This week, the House Science Committee Subcommittee on the Environment held a hearing exploring the social cost of carbon (SCC) and its use in policy-making. The Subcommittee sought to discover what, precisely, carbon dioxide emissions cost the economy. Unsurprisingly, the panel reached a verdict that there was no consensus. The SCC is an arbitrary metric and should not be used in federal rulemaking.
AEA has noted the unscientific, flawed nature of the SCC in the past. The metric fails on three major fronts: incorrect use of discount rates, inaccurate economic modeling, and the improper calculation of costs and benefits as it pertains to Office of Management and Budget (OMB) Guidance. These arguments are summarized here.
Kevin Dayaratna of The Heritage Foundation also notes that the SCC, in its current iteration, fails on another front — the time horizon. The Interagency Working Group that came up with the SCC based their work on three separate models that would calculate how much carbon emissions would theoretically “cost.” As Dr. Dayaratna explained, “It is essentially impossible to forecast technological change decades, let alone centuries, into the future. Regardless, however, these SCC models are based on projections 300 years into the future.”
Making economic assumptions three centuries into the future, and basing public policy off these assumptions, is unwise. In fact, there seemed to be general agreement on the panel that the SCC is improperly calculated. Dr. Ted Gayer of the Brookings Institute highlighted the trend of federal agencies to use the SCC to assess domestic costs while assuming global benefits. As AEA has argued before, this is akin to comparing apples and oranges. It is also in clear violation of OMB Circular A-4, which states that agencies must calculate costs and benefits domestically (they are permitted to separately provide information for global benefits). Dr. Gayer agrees:
I believe that the exclusive focus on a global measure runs counter to standard benefit–cost practice, in which only the benefits within the political jurisdiction bearing the cost of the policy are considered. It also seems at odds with the expressed intent of long-standing executive orders and of authorizing statutes…
Dr. Gayer continues:
By using the global social cost of carbon, the agencies are claiming that their rules—which impose substantial domestic costs—provide benefits that in fact largely accrue to foreign citizens. Of course, many Americans are altruistic and care about the welfare of people beyond our borders. But foreign aid decisions should be made openly, not hidden in an obscure metric used in rulemaking.
Accountability is paramount when it comes to public policy formation. Bureaucrats must be held to a standard that ensures compliance with Congressional and Executive direction, and the data and metrics produced and used should be transparent. It is abundantly clear that the SCC is improper, and its use should be discontinued. As Dr. Patrick Michaels of the Cato Institute alluded to during the hearing, the SCC simply is not ready for the Big Game.
Fortunately, Congress has acted in the past on this issue. Last Congress, several Representatives introduced the Transparency and Honesty in Energy Regulations Act. This bill sought to rein in rulemaking via the SCC (and the similar “social cost of methane”) and force a review of all regulations that use them as justification. This is a great first start to ensuring public policy be made using sound information and data. Congress should look to further explore the SCC and work to prevent its use in federal rulemaking.