CEI Comments on OMB’s Revision of Circular A-4 Regulatory Accounting Guidelines

Thank you for the opportunity to submit comments on the Office of Management and Budget’s (OMB’s) Draft for Public Review of its proposed update of Circular A-4 regulatory analysis guidelines.[1] My comments focus on the Draft’s implications for social cost of carbon estimation in federal agency benefit-cost analysis.

I. Transparency, Baseline, and Modeling Issues—Overview

OMB’s Draft Circular A-4 barely touches on the social cost of carbon (SCC)—the estimated present value of projected cumulative damages from one ton of carbon dioxide (CO₂) emitted in a particular year, or conversely, the benefit of eliminating that ton of CO₂ emissions. The term “social cost of carbon” occurs only four times in the Draft Circular, each time in footnotes to sources addressing “probabilistic analysis” or “expert solicitation” as methods for addressing uncertainties in long-term projections in general.[2]

OMB’s reticence about the SCC as a component of benefit-cost analysis (BCA) is incongruous. By one estimate, as of June 2021, federal agencies had used the SCC to calculate climate benefits in at least 80 rules.[3] SCC estimates are routine components of regulatory impact analyses (RIAs) at the Environmental Protection Agency (EPA) and the Departments of Energy, Transportation, and Interior. President Biden’s “whole-of-government approach to the climate crisis”[4] is bound to expand the use of SCC analysis in federal regulation. The Inflation Reduction Act’s authorization of $369 billion to $1.2 trillion in “clean energy” spending[5] may make SCC calculations a common feature of fiscal policy deliberation and advocacy as well.

Although the Draft Circular A-4 says little directly about SCC analysis, certain statements regarding transparency, objectivity, baselines, discount rates, analytic choices, sensitivity analysis, and the distinction between domestic and global benefits are 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.[6]

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.[7]

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.[8]

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).[9]

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.[10]

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.[11]

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.[12]

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.[13]

Since OMB has been team leader of the Interagency Working Group (IWG) on the Social Cost of Carbon since 2009, the implications of those statements for SCC analysis could not have escaped OMB’s attention.

The present comments identify several problematic features of the IWG’s work on the SCC. CEI respectfully requests that OMB address those concerns in the final revised Circular A-4.

The comments raise the following issues:

• The opacity 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.

• In the EPA’s proposed revision of federal SCC analysis, baseline CO₂ emissions during 2000-2300 are less than one-third 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,[14] 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-21^st 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.

• Federal agencies typically claim SCC estimates are solely for informational purposes and do not inform regulatory decisions. That posture ceases to be reasonable (or believable) when the social cost-based climate benefits comprise most or even all monetized regulatory benefits (the EPA’s proposed oil and gas industry methane emission standards are a recent case in point).

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