Why the EPA’s 'social cost of carbon' fails

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According to the Environmental Protection Agency, the Social Cost of Carbon (SCC) is supposed to be "an estimate of the economic damages associated with a small increase in carbon dioxide (CO2) emissions, in a given year".

However, the EPA's "analysis" of the "social cost of carbon," developed recently as justification for a rule constraining energy use by microwave ovens, ignores the fact that U.S. emissions of greenhouse gases are about 17 percent of the world total. Therefore, even an immediate reduction by half in U.S. emissions would yield a reduction in world temperatures of about one-tenth of one degree by the end of this century, a change smaller than the standard deviation, and thus difficult to distinguish from statistical noise. That temperature change is trivial; accordingly, the "benefit" of U.S. carbon reductions is zero.  As Asian emissions grow inexorably over time, even that temperature effect will become smaller, as the (logarithmic) relationship between emissions and temperatures declines as concentrations increase.

Moreover, the EPA analysis violates procedural guidelines imposed by the Office of Management and Budget: Only the supposed benefits and costs of a rule felt by the U.S. — not the rest of the world — are relevant for federal benefit/cost analyses, a constraint crucial in that incorporation of worldwide effects would leave the U.S. to bear all the costs of environmental protection for the entire globe while the rest of the world would be encouraged to obtain a free ride on U.S. efforts.

The EPA analysis assumes a range of discount rates — a crucial parameter sharply shifting the bottom line — that violates OMB guidelines.  Moreover, because the costs of the rule are far more certain than the benefits — the climate models simply are unreliable in terms of the long-term effects of changes in GHG concentrations — the discount rate applied to costs should be substantially lower than that applied to benefits.  And so on.

The bureaucracy is an interest group, the implication of which is that OMB directives cannot yield analytic objectivity; the routes by which benefit/cost analyses can be manipulated are too numerous.  Instead, only political accountability — a requirement for congressional approval of major rules — can impose discipline upon the bureaucracy and other political interests attempting to impose large costs upon the private sector in pursuit of political ends.

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