Guest post by David Middleton
Trump to Drop Climate Change From Environmental Reviews, Source Says
byMarch 14, 2017, 1:06 PM CDT
President Donald Trump is set to sign a sweeping directive to dramatically shrink the role climate change plays in decisions across the government, ranging from appliance standards to pipeline approvals, according to a person familiar with the administration’s plan.
The order, which could be signed this week, goes far beyond a targeted assault on Obama-era measures blocking coal leasing and throttling greenhouse gas emissions from power plants that has been discussed for weeks. Some of the changes could happen immediately; others could take years to implement.
It aims to reverse President Barack Obama’s broad approach for addressing climate change. One Obama-era policy instructed government agencies to factor climate change into formal environmental reviews, such as that for the Keystone XL pipeline. Trump’s order also will compel a reconsideration of the government’s use of a metricknown as the “social cost of carbon” that reflects the potential economic damage from climate change. It was used by the Obama administration to justify a suite of regulations.
Trump’s Secret Weapon Against Obama’s Climate Plans
Tom Pyle, president of the American Energy Alliance, a conservative, fossil fuel-oriented advocacy group, welcomed Trump’s comprehensive approach, calling it essential to undoing Obama-era climate policies that “permeated the entire administration.”
[…]
President Trump’s “secret weapon” is the discount rate…
How Climate Rules Might Fade Away
Obama used an arcane number to craft his regulations. Trump could use it to undo them.
by Matthew Philips , Mark Drajem , and Jennifer A Dlouhy
December 15, 2016, 3:30 AM CST
In February 2009, a month after Barack Obama took office, two academics sat across from each other in the White House mess hall. Over a club sandwich, Michael Greenstone, a White House economist, and Cass Sunstein, Obama’s top regulatory officer, decided that the executive branch needed to figure out how to estimate the economic damage from climate change. With the recession in full swing, they were rightly skeptical about the chances that Congress would pass a nationwide cap-and-trade bill. Greenstone and Sunstein knew they needed a Plan B: a way to regulate carbon emissions without going through Congress.
Over the next year, a team of economists, scientists, and lawyers from across the federal government convened to come up with a dollar amount for the economic cost of carbon emissions. Whatever value they hit upon would be used to determine the scope of regulations aimed at reducing the damage from climate change. The bigger the estimate, the more costly the rules meant to address it could be. After a year of modeling different scenarios, the team came up with a central estimate of $21 per metric ton, which is to say that by their calculations, every ton of carbon emitted into the atmosphere imposed $21 of economic cost. It has since been raised to around $40 a ton.
This calculation, known as the Social Cost of Carbon (SCC), serves as the linchpin for much of the climate-related rules imposed by the White House over the past eight years. From capping the carbon emissions of power plants to cutting down on the amount of electricity used by the digital clock on a microwave, the SCC has given the Obama administration the legal justification to argue that the benefits these rules provide to society outweigh the costs they impose on industry.
It turns out that the same calculation used to justify so much of Obama’s climate agenda could be used by President-elect Donald Trump to undo a significant portion of it. As Trump nominates people who favor fossil fuels and oppose climate regulation to top positions in his cabinet, including Oklahoma Attorney General Scott Pruitt to head the Environmental Protection Agency and former Texas Governor Rick Perry to lead the Department of Energy, it seems clear that one of his primary objectives will be to dismantle much of Obama’s climate and clean energy legacy. He already appears to be focusing on the SCC.
[…]
The SCC models rely on a “discount rate” to state the harm from global warming in today’s dollars. The higher the discount rate, the lower the estimate of harm. That’s because the costs incurred by burning carbon lie mostly in the distant future, while the benefits (heat, electricity, etc.) are enjoyed today. A high discount rate shrinks the estimates of future costs but doesn’t affect present-day benefits. The team put together by Greenstone and Sunstein used a discount rate of 3 percent to come up with its central estimate of $21 a ton for damage inflicted by carbon. But changing that discount just slightly produces big swings in the overall cost of carbon, turning a number that’s pushing broad changes in everything from appliances to coal leasing decisions into one that would have little or no impact on policy.
According to a 2013 government update on the SCC, by applying a discount rate of 5 percent, the cost of carbon in 2020 comes out to $12 a ton; using a 2.5 percent rate, it’s $65. A 7 percent discount rate, which has been used by the EPA for other regulatory analysis, could actually lead to a negative carbon cost, which would seem to imply that carbon emissions are beneficial. “Once you start to dig into how the numbers are constructed, I cannot fathom how anyone could think it has any basis in reality,” says Daniel Simmons, vice president for policy at the American Energy Alliance and a member of the Trump transition team focusing on the Energy Department. “Depending on what the discount rate is, you go from a large number to a negative number, with some very reasonable assumptions.”
[…]
This is worth repeating:
A 7 percent discount rate, which has been used by the EPA for other regulatory analysis, could actually lead to a negative carbon cost, which would seem to imply that carbon emissions are beneficial.
One of the most common ways of estimating the value of oil and gas revenue and reserves is called “PV10.”
PV10 is the current value of approximated oil and gas revenues in the future, minus anticipated expenses, discounted using a yearly discount rate of 10%. Used primarily in reference to the energy industry, PV10 is helpful in estimating the present value of a corporation’s proven oil and gas reserves.
Read more: PV10 Definition | Investopediahttp://www.investopedia.com/terms/p/pv10.asp#ixzz4bQb2uKyw
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We generally use a 10% discount rate when deciding how to allocate current capital.
A 3% discount rate, as used in the SCC calculation, essentially assumes that the time-value of money is insignificant. I suppose that since it’s OPM (other people’s money), the government doesn’t view the time-value of money as a particularly relevant thing.
OMB’s Whitewash on the Social Cost of Carbon
The “social cost of carbon” (SCC) is a key feature in the debate over climate change as well as the principal justification for costly regulations by the federal government. We here at IER and other critics have raised serious objections to the procedure by which the Obama Administration has produced estimates of the SCC.
Last summer I did a post on the GAO’s whitewash of our criticism, and now—just before the Independence Day holiday weekend—the Office of Management and Budget (OMB) has released its own whitewash.
There are several key points on which the Administration is obfuscating, but in this post I’ll focus just on the choice of discount rates. This one variable alone is sufficient to completely neuter the case for regulating carbon dioxide emissions using the social cost of carbon, so it is crucial to understand the controversy.
[…]
Why Do We Discount Future Damages?
Present dollars are more important than future dollars. If you have to suffer damage worth (say) $10,000, you will be relieved to learn that it will hit you in 20 years, rather than tomorrow. This preference isn’t simply a psychological one of wanting to defer pain. No: Because market interest rates are positive, it is cheaper for you to deal with a $10,000 damage that won’t hit for 20 years. That’s because you can set aside a smaller sum today and invest it (perhaps in safe bonds), so that the value of your side fund will grow to $10,000 in 20 years’ time.
In this framework, it is easy to see how crucial the interest rate is, on those safe bonds. If your side fund grows at 7% per year, then you need to set aside about $2,584 today in order to have $10,000 in 20 years. But if the interest rate is only 3%, then you need to put aside $5,537 today in order to have $10,000 to pay for the damage in 20 years.
An equivalent way of stating these facts is to say that the present-discounted value of the looming $10,000 in damages (which won’t hit for 20 years) is $2,584 using a 7% discount rate, but $5,537 using a 3% discount rate. The underlying assumption about the size and timing of the damage is the same—the only thing we changed is the discount rate used in our assessment of it.
Discount Rates in Climate Policy
Generally speaking, the climate damages that occur in computer simulations don’t begin to significantly affect human welfare in the aggregate until the second half of the 21st century. In other words, the computer-simulated damages need to be discounted over the course of decades and even centuries. (The Obama Administration Working Group used three computer models to calculate damages through the year 2300.) Thus we can see why the choice of discount rate is so crucial.
In its latest revision, the Working Group estimated that for an additional ton of carbon dioxide emitted in the year 2015, the present-value of future net damages would be $11 using a 5% discount rate, $36 using a 3% rate, and $56 using a 2.5% rate (see table on page 3 here). Yet when the media refer to these numbers as “the social cost of carbon,” it obscures how arbitrary the figures are. They can range from $11/ton to $56/ton just by adjusting the discount rate in a narrow band from 5% to 2.5%.
Violating OMB’s Clear Guidance
Fortunately, OMB provides explicit guidance (in the form of “OMB Circulars”) to federal agencies on how to select discount rates. Specifically, as we carefully explain on pages 12-17 of IER’s formal Comment, OMB Circular A-4 (relying in turn on Circular A-94) states that “a real discount rate of 7 percent should be used as a base-case for regulatory analysis,” as this is the average before-tax rate of return to private capital investment.
Now it’s true, Circular A-4 goes on to acknowledges that in some cases, the displacement of consumption is more relevant to assess the impact of the policy under consideration, in which case a real discount rate of 3 percent should be used. Thus it states: “For regulatory analysis, you should provide estimates of net benefits using both 3 percent and 7 percent” (bold added).
[…]
The current SCC is based on a moronically low discount rate of 3%. OMB guidance clearly states that “’a real discount rate of 7 percent should be used as a base-case for regulatory analysis,’ as this is the average before-tax rate of return to private capital investment.”
As 7% discount rate makes the SCC negative and would mean that carbon emissions are economically beneficial.
Conclusion
A “real world” discount rate zeroes out all of the economic benefits of carbon emission regulations. The simple application of a 7% discount rate to the social cost of carbon would falsify the EPA’s endangerment finding and obviate the agency’s court-imposed obligation to regulate CO2.
Reference
Nordhaus, William D.
Revisiting the social cost of carbon
PNAS 2017 114 (7) 1518-1523; published ahead of print January 31, 2017, doi:10.1073/pnas.1609244114
Addendum
As a default position, OMB Circular A-94 states that a real discount rate of 7 percent should be used as a base-case for regulatory analysis. The 7 percent rate is an estimate of the average before-tax rate of return to private capital in the U.S. economy…
https://www.transportation.gov/sites/dot.gov/files/docs/OMB%20Circular%20No.%20A-4.pdf
It might be faster to issue an executive order erasing all executive actions of the worst President of my lifetime in one sweep. The extent of Obama damage throughout government is extensive and egregious.
It would be faster, if not for the litigation that would follow.
That would imply executive orders are in fact making laws without Congress.
@ResourceGuy – That “executive orders are in fact making laws without Congress” has been openly acknowledged since WJClinton. Remember, “Stroke of the pen, law of the land. Kinda cool.”?
It used to be a legal dictum that fraud obviates all. Trump should bear down on the fraudulent aspects of both the CAGW promoters and the Obamaunist administration itself.
Dump it all, and spend 4 years rooting the CAGW fraud out lock, stock and barrel including better data. Or at least acknowledge the prior data fruds and missing data. Otherwise the CAGWers will excuse the missing data as “Trump’s fault” when it was either missing or fiddled earlier.
Obama must be frontrunner to be elected the most successful failure in USA presidential history. If not the world. His legacy is failure.
Go the Donald.
No, Dave is right, just setting the discount rate to the default OMB rate, 7%, would do the job. As he carefully explains, this makes the “social cost of carbon” into a benefi! As it really is, of course 😉
Naa–the green blob is certain to sue to preserve the status quo, so reversing the Obama actions in a defensible way is very advisable.
the second half of the 21st century
================
it is absurd to apply discount rates to anything 50 years in the future, because there is an implied assumption of business as usual going forward for 50 years.
Discount rates make sense when you are planning 5-10 year projects, but 50+ years makes no sense because the rate of change in the underlying economy will overtake your assumptions long before then. The world your model is operating in is pretty much assumed to look like the world today, but in 50+ years there will be change upon change that no one anticipated.
As a result it is foolish to plan for something that only pays off in 50 years. The odds are much higher that the thing you are betting on will be drastically changed long before then, and your bet will be wasted. It is hard enough to get a 5 year plan to even remotely match reality. A 50 year plan? Folly.
Actually you don’t need to worry about that. Any sensible discount rate makes the value of things 20 years in the future so close to zero they don’t matter. If you take equal annual amounts for 50 years, and discount them at 10%, 86% of the value is in the first 20 years, and 95% is in the first 30 years.
Using 12%, the figures are 90% and 97%.
Pensions?
How about we recognize that benefits of CO2 and use it to cancel the Social Cost of Carbon. If the Libs complain, claim that we should pay people to produce more CO2; that will shut them up and make them agree to simply letting the world use carbon-based fuels.
Two typos to be addressed: SSC should be SCC (Social Cost of Carbon), towards the bottom:
“The current SSC is based on a moronically low discount rate of 3%. OMB guidance clearly states that “’a real discount rate of 7 percent should be used as a base-case for regulatory analysis,’ as this is the average before-tax rate of return to private capital investment.”
As 7% discount rate makes the SSC negative and would mean that carbon emissions are economically beneficial.”
There were actually three SSC typos… Argh.
At least you’re not addicted to OPM.
Wanna see a NASA typo repeated?
https://stereo.gsfc.nasa.gov/gallery/item.php?id=selects&iid=202
Micrometeor, maybe?
Unless somebody left a micrometer in orbit, I’d call that a typo… 🙂
Hey, DM, to error is human. Now we know you are not some alien life form infecting our blogosphere. Unlike possibly Mann, Schmidt, Karl, Trenberth, Hansen…who ‘never errored’ and therefore could be aliens. Just sayin /sarc.
LOL!
You could always take Pee-wee’s stance…
Ristvan: Not to be too critical, but the phrase is “to err is human…”. Err is a verb, error is a noun. But you should be forgiven.😉
..and that is why I never corect anyone
Yeah, but there should be 4 ‘r’s in errorred, no?
“Unless somebody left a micrometer in orbit”
Considering all the other stuff that has been left in orbit, I wouldn’t completely discount that possibility.
Great news. More evidence the Trump Administration is following the campaign promises POTUS made to the American people!!
RickC PE: re your comment ‘To err is human’ is grammatically incorrect. Best to stick to engineering and leave grammar to the professionals. The original phrase ‘to err is human, to forgive divine’ is correct. The phrase “to err” is not a verb, neither is “to forgive” (with its implied “is” as the verb there).
Try this example for clarity: “To forgive, he reasoned, was the fairest policy”
A “real world” discount rate zeroes out all of the economic benefits of carbon emission regulations. The simple application of a 7% discount rate to the social cost of carbon would falsify the EPA’s endangerment finding and obviate the agency’s court-imposed obligation to regulate CO2.
Use of dynamic scoring and lower regulatory overhead would probably result in a Zero Cost of Carbon breakeven closer to 4%. Then again the declaration of CO2 as a pollutant could simply be voided.
CO2 has never been given a proper cost/benefit analysis in this farmer’s opinion.
I agree, Pop. It seems they looked at only the cost and fastidiously ignored all benefits.
Five decades of involvement with land and sea has shown me an enormous improvement in the greening of the country, despite increased pressure on development. After a number of floods, droughts and soaring interest rates during the 70s and 80s, higher CO2 has benefited us enough into becoming a highly prosperous rural and mining country, despite the mad left push back to those days. The fools running it now in Australia, at least, could still take
our present decline back to that era. Oh for a Trump here.
Tom said “Oh for a Trump here”
If he’s able to succeed here, his policies will no doubt attract imitation.
There is much resistance from the global propaganda machine and the Yank media.
The MSM news on the new president always has a negative spin, with a leftist thought interjected at the end. You’d think they’re hoping to impeach Trump from the tele’s point of view.
Sunshine is terrible because it causes sunburns and melanoma!
The Climate Group, Founded 2004
0% Carbon organization with 39 member states around the world. Organization that operates at the sub-national level.
States & Regional Alliance
Co-Chairs and Steering Group includes: Philippe Couillard, Premier of Quebec.
Click on each member for more information.
https://www.theclimategroup.org/StatesandRegions
Let’s at least ask for consistency from our government. Why don’t we mandate that the same time value of money be used for calculating both pension fund levels and the social cost of pollution (er, fake pollution in this case)? Think you can earn a return of 12% on that pension fund? Well then use a discount rate of 12% when deciding on the cost-benefit of CO2 reductions. The competition between those assumptions might stop the magical thinking and bring some sanity back into both wasteful CO2 regulations and inadequate pension funding.
Very insightful comment. The political discount rate shenanigans in full view.
+100!
There is an underlying OMB problem that would make any life insurance company laugh. I checked the current government guidance from OMB. Google “OMB Circular A-94, Discount rate guidance for federal programs”. It specifically directs using CURRENT fed rates for all futures, rather than historic averages. So in the post 2008 financial crisis low interest rate environment, the Obama era directive deliberately overstates SCC.
There is a second more subtle bias. The fed rate on debt is much lower (possibly irrationally) than the nongovernmental bond and equity (related by CAPM theory) rates. But the SCC is mostly a PRIVATE cost. It is the nongovernmental historical rates that should prevail. The equity equivalents have been 6.5-7.5% for the last century. Which, to get back to life insurance companies, is what their actuaries use when computing insurance premiums from changing life expectancy tables.
6.5-7.5% for the last century
===============
7% matches the rule of money. Every 70 years the purchasing power of $1 shrinks so that it takes $100 to buy the same amount of goods and services 70 years later. $1 compounded annually for 70 years = $114
That’s not the same as the discount rate – and be careful quoting real and nominal comparisons. Discount rates reflect opportunity costs, not inflation.And getting back the equivalent of $100 is only relevant where there is nor risk to the investment. And nobody invests for 70 years, so the 70 year average is irrelevant.
The discount rate for the SCC is one of the least important factors. Just one example of a much more important factor is the ‘boundary of analysis’ used in assessing regulations.
The rule for ALL regulatory assessments is that they must use a cost benefit analysis framework – with only costs and benefits accruing to the US population to be included. The use of SCC violates this because the $40 SCC is the GLOBAL social cost of carbon (the cost to the entire world’s population) – not just the US population. To comply with standard regulatory assessment rules one would need to use the US Social Cost of Carbon. A rough estimate is to simply take the US population as a proportion of the global population (roughly 4.4%) and apply this adjustment factor to the $40 value – one ends up with an estimate of $1.74 as the US SCC.
As can be seen, the Obama-era regulatory assessments were biased – and this simple ‘exclusion’ to the standard rules of cost benefit analysis for regulatory assessments has by far the largest impact on the results of cost benefit analyses.
No, it’s the most important. Sensible discounting shows what sensible already know – we give very little value to things far in the future, and much greater value to things now.
Plants vote for more CO2. Animals vote for more plants. People vote for more plants. Increased CO2 addsto agricultural production. As CO2 levels rise, the Earth steadily greens and grows more prosperous. One does not need complex mathematics to see that we need to stop the primitive magical thinking about ‘Global Warming/Climate Change’ and bring sanity back into wasteful CO2 regulations. Climate is changing and changing for the better.
So far, so good, anyway.
This post is right on the money! One of the most powerful and helpful concepts I grasped in school and applied in my career as an engineer and capital project manager is the time value of money. In my first year after graduation, 1978, I proposed a small capital project. I distinctly remember filling out input forms for punch cards from the data processing department so I could run a discounted cash flow program on the mainframe. (And yes, this was a fossil-fuel related project 🙂 )
Ha! That was advanced technology!!
(The only mainframe for AT&T was in Princeton and I was in Western Electric near NYC.)
I used the “Mathematical Tables of the Handbook of Chemistry and Physics” (published by the Chemical Rubber Corporation) which had tables for everything including logs, anti-logs, trig functions, and integrals among many other things including various interest tables.
An engineer in the US at the time would carry this book along with his slide-rule for all his project work. (I’d say “his or her” slide-rule, but there were no female engineers to speak of then.)
Who else remembers this resource?
CRC rocks!!!
Remembers the CRC Handbook of Chemistry and Physics?
Yougottabekiddingme!
Just as indispensable to the chemist today as back then. You would be hard pressed to find a chemistry undergraduate who is not well familiar with it.
Still going strong at 97th(!) edition. I won’t tell which edition I own.
George, I recall these; Slide Rule & CRC Handbooks. But also, 1st edition of Tuma “Engineering Mathematics Handbook (later editions became less and less practical). A less often used but invaluable source was M. Abramowitz and I. A. Stegun, Handbook of mathematical functions from the National Bureau of Standards.
Thanks for the pleasant memories.
I’m 58… I remember when TI55’s were cool.
DM,
You said, “CRC rocks!!!” Are you referring to the rocks found in the CRC publication, “Physical Properties of Rocks and Minerals? (Carmichael, 1989)?” 🙂
Loved the CRC manual. Still have my copy.
Used the actuarial tables in it to determine the distribution of several billion in assets for a failed insurance company.
I’m older than that. I have one of these…
I can still reach my slide rule from where I’m sitting…
CRC AND Burrington Handbook of Mathematical Formulas
Mine is the 51st edition. Still have it, although the layer of dust on it…
We had one (1) lady engineer in our classes back in the late 50s. And, yes, I had? have? a CRC handbook. And Perry’s. I still have a few slide rules. Those were the days.
If you don’t know why the word “Rubber” is in the title of the Corporation, and what that has to do with Mathematical tables, then you need to send all your fancy degrees back to the school that awarded them.
George- Still have my very dog-eared copy. And occasionally still use it
We called it the “Rubber Bible” ….my first copy had a soft cover but later editions were hardbound. I still have the 60th & 73rd Editions…..and I actually looked something up in it just yesterday! : ]
Absolutely! I have the 57th edition in my computer room!
NW sage,
I have a 1948 Third Edition of Burrington… A hand-me-down from my older brother… I’m not sure who handed it down to him, because he would have only been about 3 years old in 1948.
I still have mine.
>>
. . . which had tables for everything including logs, anti-logs, trig functions, and . . . .
<<
And some of us remember how to interpolate correctly while using those tables or other number ranges. Apparently climatologists, like Kiehl and Trenberth, don’t.
Jim
You say that at 7% the SCC becomes negative. I found this a little puzzling because there is no discount rate at which a future cost will become a present benefit. There must be at least some future benefits involved in the calculation for this to happen.
Now there are future benefits like CO2 fertilisation that should be included. However my understanding was that SCC calculations usually ignore them. Without including benefits you can’t get a negative SCC just by tweaking the discount rate. So that made me wonder just a bit about where your 7% figure came from. Then I noticed the caption to the last graph
which suggests you got the number by extrapolating this graph.
Can I point out that linear extrapolation is a somewhat foolish method to apply to what is essentially an exponential graph, especially if you are going to use it to try to predict where the graph will go negative, which an exponential graph will never do.
This is a minor mathematical quibble and does not negate the main thrust of your argument, which is that the SCC is a dishonest figure critically dependent on the discount rate. I also think it is entirely plausible that the SCC, if accounted properly, should indeed be negative, however adjusting the discount rate is not going to get such a result unless benefits of CO2 like CO2 fertilisation, increased length of growing season, and so on, are also properly accounted for.
Discounted net present value (NPV) can be negative. At a high enough discount rate anything can have a negative NPV.
The negative NPV at 7% is cited in the second Bloomberg article.
The SCC is an avoided future cost. At a 3% discount rate, its worth $21/ton. At a discount rate of about 7%, its NPV goes negative.
Consider a cost $1,000 which will be incurred in exactly one year (by going for exactly one year we don’t have to worry about compounding which makes the calculation trickier but does not change the outcome). What discount rate would be needed to make this cost have a negative present value? If the rate is r% then the present value is the amount of money which would need to be invested at r% in order to have $1000 at the end of the year. Which is 1000/(1+ r/100). This is less than zero only if 1+r/100 is negative which would need r < -100%. That puts us in surreal and impossible accounting territory where debts become assets and assets become debts over the course of a year.
You’re totally unclear on the concept.
Ian H has a point. For a low discounted value to have a cost of $21/ton and a high discounted value to be zero, there must be some negative values (i.e. benefits) in the early part of the time series. What are they? And why do the benefits disappear but the costs continue on for 100 years?
I suspect, GIGO. Stupidly long CO2 residence times, for one.
Not true. If every cashflow is positive, it is impossible to ever have a negative PV (note the difference between PV and NPV). And vice versa.
If every year from now on is a cost, then every PV will be a cost, at every discount rate.
The purpose of the discount rate is to determine the net present value of a capital allocation.
The entire SCC calculation is GIGO. The undiscounted net present value (NPV) of a ton of avoided carbon emissions is between $250 and $300 according to the GIGO. The only real number is the discount rate.
At a fraudulent discount rate of 3%, 1 ton of avoided carbon emissions has a NPV of about $21, using the Obama maladministration’s GIGO.
At a real world discount rate of 7%, SCC has a negative NPV.
3% is not a fraudulent rate. There are very good reasons why, as I have explained, but you ignore. You are entitled to disagree with these eminent economists and explain why you think 3% is the wrong one to use. What you re not entitled to do is assume all these people with expertise in this area, such as Kenneth Arrow, are fraudulent.
It’s fraudulent to use 3% as the base-case discount rate. It’s every bit as fraudulent as using RCP 8.5 as a “business as usual” scenario.
You may have had a leg to stand on if you had argued it is the wrong discount rate to choose. You are legless by claiming it is fraudulent.
At least we now what you think is fraudulent. A position in a controversial subject that is well established, supported by large amounts of literature including some of the most eminent in the field, but is not the one you prefer. Good to get that established.
Fraudulent is the appropriate word to use for two reasons…
1) The base-case discount rate should be 7%.
2) The Federal government has no authority to impose global costs on US taxpayers and consumers.
Hey this is climate, you can draw a straight line through anything ( everything is better ) then extrapolate as far as you want outside the calibration period of the straight line fit. Please try to keep up 😉
Seriously good catch. I couldn’t work out how it go negative either.
Heck, all you need is greater positives than negatives, net. It’s as easy as that. My main field of study is history, and it never occurred to me that the net effects of fossil fuels could ever be regarded as negative. The very notion was absurd, prima facie.
Ian H – about the discounted cost going negative: The Bloomberg article says “The SCC models rely on a “discount rate” to state the harm from global warming in today’s dollars. The higher the discount rate, the lower the estimate of harm. That’s because the costs incurred by burning carbon lie mostly in the distant future, while the benefits (heat, electricity, etc.) are enjoyed today. A high discount rate shrinks the estimates of future costs but doesn’t affect present-day benefits. The team put together by Greenstone and Sunstein used a discount rate of 3 percent to come up with its central estimate of $21 a ton for damage inflicted by carbon. But changing that discount just slightly produces big swings in the overall cost of carbon, turning a number that’s pushing broad changes in everything from appliances to coal leasing decisions into one that would have little or no impact on policy.“.
https://www.bloomberg.com/news/articles/2016-12-15/how-climate-rules-might-fade-away
As discount rate increases, current benefits stay unchanged and future costs decrease. At some point, current benefits will outweigh future costs. ie, the SCC will go negative.
For example, imagine a project that gave immediate short term benefits, that is to be paid for by a one time payment in the distant future.
The discount rate would determine if the project was worth doing or not. (The net present value as Dave indicated).
In the private world, the NPV is a tool to select among competing projects.
Of course if the NPV is negative, you shouldn’t even consider it!
“Now there are future benefits like CO2 fertilisation that should be included. However my understanding was that SCC calculations usually ignore them.”
The answer is very simple – the calculations do not ignore them. I don’t know why you understood this to be the case. However, the fact that the cost can be negative should have led you to question your assumption.
Man has been using fossil fuel for nearly a century.
Has civilization Progressed or Regressed…. that is the most basic “social cost” test there is
I was puzzled by that too. For there to be a PV or NPV that changes sign, there must cashflows with different signs. That is an utterly basic concept.
If there is not in this example, then the curve will approach zero but never cross the line.
If you spend $1 now to get $1 back next year, the NPV will be negative at any discout rate above 0%.
Once you realize that we couldn’t have made steel without carbon, then its true value and benefit becomes more apparent. Not using it at all would set us back to a pre-bronze age level of civilization. While Greenpeace would be happy with that, most voters would not.
Hell… We would have had a tough time discovering fire without carbon… 😉
Yeah, how could you start a fire without some charcoal. Even neandertals knew how to start a barbie.
Maybe an old newspapyrus to light?
This looks like a litigation proof approach to negating all SCC driven policy. Very exciting! After a mere 5o days, is it too soon to call The Donald the best president “evah “!
He’s certainly the best president of the century… And I voted for Dubyah 4 times.
God, think where we’d be if Algore had won… Holy Shist, Rockman!
On second thought, Al couldn’t have pushed his own agenda as well as Obama did for him those second 4 years.
Clearly the discount rate for everything else is too high.
If 7% were reasonable then the historical use of fossil fuels would have been beneficial to the world in the past.
Yet obviously the world and its people are worse off now than in the 18th century.
There are so many more people these days; it’s claustrophobic and they all live so much longer they must get bored.
One does not have to read between the lines very far to see that the SCC or any arbitrary discount rate is not the real problem. The real problem is Regulation Nation and the unbridled regulatory monster the Govt. has become. One regulation set upon the bureaucracy spawns thousands of rules which affect every manner of goods and services. (rules, not laws. But with the force of law. Nice dodge around the constitution, that).
Worse, these regulations spread their tentacles throughout the govt. and grow themselves right into the fabric of govt., making them impossible to remove.
Trimming back here and there is welcome, but ultimately is ineffective if the root regulatory system is not addressed. Unfortunately, I do not know if this root problem can be addressed.
The root problem has to be ripped out by the roots… But that would require small-r Republican supermajorities in both houses of Congress.
It was pretty clear to me, from the first time I went through the “explanation” of the SCC, that it was an entirely fictional construct sprung from whole cloth. In effect, the “calculators” only needed to know what number they were expected to produce, everything else was merely so much smoke and mirrors. Those three computer programs they used, I’m sure their real names are: Smoke. And. Mirrors.
Remember Al Capone was taken down for tax evasion.
Use whatever tool at hand to reverse the existing over-burdening regulation that the Obama administration imposed.
The SCC can be a sword to cut down a significant portion of current and future unfounded regulation.
The next steps could be:
– Use the bully pulpit to convince the nation that the purpose of the EPA is to insure clean water and to remove harmful particulates from the air, and to stop the EPA beating its head against the wall fighting against plant food.
– Ride the tide of of American citizens’ opposition to the establishment and “regulatory” government giving power back to the states and reducing the size and budget of the bureaucracy. DJT has 4 years to show that reduction of the Federal influence is better than expansion.
Like I’ve told you guys all along. You don’t have to fight the science to win the policy war.
We can multitask… 😉
We aren’t fighting the science. Only the fraud that is climate “science”.
Heck, I just want to pursue the science where it leads. If it actually leads into territory I consider to be alarming, I will change my mind and my tune.
Steve, Old Oracles, that way, in hindsight; you always are right. In nothing.
Maybe you should have said
“Like I’ve told you guys all along. [ You don’t have to fight ] ->
understand + apply science to win the policy war.
Forrest, I can’t remember if it was here, at Climate etc, or both. He said it so general “you guys” can be anybody or any group that wants to win any policy battle… likewise, any science you want to fight about. So why would he need to set out some details of the policy war?
Johann, I can’t remember where it was but several times 2+ years ago he made general statements and specific statements. IIRC, one or more were in post about Peabody’s loss, and what the judge ruled. He also did similar in the evacuation of the town below the dam in California.
It’s about time. The SCC, or social cost of carbon is a positive. The more carbon in the air the healthier people have become, the higher yields of crops, and the higher standards of living…and we’ve gotten warmth.
This article covers just how insane the costs involved are.
Just How Much Does 1 Degree C Cost?
https://co2islife.wordpress.com/2017/01/25/just-how-much-does-1-degree-c-cost/
How do you manage others toxic gas like co, no, no2, etc that are produced inevitably with Co2?
To start, what is the assumed cost of those molecules. I doubt NO and CO last very long, and do any harm. Don’t know of any harm from NO2.
All we have to do now is stop oxygen declining. It’s slow, but the trend is there. Must be that highly efficient carbon cycle kicking in 😇
LOL, maybe that will be the next scare after the ocean acidification wears thin.
It would be better to attack the presumed future costs directly. If all you do is play with the discount rate, you are implicitly accepting the underlying fallacy. And that will come back to bite you. Better to discard the whole thing as rubbish.
That wouldn’t have as good of a chance in court and it would take a lot longer to put into effect. Trump can’t just undo this. It would have to be done through a lengthy regulatory process.
Trump can quickly neuter the reg’s through the use of the OMB base case discount rate and then have Pruitt, Perry, Ross and Zinke undo all of the regulatory malfeasance in an orderly manner.
As was said before, “Who says we cannot do both?”
Robert Stewart is correct that you cannot let absurd assumptions about 50+year futures overrule what we know about the next 5 and 10 years. Every absurd assumption doesn’t need to be addressed in one package. Let each proceed on its merits.
A flood forms from the contribution of many tributaries and creeks.
It’s a bit analogous to the Tanker War. The Iranian speedboats were too fast to effectively use Harpoon anti-ship missiles. So the Navy would first disable them with faster Standard surface to air missiles and then sink them with Harpoon missiles.
The discount rate is the Standard missile and the regulatory reform is the Harpoon missile.
The problem with negating the policy with a discount rate is that a future administration can just change the rate again.
invalidating the finding and into the official record makes it a little harder to change it again later.
So do both, first set the appropriate discount rate, and then invalidate the concept to simplify policy
future administration can just change the rate again.
============
that problem exists no matter what approach you take. Consider the “Presidential Legacy”. No-one elected any President for more that 4 years. Why should a President expect their good works to last beyond 4 years?
The reason Presidents get 4 years is because they are human. They make bad and good decisions. You want to be able to kick out the bad decisions at the end of 4 years. If a President make a good decision, maybe the next won’t try and get rid of it.
Hilarious – immediate reversal of predictions of fake carbon damage. Funny accounting is the only way they can make it look bad, even with their broken, hyped up models.
$40/ton works out to a perpetual annuity of about 1% of GDP. All that is needed to demonstrate that fossil fuels are net beneficial is to show that their indirect (i.e. external) benefits are greater than 1% GDP. Seems obvious to me. Without fossil fuels, real non-energy GDP would surely shrink more than that.
Elegant.
How would one go about showing that the external benefits are greater than 1% GDP? That is the entire point of the social cost, and whilst some models do show a benefit for rises up to 2C they all show negative after that. You might not realise it, but what you are suggesting is coming up with a new model that shows positive benefits at all temperature rises.
I think you problem is that the external benefits are not the same as the economic benefits. So nobody is suggesting that fossil fuels are causing net harm. The massive economic benefits are all internalised by the producers and consumers. They feel all these costs and benefits themselves, so correctly price carbon to produce and consume an efficient amount of it.
Nobody is suggesting that we stop using fossil fuels (at least I am not). I am suggesting that a slightly lower use of fossil fuels would lead to more benefits than costs.
Everything can carry on petty much as before. You still have cars, but because fuel is a bit more expensive you might choose a car with a bit better economy. The choice is not between cars and no cars, bus gas guzzlers and fuel efficient cars. Sure, you lose a little utility from choosing car with a slightly smaller engine, but it doesn’t make a whole heap of difference to your life. And if it does, then keep the gas guzzler and cut back a little on something else that you don’t care about so much.
The social costs are then covered by that small reduction in consumption, allowing those huge economic benefits we all agree on to continue as before.
If the opportunity costs outweigh the external costs, I doubt if a carbon tax makes sense. Unless you believe that being poorer is for the greater good. Imagining an economy without fossil fuels helps put a floor on those opportunity costs. If the external costs are greater, then so be it, tax away.
The discount rate of 3% is not moronically low. It is a very reasonable rate when considering intergenerational transfers such as the SCC
The selection of the discount rate is not an exact science-it cannot simply be measured. Part of the problem is how much should we care about people not yet born?
One way to arrive at the rate is the Ramsey formula. This assumes markets are perfect and represent all information.
“economic growth, due to Ramsey (1928), implies
equivalence between the market interest rate (r),
and the elasticity of marginal utility (n) times the
consumption growth rate (g) plus the pure rate of
time preference (p):
r = ng + p”
Different economists arrive a different figures. Stern arrived at a very low figure of 1.4% in part by by setting a low value for pure rate of time preference (basically a measure of impatience), p. He used this low figure because he believed it was ethically wrong to treat future people as less important than current people. This is called the prescriptive approach. Ramsey himself was in favor of this approach.
Nordhaus in 2008 arrived at the higher figure of 5% by making a different set of assumptions.and following a descriptive approach, that is the figures should be derived at from observing behavior and there is no place for ethical considerations such as future people should count as much as current people.
Another way is to use historical yields on very low risk investments, say USA treasury bonds. This gives 4%
Probably a better way is to use a declining discount rate (DDR). In a paper authored by among others Kenneth Arrow, William Nordhaus and Richard Tol they say:
In these studies, estimates of the social cost of carbon are increased by as much as two- to threefold by using a DDR, compared with using a constant discount rate of 4%, the historic mean return on U.S. Treasury bonds
http://scholar.harvard.edu/files/weitzman/files/science-2013-arrow-349-50.pdf
Arrow sadly passed away recently, but he was something of a giant in economics. But Richard Tol and William Nordhaus are very much still among us.
So you can argue to some extent about what the discount rate should be. Very clearly 3% is an entirely reasonable one and many consider it too high. I think very few economists would stand by 7% as an appropriate rate.
Hmm. Thank goodness my parents’ generation did not do for my generation what this generation says it wants to do for the planet.
If you like 3%, perhaps you can lend me A$90B. I need to build a battery for SA’s unreliable power infrastructure.
Hivemind – read the above “It is a very reasonable rate when considering intergenerational transfers such as the SCC”
What you are describing is not such a transfer so a different rate would be reasobable.
The OMB was very clear…
“’a real discount rate of 7 percent should be used as a base-case for regulatory analysis,’ as this is the average before-tax rate of return to private capital investment.”
There’s no special economic exemption for green schist.
David. They do not intend for this 7% figure to be used to calculate the costs/benefit, merely for comparisons. They specifically state that a rate lower than 3% should also be used for long term consequences such as the SCC.
In the UK, investment plans need to provide what the returns would be for illustrative rates of return, 3% 5%%and 8%. It allows simple comparison of costs between plans. It is made very clear that these are not what the plan will produce. It is the same principle here. The OMB also states that 3%, 5% and 7% should be used to illustrate. They cannot all be the appropriate rate.
In the paper you link to Nordhaus says “With the current calibration, the discount rate (or, equivalently, the real return on investment) averages 4¼% per year over the period to 2100.”
He uses the descriptive approach, which gives higher discount rates, and stops at 2100. Thus the sources you cite support my case.
3% is entirely reasonable and backed up by all the literature. It is not moronically low, it is about middling.
Tbe private sector pays for the fracking government. The OMB states that 7% should be the base case for regulations because that is what the private sector generally uses for capital allocation.
When government uses a fantasyland discount rate the cost-benefit analysis of a regulation, it is committing fraud and the perpetrators of this fraud should be prosecuted to the fullest extent permitted by law.
David, This is not appropriate for long-term assessments. OMB Circular A-4 stated, “If the regulatory action will have important intergenerational benefits or costs, the agency might consider a sensitivity analysis using a lower but positive discount rate, ranging from 1 to 3 percent, in addition to calculating net benefits using discount rates of 3 percent and 7 percent.”
So for the thing that we are talking about here the OMB did not say that a discount rate of 7% should be used.
The OMB was very clear. Lower rates from 1-3% may be appropriate and therefore 3% is not moronically low.
https://obamawhitehouse.archives.gov/sites/default/files/omb/inforeg/regpol/circular-a-4_regulatory-impact-analysis-a-primer.pdf
And they go on to say
“If the regulatory action will have important intergenerational benefits or costs, the agency might
consider a sensitivity analysis using a lower but positive discount rate, ranging from 1 to 3
percent, in addition to calculating net benefits using discount rates of 3 percent and 7 percent. ”
1 to 3 percent is not moronically low. 3% is recommended and less than this is appropriate to consider. From the same document you put up.
The 7% discount rate was not used… Why? Because it yields a negative NPV.
The lower discount rates are simply to see if there are any scenarios in which the discounted NPV of the benefits are positive.
7% is supposed to be the default base-case.
I am not speculating on why they did not use 7% The fact is that 3% is not a moronically low discount rate. It is a sensible discount rate for the type of regulatory action we are discussing. The very sources you cite confirm this.
This is actually written in English…
7% is supposed to be the “default base-case for regulatory analysis”… because 7% “is an estimate of the average before-tax rate of return to private capital in the U.S. economy.” 3% and lower discount rates can be used for notional purposes… but 7% is supposed to be the “default base-case for regulatory analysis.” Using 3% as the base-case is moronic, if not criminally moronic.
DDR sounds like a bit of fairy dust being sprinkled on the SCC to make it magically worse than otherwise. Why else abuse DCF, a keystone of financial analysis for decades?
BoyfromTottenham. Maybe your insights in the realm of welfare economics are superior to eminent and Nobel prize winning economists. Maybe. However, my money is on the professionals in this instance.
3% is not moronically low
=====================
It is stupidly low. It is better to have $1 in your hand today than in 70 years, because in 70 years that $1 won’t buy anything. It will be worth about 1 cent today. So paying for damages in 70 years with today’s money is the height of folly.
Why worry about a debt to be paid in 70 years? You could be dead, or the folks to be paid could be dead, or someone could have invented a wiz-bang engine that runs on CO2 and spits dollar bills out the back end. Come to thing of it, it already exists. Its called corn.
ferdberple. A discount rate of 3% is not a rate of zero. You have offered nothing to suggest what the rate should be. All you have argued for is that some positive rate is appropriate. 3% is a positive rate, so you have not made any argument that it is too low.
Speaking of inter-generational wealth transfers, the unfunded future costs of public pensions, Social Security and Medicare/Medicaid are many times the GNP. This implies that the progressives who developed these Ponzi schemes are presuming a very high discount rate. They are so confident that the true discount rate is well beyond the OMB’s 7% that they completely ignore any aspect of actually paying for their promises.
Our federal government can always pay for Social Security payments. It creates the US dollar, something you and I and IBM can’t do. There is no such thing as a “Social Security Fund.” All payments to recipients come out of the US Treasury’s General Account at the Fed. For those of you who get SS and were getting paid five or six years ago by check before they went 100% electronic, your check said US Treasury.
“Printing money” refers to a time when the federal government physically printed treasury securities. Treasury securities are cash equivalents with yields. A physical dollar is a treasury security with zero maturity.
The USA created (issued) approx $95 trillion in new USD in fiscal 2016. It only collected approx $2.7 trillion in taxes. The “my taxpayer dollars pay for . . . ” line is complete BS.
Sophistry.
Dave, you presented a graph of the DICE model results of $32/tCO2 at a 2.5% real discount rate. The DICE model should not be used for social cost (benefit) of carbon dioxide as it have an uncalibrated damage function. The model assumes that the optimum climate for humans was in 1900, near the end of the Little Ice Age, and all warming since then was harmful. There is no evidence that warming since 1900 was harmful. A major study of death records in 13 countries show that cold weather kills 20 times as many people as hot weather. In Canada, the death rate is 100 days/day greater in January than in July. Obviously, warming is beneficial. There is no evidence that warming causes more severe storms or hurricanes, yet the DICE model assumes warming causes more storms. The DICE model sea level rise projection far exceeds the mainstream and IPCC estimates. The graph:
shows that the DICE model sea level rise projection from 2010 to 2100 is 5.9 m, and the SLR of the multi-model mean is 3.0 m. Using the realistic ECS of 1.0 °C, the expected SLR from 2010 to 2100 is only 1.1 m. The DICE model doesn’t include any significant CO2 fertilization effect, which has added US$3.8 Trillion to global crop value from 1961 to 2011 according to Dr. Idso, and doesn’t include any benefits of warming.
The only IAM that should be used is the FUND model. Dr. Michaels says the CO2 fertilization effect in FUND may be up to 4 times too small. Using a 3% discount rate, with a realistic 1.0 °C ECS, FUND gives a SCC of US$-18/tCO2, or a net benefit of US$18/tCO2. Using the Lewis & Curry ECS probability distribution, but adjusted for the UHI effect and the millennium cyclic warming from the Little Ice Age, the best estimate is a net benefit of US$17/tCO2.
The DICE model was a single point on the graph, if I was reading it correctly.
That said, I agree the the DICE model is problematic. Even with all of the alarmist “garbage in,” the “garbage out” is an insignificant economic benefit from avoiding “business as usual.”
“The model assumes that the optimum climate for humans was in 1900” It does not. It uses a damage function based on a paper by Moffat that included 26 studies of the effects of warming. This is not an assumption of ideal climate in 1900. These studies will have included benefits as well as costs.
seaice1,
Do you have a link of some sort to the paper by Moffat, or to any of the impact studies that actually evaluate the effect of changes for the warming thus far, including benefits? I failed to find it in a quick google search, but I did find two intriguing paragraphs in PROJECTIONS AND UNCERTAINTIES ABOUT CLIMATE CHANGE IN AN ERA OF MINIMAL CLIMATE POLICIES by Nordhaus, dated December 2016. It says:
—
The damage function was revised in the 2016 DICE version to reflect new findings.
The 2013 version relied on estimates of monetized damages from the Tol (2009) survey. It
turns out that that survey contained several numerical errors (see the Editorial Note
2015). The current version continues to rely on existing damage studies, but these were
collected by Andrew Moffat and the author and independently verified. We examined
different damage estimates and used these as underlying data points and then fitted a
regression to the data points. We also added an adjustment of 25 percent of the damage
estimate for omitted sectors and non-market and catastrophic damages, as explained in
Nordhaus and Sztorc (2014). Including all factors, the final estimate is that the damages
are 2.1% of global income at 3 °C warming and 8.5% of income at 6 °C warming.
The method for estimating the damage function is the following: The new estimates
start with the survey of damage estimates by Andrew Moffat and Nordhaus (in process).
The survey included 26 studies. Of these, 16 contained independent damage estimates and
were included, and of these 9 received full weight. Those receiving less than full weight
were ones that were earlier (but different) versions of a model (for example the FUND
model) or had serious shortcomings. If a study had several estimates (say, along a damage
function), the sum was constrained to be 1.
—
This matches the 26 studies, but is clearly stated as “in process” as of Dec 2016. A similar description exists in his “Revisiting the Social Cost of Carbon”, without the (in-process) but with no link visible to actual studies in the SI. I’ve read the Tol 2009 survey and all the non-paywalled articles it references that I could find, plus the studies I could find that are plotted on the relevant chart in AR5. I think Tol is understating the situation when he says in his 2009 survey “The best available knowledge—which is not very good—is given in Table 2.” I think the error bars are enormous in these damage functions, and while Tol argues that unknown risks could be massively negatively skewed towards harm while unknown benefits are unlikely to be large, I think the field in generally is politically oriented to assess harms, and the 25% damage increase to account for damages-we-just-didn’t-think-of for Nordhaus above constitute a substantial thumb on the scale — though creating the pre-thumbed estimate via a regression of damage estimates also strikes me as very unsound whether done by Nordhaus or Tol — the estimates all cannot be equally good (or for this subject, equally bad), and they aren’t *data points* by any stretch of the imagination. What they truly represent is a wide range of *conflicting* estimates, and it would be best to look at that range, add substantial error margins on both sides, and then say “we think the effect is *probably* in here”.
“Environmentalists said the president’s action will erode the international leadership the U.S. has played addressing climate change and encouraging other countries to limit the heat-trapping greenhouse gas emissions that are the primary driver of the phenomenon.”
“The anticipated action “puts our country, our communities and our people at great risk,” said Paul Getsos, national coordinator of the People’s Climate Movement, a coalition of labor, civil rights and faith-based groups. “It also sends a dangerous message to the world that the United States does not care about climate change or protecting front-line communities.”
Yup absolutely correct – I congratulate the Trump and his administration.
Roger
http://www.rogerfromnewzealand.wordpress.com
Looking forward to Friday;
http://www.news.com.au/world/north-america/donald-trumps-plan-will-slash-spending-to-certain-departments/news-story/50321e4d374c6789aa2f95c0142c3819
The (in)famous Stern report which was used by the government in the UK as the basis for their climate change policy actually used a 0% (zero) discount rate as the only way to make the future costs anything like relevant to today’s dollars (or pounds). I remember that it was William Nordhaus who led the assault on that report by all sensible economists, but it didn’t do any good then. I just hope that the argument will be listened to now.
It did not. It used a 1.4% discount rate. It set the pure time preference part close to zero.
A 1.4% discount rate is criminally moronic.
As is a rate of 7%
And they go on to say
“If the regulatory action will have important intergenerational benefits or costs, the agency might
consider a sensitivity analysis using a lower but positive discount rate, ranging from 1 to 3
percent, in addition to calculating net benefits using discount rates of 3 percent and 7 percent. ”
1 to 3 percent is not moronically low. 3% is recommended and less than this is appropriate to consider. From the same document you put up.
Now it has been pointed out I presume you will be adding this to the main article?
The 7% discount rate was not used… Why? Because it yields a negative NPV.
The lower discount rates are simply to see if there are any scenarios in which the discounted NPV of the benefits are positive.
7% is supposed to be the default base-case.
The article already says that they should run both 3% and 7% cases,
They should run the 7%, but that does not mean that is one that should be used. A lower rate is more appropriate, as I have explained several times, but you ignore. Fix on one line if you want and ignore the rest. That is no reason to write off the conclusions of experts in this area as moronic and fraudulent.
Good fracking grief!!!
Yes, and then it goes on to explain why sometimes 3% is appropriate and sometimes less than 3%. Your ellipsis tells a story.
As I said, fix on one line and ignore the rest if you want, but that does not give you right to call those that do not frauds.
The one line says that 7% should be the default base-case. It never says that 3% or lower discount rates should be the default base-case.
So, it is moronic or dishonest to use 3% as the base-case.
Trump’s Team will likely fix this before they get around to fixing the EPA’s website.
The whole notion of a social cost of carbon is a nonsense. For reasons peculiar to a US legal system it may be easier to tinker with parameters used than to discard the whole methodology. A potential damage from climate change? How much damage from climate change was there in any year in Obama years? The SCC has more to do with witchcraft than anything else.
Hey Seaice1,
It sounds like Stern wants to take known benefits away from future generations because he is afraid of unknown future risks associated with fossil fuels? No, thank you.
Similarly, the others you mentioned want slower growth for future generations because of unknown future risks?
Really, this analysis has faulty logic – begging the question. First, you assume low discount rate, then you deliver low growth rates because you enact policies based on that low discount rate. It’s a self fulfilling prophecy.
Idiocy!
Chris, you clearly have not understood. Even if you use the descriptive approach, which has no in-built ethical judgments, 7% is still too high. Nordhaus gets 4.4% using this approach.
Nordhaus’ Dec 2016 “PROJECTIONS AND UNCERTAINTIES ABOUT CLIMATE CHANGE
IN AN ERA OF MINIMAL CLIMATE POLICIES” uses two discount rates, 1.5% for welfare discount rate (intergenerational transfer) and 4.25% for goods discount rate.
The damage estimate is 0.236% loss in global income per °C squared with no linear term. That implies a tiny but negative impact from the ~1C warming we’ve already experienced. Show me the beef.
Dale S. the reason why the discount rate is important is because most of the damage is in the relatively far future. This is consistent with very little damage so far.
I never questioned the importance of the discount rate, just clarifying that Nordhaus used two different ones in his analysis.
The “where’s the beef” has to do with the damage estimate for warning-to-date. 0.236% per degree certain implies a net negative at +1C, but what I haven’t seen is anything resembling quality analysis that shows actual net negative impacts for +1C. CIA world factbook estimates 2015 was $75.73 trillion at the official exchange, if that’s 0.236% lower than it would be absent +1C warming, that’s a net negative of about $180 billion. I’d like to see a high quality paper quantifying the effects of the temperature and CO2 rise we’ve *already had*. I rather doubt it would demonstrate $180B in harm. Heck, even if you ignored the positive effects of warming and fertilization, I doubt $180B in damage could be demonstrated. (Unless you included the damages from money spent on climate change *policies*, in which case $180B is far too low.)
The illusion of technique….a book I read many years ago…
Is the discount rate they are using supposed to be real or nominal? In other words, are the future costs estimated in current dollars or in future dollars? It makes a big difference. Long term, real interest rates tend to be about one or two percent which justifies the sort of discount rate currently being used. Nominal interest rates are higher because they include an estimate of future inflation.
This is a hugely important issue. If the models to calculate future economic damage included some nominal inflation rate, then the discount rate should have added that in. SO if they assumed some cost inflation in the model the discount rate used should have been more like 9 and 5%.
The other thing to comment on is how to set the rate to use for discounting. In finance, there is the CAPM framework, which helps understand the value of an investment to a given firm. In social costs, there is not a solid theoretical framework for what the discount rate should be. It is pure seat of the pants, politically driven speculation. Sensitivity to discount rate is really important, but we shouldn’t pretend or assume accuracy or even relevance to any given number.
“’a real discount rate of 7 percent should be used as a base-case for regulatory analysis,’ as this is the average before-tax rate of return to private capital investment.”
David, I would say PV10 is being generous.
In general, when making project decisions, the greater the risks, the higher the discount rate you would apply.
In other words , for a sure thing / oil field investment, you might apply a PV10 . If there was risk associated with any aspect of the project, you would apply a higher discount rate, say PV12 or maybe PV15.
IF CAGW were an oil and gas deal & I was asked to do an economic analysis, I would apply something like a PV20, or even greater given the huge contradictions between the models and real world observation … which would say that the SCC is hugely negative / wildly uneconomic.
If CAGW were a prospect, I wouldn’t drill it even with your money because it would looks so risky & so uneconomic, given the facts at hand.
PV10 is generally used for revenue and proved reserves… P90 sort of numbers.
We are saying the same thing. CAGW & SCC by association are not “proved reserves” … more like a rank wildcat in an undrilled basin (by analogy) … thus not deserving even a PV10 assessment
David: Your post illustrates the importance of the discount rate to the social cost of carbon, but distorts and oversimplifies the problem.
Private business applies a discount rate of 10% to investment decisions because their cost of borrowed is far higher than for the government and because equity investors demand an even higher return to compensate for the risks they are running. The government can borrow money at a far lower rate which has historically averaged 3%. This is one of the Obama administration’s rationals for choosing 3%.
However, since most investments in energy infrastructure are made by private industry, the average citizen is charged far more than 3% (via a PUC, for example). If energy infrastructure were provided by the government, citizens would pay far more for the inefficiency of government operations.
The other factor that effects the discount rate is the wealth of our descendants who will suffer from the damage from warming. If we make the right choices today and grow our economy at even a modest rate, our descendants at the turn of the century are going to be far more wealthy than we are, especially in the developing world. They could be far more capable of adapting to climate change than we are of mitigating it today. The future economic growth rate enters in a formula called the Ramsey equation, used to calculate the discount rate in integrated assessment models like Nordhaus’s. The higher the economic growth rate, the higher the discount rate. Countries like India that are hoping to emulate China’s economic boom should use a higher discount rate. China horrendous pollution is a practical demonstration of thinking this way: The wealthy next generation can afford to clean up pollution that earlier generations were too poor to prevent.
Nordhaus discusses the discount factor and the Ramsey equation here:
http://www.econ.yale.edu/~nordhaus/homepage/stern_050307.pdf
The government isn’t borrowing money to pay for this. It would be imposing a cost on the private sector. This is why the OMB says…
They clearly say that this is not the appropriate measure for intergenerational transfers such as climate mitigation. You missed off the next bit:
”
“The 3 percent discount rate is based on a recognition that the effects of regulation do not always
fall exclusively or primarily on the allocation of capital. When regulation primarily and directly
affects private consumption, a lower discount rate is appropriate….
Discounting the welfare of future generations at 7 percent or even 3 percent could
create serious ethical problems.
An additional reason for discounting the benefits and costs accruing to future generations at a
lower rate is the longer the horizon for the analysis, the greater the uncertainty about the
appropriate value of the discount rate. Private market rates provide a reliable reference for
determining how society values time within a generation, but for extremely long time periods no
comparable private rates exist. As several economists (including Martin Weitzman9
) have explained, for the very distant future, the properly averaged discount factor corresponds to the
minimum discount rate having any substantial positive probability.
At the same time, some economists have cautioned that using a zero discount rate could raise
intractable analytical problems. They have argued that with zero discounting, even a small
improvement in welfare, if permanent, would justify imposing any cost on current generations
since the benefits would be infinite.
If the regulatory action will have important intergenerational benefits or costs, the agency might
consider a sensitivity analysis using a lower but positive discount rate, ranging from 1 to 3
percent, in addition to calculating net benefits using discount rates of 3 percent and 7 percent. ”
In other words, 3% would be appropriate, but even this misses out some important considerations, so maybe even lower than 3% is appropriate.
You have to read the whole thing to get the message, not just pick out the bit you like. It is quite clear that lower rates are favored for long term, intergenerational effects such as we are considering here.
It still says that 7% should be the base-case as the default position for regulatory analysis. The lower discount rates for “ethical” considerations are simply to see if the regulation can retain any positive NPV under those scenarios.
In the case of SCC, they never bothered to run the 7% case; much less use it as the base-case scenario.
and these economic models are superior to climate models in what way?
forget all that about the pinhead angels.
these are MODELS:
David: I did mentioned the cost of private capital as one possible discount rate. For a long time, I thought this was the most sensible discount rate. Unfortunately, OMB’s guidance is neither law nor the discount rate economists would recommend as optimal for the climate change issue (and inter-generational problem where future growth of the economy is a critical issue). I’m told the Ramsey equation has been proven mathematically to provide an optimum path for a given set of assumptions. Richard Tol, who criticizes the consensus more than he supports it, uses the Ramsey equation. The Nordhaus link has nice discussion of the issue and was written to criticize Stern’s arbitrary low discount rate.
What I personally find craziest is the hubris shown by people who think they know how to effectively spend money today to make the world a better place a century from now. Imagine someone in 1900 spending money in order to make our world today a better place. As the joke goes, an academic study of problem of horse manure predicted that major cities like New York City would be buried 10 feet deep in horse manure by 1925. The prediction turned out to be correct only for college campuses.
US Social Security will go broke about 2030, causing a 25% cut in benefits under current law. The rising cost of Medicare and Medicaid is a more intractable problem than SS. Unfunded pension liabilities drove Puerto Rico, Detroit and other cities into banruptcy and many other cities and states are vulnerable. Yet the Democrats believe poorly-understood climate change is THE critical issue that we must solve today, ignoring the intractable nature of global issues.
David: The worst problem in the Obama administration’s calculations is that they compare the worldwide benefit of US mitigation to the US cost of mitigation. This might make some sense if there were an effective world-wide binding agreement to mitigate and everyone made good on their commitments. Fat chance!
I vote 10% forever!
I know of no example of a regime that develops the country by accumulating money.
On the other hand, there are examples of development by realizing the opportunities / possibilities.
/ a country is supported by taxpayers able to pay taxes /
The science clearly shows that the earth is getting greener and that a major reason for this is increased CO2.
This represents a massive financial gain for the world. Can anyone estimate this gain in dollars?
This alone probably makes the ridiculous SCC negative.
Chris
Yes I can do that. At 200PPM vegetation is at stasis – that is there is zero net growth at 400 PPM we get 100% growth (as of today) so from that it follows that roughly 100%/200PPM = 0.5% of todays growth rate occurs for every PPM over 200PPM or stated otherwise 1% growth increase for every 2PPM, so one could say that yield improves around 1% for each 2PPM increase. Now CO2 is increasing at around 2PPM per annum yielding 1% per annum yield growth.in 2010 the World bank estimated Agricultural value at 2.81% of GDP $1.75T so combining these it follows that the increase in food yield is equal to 1% of that or 0.028 % of 2010 World GDP Per Annum. or That’s around 17.5B in 2010 to 122B (2010 dollars) per annum in 2016. An Expression for value in the year Y would be 17.5B x (Y-2009) or there about. This assumes that all the food can be consumed which is likely given the population is also increasing 1% per annum. The Total benefit from 2009 to 2016 of CO2 Enrichment is of the order $490 Billion.
I would like to comment david.
One of the biggest problems with the SCC is that it assumes that decarbonisation has no costs, that the alternative to fossil fuels has the same ongoing cost profile as fossil fuel. The problem is that this isn’t even remotely so. One could estimate the benefits fossil fuels by comparing the GDP of the world with the GDP of a theoretical world devoid of electricity, motor vehicles, electronics, modern communication. A world where ships still use sail and there is limited or no sewerage/ modern health care. This case is approximately the same as comparing GDP in 1850 with today (scaled for the extra people nowadays). Then there are the indirect costs of the mitigation – Lets assume mitigation is successful and CO2 is reduced to 350.orgs 350 PPM – this represents a loss of around 25% food yield that is being sustained by CO2 fertilisation. Take this away and not only do I lose 490B per annum in agricultural revenue but I drive the world into a famine – how is that risk of LOW CO2 Levels factored in?
There is no doubt that fossil fuels and therefore CO2 are extremely valuable to society and it is this inherrent value that must be exceeded by the alternatives. This is especially true given the state of much of the world is similar to Pre Industrial so much of the value from Fossil Fuels is yet to be earned. One has to assume that value will continue to be accumulated into the future.
I also have to point out that mitigation is a technological activity, activities based on technology do not follow the normal rules of inflation. For example an Airline flight from London to New York is significantly cheaper today (in real terms) than it was in 1970 simply because the technology improved. The Cost of Future mitigation is highly likely to be far less than the cost today. This suggests a higher discount rate is definitely required.
Finally mitigation costs are very likely to be inflated. In most cases they assume unmitigated damage rather than minimum cost mitigation. For example to deal with sea level rise it’s not appropriate to count the value of expensive coastal property that would be flooded rather I should estimate the cost to pile up dirt along the entire US coast which at $100000 a mile would cost only 8.8 Billion. That’s not counting discounts for cliff lines or uninhabited wetlands or uninhabited Alaskan coastline where no piles of dirt are required.
There is so much wrong with this metric but I think it’s worth it to calculate properly. A competent valuation of the total past/present/future societal benefit of fossil fuels against the total of minimum cost past/present/ future adaptation would be hugely positive, for thousands of years. It should be known because it would end the debate.
We should also consider land made more habitable from a more comfortable climate.
it’s clear from the comments above that this whole analysis needs re-examination, and some public comment on the results. A good task for the Pruitt administration – call a Conference on it, get both sides there, and issue majority and minority reports and whatever consensus can be hammered out. Make sure the (sometimes silly) assumptions in the current analysis are highlighted and countered as necessary. Also, make sure that realistic costs of implementation of the regulations, and costs to consumers in the future of these schemes are included in the analysis. Then let people decide.
Finally, in all of SeaIce’s arguments, he fails to acknowledge the meaning of “sensitivity analysis”. The reason 3% comes up as a counter to the standard 7% is that OMB is suggesting looking at various values, not to regulate based on them, but to see how much the calculations would vary at various rates. That’s what sensitivity analysis is all about – “how far off could my estimate be, and what would be the consequences if the central assumption is wrong?” It by no means excuses not doing the base (7% analysis) and pretending that 3% is the only reasonable solution. As SeaIce points out himself, 3% might not be an unreasonable number, but it’s clearly not the only number, and clearly not to be used in lieu of the standard number.
Taylor Pohlman. 3% is not the only number. There has been extensive debate about this and as yet no agreement on “the best” number, or even if there is a best number. Using a single number leads to contradictions, as described in the Arrow et al paper I posed earlier. In part it is because it is an ethical question about how we should value people not yet born, but even without that there is no agreement. However, those that think the value should be higher than 3% do not think those that think it should be 3% are moronic or fraudulent.
This is why I think your first point is a bit off. The debate has been and is sill going on. It does not so much need re-examination as it is being examined as we speak. However 7% is not the standard number for this sort of analysis . It is instead the upper bound of the social discount rate.
Longterm discounting is an ethical issue not yet resolved in public policy, and to pretend it is by dismissing the conclusions you don’t like as moronic or fraudulent is wrong.