The Trump Administration’s new social cost of carbon policy muddies the waters.
President Donald Trump signed an executive order last month calling for the elimination of health and safety rules related to domestic energy production. The order starts a long—and legally risky—process of dismantling President Barack Obama’s executive actions to address climate change.
One section of the order purports to withdraw the federal government’s estimates of the social cost of carbon, a metric developed to quantify the economic costs of each ton of carbon dioxide pollution, based on peer-reviewed science and economics. The government uses these numbers to evaluate the benefits and costs of proposed regulations and decide if a rule makes sense.
President Trump’s executive order throws out an estimate of the social cost of carbon that the federal government has carefully developed over many years, replacing it with an agency-by-agency approach that would value greenhouse gas emissions in a manner “consistent with the guidance contained in Circular A-4,” a guidebook on cost-benefit analysis issued by the Office of Management & Budget during the George W. Bush Administration in 2003.
What the executive order fails to acknowledge is that the Obama Administration’s estimate of the social cost of carbon is consistent with the guidance from Circular A-4. Asking each agency to develop its own metric will waste agency resources and open rules up to needless and risky legal challenges.
The executive order insists that agencies comply with Circular A-4 with respect to two main factors: “domestic versus international impacts,” and “the consideration of appropriate discount rates.” For each of these factors, the existing estimate of the social cost of carbon that the executive order attempts to dismantle is, in fact, already consistent with the approach in Circular A-4.
Many opponents of federal climate action argue that it is inappropriate for the United States to consider the effects of our carbon emissions on other countries when analyzing proposed regulations. They argue that if the costs of the regulation are felt locally, the government’s cost-benefit analysis must focus only on local climate benefits. Experts have written extensively about why a global analysis is the appropriate approach from an economic and legal perspective, and a federal court ruling recently upheld the government’s global approach to analyzing the social cost of carbon.
Moreover, Circular A-4 provides for the consideration of global effects. The guidance does note that an analysis should “focus on benefits and costs that accrue to citizens and residents of the United States,” but it also instructs, “where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.” That is, when effects are felt globally, as with climate change, the analysis should consider those effects, with the global and the domestic effects broken out separately.
The current social cost of carbon is based precisely on this approach. The federal government has reported a global value, in addition to offering a rough estimate of the proportion of the value involving domestic damages. (As the National Academy of Sciences recently noted, a precise value for domestic damages is difficult to calculate given the fact that climate damages in other countries also affect U.S. interests, through threats to investment, trade, and national security.) By offering an estimate of the domestic portion of damages, as well as reporting a global value, the existing guidance on the social cost of carbon is consistent with Circular A-4.
President Trump’s executive order also insists that agencies must evaluate climate impacts by using “appropriate discount rates,” consistent with Circular A-4. Again, the social cost of carbon developed under the Obama Administration already adheres to Circular A-4’s guidance on discount rates.
Discount rates are needed in economic analysis when the benefits and costs of a rule do not occur in the same time period to reflect that costs and benefits accruing sooner are worth more than those accruing later in the future. The higher the discount rate, the less value is placed on future impacts. In this case, because the harms from climate change accrue over a long time period, the higher the discount rate, the lower the estimate of the social cost of carbon.
Circular A-4 recommends that agencies analyze proposed rules using a range of discount rates that reflect the nature of the rule’s impacts on affected parties. It recommends that agencies use a discount rate that reflects the “before-tax rate of return to private capital,” as well as a discount rate that reflects the “real rate of return on long-term government debt.” In 2003, these values were 7 percent and 3 percent, respectively, but given the low interest rates in today’s markets, the Council of Economic Advisers recently noted that these numbers may be too high. Surveys of economic experts have also found that the 7 percent and 3 percent values are likely too high in the context of long-term decisions affecting the public, like climate change.
Additionally, Circular A-4 instructs agencies that if a “rule will have important intergenerational benefits or costs,” then the agency “might consider a further sensitivity analysis using a lower but positive discount rate.” That is, for an issue like climate change that will impact future generations, it makes sense to offer additional estimates of net benefits using an even lower discount rate.
Existing social cost of carbon estimates already follow the discount rate approach from Circular A-4. In particular, the government’s guidance on the social cost of carbon recommends a range of discount rates, from 2.5 percent to 5 percent, with a central estimate based on a 3 percent rate. Especially given the intergenerational nature of climate change and low interest rates in markets, this range of estimates is consistent with Circular A-4’s guidance.
In issuing an executive order to revoke the existing government-wide estimates of the social cost of carbon, President Trump is purporting to replace it with separate analyses by each agency based on the guidance in Circular A-4. However, the current government-wide estimates are already consistent with that guidance. To insist otherwise is yet another example of the Trump Administration’s embrace of “alternative facts.” By calling for each agency to establish its own estimates, the Trump Administration is wasting taxpayer dollars on unnecessary new models and exposing agencies to expensive and risky lawsuits.