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GIGO Strikes Again: EPA's Social Cost of Methane

The Environmental Protection Agency’s final methane emission standards for new, modified, and reconstructed oil and gas sources were published in the Federal Register last Friday. The rule is precedent-setting in three ways.

It is the first time EPA has finalized a rule where the monetized benefits are estimated solely from the greenhouse gas emission reductions (see page 1-8 of EPA’s Regulatory Impact Assessment). It is the first rule to incorporate a novel metric, the social cost of methane (SCM)—a guestimate similar to the intractably speculative social cost of carbon (SCC). Most critically, it is the first rule where climate benefits alone are used to “justify” regulatory costs.

As with the SCC, the SCM is a product of errant climate models combined with made up damage functions (conjectures about the potential economic impacts of greenhouse gas-induced changes in global climate). As with the so-called Clean Power Plan, EPA again employs accounting gimmickry to inflate the rule’s apparent benefits.

For example, EPA disregards Office of Management and Budget (OMB) Circular A-4, which instructs agencies to use both 3 percent and 7 percent discount rates to estimate the present value of future regulatory benefits. The lower the discount rate, the higher the present value. To estimate the benefits of methane reductions attributable to the rule, EPA uses discount rates of 2.5 percent, 3 percent, and 5 percent, but not 7 percent. Through the miracle of compounding, those rates yield much higher SCC values than would a 7 percent discount rate.

In addition, EPA’s benefit-cost assessment misleadingly compares apples (global benefits) to oranges (domestic costs). The rule’s methane-related climate benefits are estimated to be $360 million in 2020 and $695 million in 2025 (using the “central” 3 percent discount rate). Thus, benefits appear to substantially exceed regulated parties’ estimated total annual engineering costs of $250 million in 2020 and $360 million in 2025.

But in the 2010 Technical Support Document on the Social Cost of Carbon, EPA guessed that, due to America’s greater adaptive capabilities compared to most other countries, the U.S. domestic benefit of reducing one ton of carbon dioxide (CO2) emissions is only 7 percent to 23 percent as large as the global average benefit. If the same relationship holds for methane emissions, then the rule’s domestic costs exceed putative domestic benefits by 4 to 14 times in 2020 and by 2 to 7.5 times in 2025.

Curiously, the agency’s SCM estimates are based on a single staff study that is behind a $50.00 paywall. So much for the “most transparent administration in history.”

For further discussion, see the December 2015 letter from Senate Environment and Public Works Chairman James Inhofe (R-Okla.) to EPA Administrator Gina McCarthy, and EPA’s cursory response in the rulemaking docket.