As a teacher of benefit-cost analysis (BCA), the review by the current administration of the Clean Power Plan (CPP), a cornerstone of the Obama era climate change regulations, presents what we often call “teachable moments.” Specifically, how could the CPP produce benefits that exceed costs in the Obama administration and then costs that exceed benefits in the Trump administration?
In 2015, the Environmental Protection Agency (EPA) announced the CPP , which set standards for electricity generating power plants and guidelines for state-level plans, with a goal of reducing carbon dioxide (CO2) emissions by 32 % by 2030 compared to 2005. As an economically significant regulatory action, the CPP was subject to a benefit-cost analysis (BCA) as required under Executive Order No. 12866 and Circular A-4 from the Office of Management and Budget. The analysis indicated that the benefits of regulation outweighed the costs.
More recently, however, in keeping with the views of the current administration, EPA proposed to repeal the CPP . In October 2017, the EPA published a BCA for this proposal, indicating that the benefits may no longer outweigh the costs. Why the difference between the earlier and more recent analyses?
Both the earlier and later analyses include benefits of reducing climate change impacts associated with lower emissions of CO2. However, a key difference is the value ascribed to these benefits.
The social cost of carbon dioxide (SC-CO2) represents the monetized value of the benefits of abating one ton of CO2. The SC-CO2, estimated by the US Government Interagency Working Group on Social Cost of Greenhouse Gases , encompasses both direct and indirect costs from climatic damages. These damages include adverse human health effects from higher temperatures, lost value of agricultural productivity due to changes in temperature and precipitation, and infrastructure damages from sea-level rise.
However, by altering the discount rate for climate damages and the choice of “whose damages count” (global damages or only those to the United States), the BCA for the proposed repeal calculates that the SC-CO2 (for emissions in the year 2015) could be as little as $1 (2011$). By contrast, the Obama administration calculated and adopted a value of $36 (2007$) in the BCA for the CPP .
Each year, many students in my class question the usefulness of BCA in promoting good policy, often asking whether the BCA framework is too flexible, and therefore meaningless. Does this example support their skepticism? I am anticipating some tough questions from my students and here’s how I plan to answer them.
Question: One key difference between the values used for the SC-CO2 comes down to whose benefits and preferences should be included in the analysis. Who makes this decision?
Answer: The short answer is that BCA alone cannot guide us as to who has standing. While there is consensus that climate change is a global problem and that the most efficient policy would internalize the global social cost of CO2 emissions, there is less agreement about whether it is appropriate for the US government to consider damages to those living outside the United States. Two recent papers – the first by Gayer & Viscusi (2016) and the second by Howard & Schwartz (2016) – present divergent views and raise questions about precedent, legal authority, international reciprocity, and altruism towards inhabitants of other countries.
Practical constraints are also important; the Interagency Working Group in 2010 estimated a domestic value of between 7 to 23% of the global value, but termed that value “approximate, provisional, and highly speculative .” Consequently, it is recognized that an improved domestic estimate would be needed to support its use in future BCAs. That being said, the question of who has standing is as much ethical and political as it is legal or practical.
Question: The SC-CO2 was calculated by the Interagency Working Group using three discount rates, 2.5%, 3% and 5%. For the BCA for the CPP rule, the results for a 3% discount rate were selected. In the review of the rule, the results are presented for 3% and 7%. The discount rate is critical for climate change policies where the benefits may not be observed until the middle of the century. So, who “picks” the discount rate?