Elephant in the elevator: How government manipulates the social cost of carbon to justify regulations

Four CEI colleagues and I each submitted comments this month on the Office of Management and Budget’s proposed update of Circular A-4—OMB’s guidelines on how federal regulatory agencies should conduct benefit-cost analysis (BCA). Our submissions cover a wide range of topics reflecting our diverse research interests.

My comments focus on a peril OMB does not discuss directly but implicitly encourages—the increasingly prominent role of social cost of carbon (SCC) analysis in regulatory benefit calculations.

I document the persistent lack of balance and objectivity in federal agency SCC estimates, and argue that SCC-based benefits should not be a factor influencing regulatory decisions.

Although OMB never mentions the SCC elephant in the BCA elevator, the proposed update’s statements about transparency, objectivity, baselines, discount rates, analytic choices, sensitivity analysis, and the distinction between domestic and global benefits are clearly pertinent to the ongoing debate over SCC methodology.  

Such statements include:

• “You should aim for transparency about the key methods, data and other analytical choices you make in your analysis.”

• “Your analysis should be credible, objective, realistic, and scientifically balanced…. Objectivity refers to whether the disseminated information is accurate, reliable, and unbiased as a matter of presentation and substance.”

• “The benefits and costs of a regulation are generally measured against a no-action baseline: an analytically reasonable forecast of the way the world would look absent the regulatory action being assessed, including any expected changes to current conditions over time.”

• “Agencies are encouraged to consider the likely path of future government programs and policies when relevant and appropriate, either reflecting them in the primary or in a supplemental baseline (in either approach, carefully describe the ways in which the future government programs or policies may affect your analysis).”

• “If the analytic results are sensitive to a given assumption or data source, alternative modeling assumptions or data sources can be used to demonstrate the sensitivity of the results . . . Your presentation should also generally explain, when relevant, how your analytical choices have significantly affected your results.”

• “Sensitivity analysis can be used to find ‘switch points,’ critical parameter values at which estimated net benefits change sign or the alternative with the most net benefits switches.”

• “In certain contexts, it may be particularly appropriate to include effects experienced by noncitizens residing abroad in your primary analysis. Such contexts include, for example … regulating an externality on the basis of its global effects supports a cooperative international approach to the regulation of the externality by potentially inducing other countries to follow suit or maintain existing efforts.”

• “When your primary analysis focuses on the global effects of the regulation, it is generally appropriate to produce a separate supplementary analysis of the effects experienced by U.S. citizens and residents, unless you determine that such effects cannot be separated in a practical and reasonably accurate manner, or that the separate presentation of such effects would likely be misleading or confusing in light of the factors detailed above.”

OMB has been team leader of the Interagency Working Group (IWG) on the Social Cost of Carbon since 2009, so it cannot have missed the implications of those remarks for SCC analysis. Keying off those excerpts, my comments develop the following points:

• The opaqueness and increasing implausibility of the emission baselines used in the IWG’s 2010, 2013, 2016, and 2021 technical support documents (TSDs) render any regulatory decision informed by the IWG’s estimates vulnerable to challenge as arbitrary and capricious.

• The pervasive use of unrealistic emission baselines in official and academic climate impact assessments corrupts both science and politics. The projected quantity of emissions is the central variable in climate assessments. Inflated emission baselines bias all climate impact and SCC calculations. Such scary scenarios also fuel the climate crisis narrative, which in turn mobilizes support for global governance, regulatory overreach, political control of private capital investment, and intolerance of viewpoint diversity.

• In the EPA’s proposed revision of federal SCC analysis, baseline CO₂ emissions during 2000-2300 are less than one-third of those projected by the IWG, yet the EPA’s SCC estimates are more than three times higher. How do dramatic reductions in projected emissions yield much larger climate damage estimates? Far from explaining this less-is-more social cost paradox, the EPA does not even acknowledge it. That is not transparent.

• SCC estimates are highly sensitive to the modeler’s choice of assumptions and inputs. The IWG’s analytic choices with regard to emission baselines, climate sensitivity, time horizons, CO₂ fertilization, discount rates, and future adaptive capabilities are tendentious. All increase the estimated social costs of emissions and climate benefits of emission-reduction policies.

• The IWG does not provide sensitivity analyses to show how its analytic choices drive the results. A recent peer-reviewed sensitivity analysis finds that substituting reasonable alternative estimates of just two variables—climate sensitivity and CO₂ fertilization—produce strong probabilities that the SCC is negative (i.e. net-beneficial) through the mid-21st century. The IWG and the EPA omit such studies from their lists of references. That is not balanced.

• The alleged analytic and strategic merits of estimating the global benefits of U.S. greenhouse gas (GHG) regulations do not excuse agencies from estimating the domestic benefits of such policies. Comparing apples (domestic costs) to oranges (global benefits) is a form of presentation bias, inflating the perceived net benefits Americans supposedly reap from U.S. climate policies.

My concluding section offers some big-picture points OMB is probably even less inclined to address.

Federal agencies typically claim SCC estimates are solely for informational purposes and do not influence regulatory decisions. That posture ceases to be reasonable (or believable) when social cost-based climate benefits comprise most or even all monetized regulatory benefits. For example, in the EPA’s recently proposed methane emission standards for oil and gas industry infrastructure, 100 percent of the projected monetized benefits, totaling $55 billion, are social cost-based climate benefits. Absent such benefits, the rule’s projected $13 billion in compliance costs would be very hard to justify.

Given the Biden administration’s “whole-of-government approach” to the so-called climate crisis, we may expect that an increasing number of regulations will depend for their purported rationality on SCC-estimated climate benefits.

But there’s the rub. The reality and substance of such benefits cannot be verified or perceived in human or natural events. This makes climate benefits different from conventional environmental benefits, which in general are fairly traceable to specific policies and can be experienced (e.g. improvements in air quality) within the lifetimes of the intended beneficiaries. 

For example, based on the EPA’s climate policy calculator, a model called MAGICC, the agency’s proposed methane emission standards would avert 0.004°C of warming by 2050 and 0.011°C of warming by 2100. For perspective, the standard deviation for measuring changes in global annual average temperatures is 27.5 to 10 times larger—0.11°C. The rule’s purported effects are too small to be detected by scientists or experienced by people and other living things.

Undetectable, non-experiential effects are “benefits” in name only and should not be netted against multi-billion-dollar compliance costs that impose verifiable burdens on identifiable people and businesses.

In addition, SCC estimates are so sensitive to modelers’ analytic choices that political manipulation has been the norm. After all, the incentives to manipulate are obvious and powerful. Progressives dominate the social cost fraternity, and leading “experts” now openly advocate making SCC analysis the handmaid of the Net-Zero agenda. Moreover, as insiders know, by adjusting the knobs and dials, social cost modelers can, in principle, make fossil fuels look unaffordable no matter how cheap, and climate regulations look like a bargain at any price.

Whatever value SCC analysis may have as an academic exercise, it is too dependent on speculative assumptions to inform regulatory decisions. Unplugging SCC analysis from regulatory justification is not an option for OMB in the current administration. However, when political conditions are more propitious, OMB should develop the case for such a course correction.