers to believe such a move would be good for the United States on net, which is not true, unless we make some optimistic assumptions about the rest of the world following suit and damaging their own economies for the greater good.

For a point of reference, climate scientist Chip Knappenberger recently estimated that the U.N. Intergovernmental Panel on Climate Change’s own simulations show that unilateral US action on greenhouse gas emissions would reduce global temperatures by the year 2100 by about 0.2 degrees Celsius. Again, that’s no typo: Even draconian restrictions on US emissions would perhaps spare the world of two-tenths of a degree of warming, a century from now. This is because emissions would continue to grow in China, India, and other economies, especially as a U.S. tax pushed businesses to relocate (a factor not included in Knappenberger’s analysis).

In summary, Americans should be wary of analysts who produce calculations allegedly proving that more regulations and taxes from DC will improve their lives. A quick inspection will typically show that the assumptions used to generate those results are very dubious.

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