IER Comments on Cost-Benefit Analysis

In its first two years, the Trump administration has repealed, rolled back, and rescinded much of the Obama administration’s work on environmental regulation. Prominent among the abandoned initiatives are the Paris Climate Agreement and the Clean Power Plan. Perhaps more important than any concrete action taken by the current administration, however, is the upcoming review of the executive branch’s use of cost-benefit analysis in rule-making.

The framework from which an executive branch operates in its evaluation of this issue provides the foundation for all regulatory proposals and the impending Environmental Protection Agency (EPA) review of its practices thus merits attention. In anticipation of this review, EPA solicited commentary from the public on the best approach to the cost-benefit question with the stated purpose of creating a unified agency position—as opposed to the office-based positions taken in the past—and a more visible process than was pursued under prior administrations. According to EPA, this notice-and-comment procedure will “provide the public with a better understanding of how EPA is evaluating costs when developing a regulatory action and allow the public to provide better feedback to EPA on potential future proposed rules.”

As an organization keenly aware of the risks of regulatory overreach, the Institute for Energy Research (IER) has an important voice in this discussion and submitted its official comment to EPA on August 13. The comment can be read in full via EPA’s public docket.

The key points IER offered to EPA center on the construction of the “social cost of carbon” (SCC) and its role in federal rule-making vis-à-vis climate policy. To the extent that the SCC will influence regulatory action, IER argues that it ought to be presented to the public in a way that communicates clearly its dependence on selected assumptions and the startling variance that emerges as a result. Below you can read a summary of IER’s comment.

Discount Rate 

The potential adverse outcomes of climate change intensify in the future, but the cost of regulating emissions will be intensely felt in the present. The discount rate is the means by why a regulatory agency weighs future dollars against present dollars. The rate has enormous impact on the estimated SCC. For example, in a May 2013 Interagency Working Group update, the SCC in the year 2010 was reported as $11 per ton at a 5% discount rate, but $52 per ton at a 2.5% discount rate. According to calculations based on Heritage Foundation’s Monte Carlo simulations results using one of the three Integrated Assessment Models preferred by the Obama administration, the SCC at a 7% discount rate is less than half of the SCC at a 5% discount rate.

Cost-benefit transparency requires that policymakers and citizens are made aware of just how influential the choice of discount rate is in calculating the SCC. We argue that all cost-benefit analyses should be presented with a range of discount rates, including the 7% rate omitted by the previous administration’s Interagency Working Group.

For a more thorough treatment of the SCC’s discount rate issue, read this previous IER post.

Global vs. Domestic

Another under appreciated element of cost-benefit analysis is the question of cost and benefits to whom? The costs that a warming planet would entail would not be distributed evenly. Some regions will face costs in the future due to climatic changes, but others will find the changes commodious. Some regions of the globe, for example, would stand to gain from the greening effect of increased carbon dioxide concentrations and the longer growing season promoted by warmer temperatures. In calculating the SCC, agencies of the executive branch ought to communicate not only a global figure, but a domestic one as well. To be sure, a strong argument exists for considering the global costs of climate change, but the overarching purpose of a cost-benefit analysis for proposed federal regulatory action is to understand the impact on Americans so that U.S. policymakers can decide whether they wish to support the proposal.

Symmetry 

Relatedly, we recommend that in choosing variables analysts exercise consistency and symmetry. For example, in the early days of climate change impact modeling, some researchers would include the negative impact on winter recreational snow skiing while ignoring the positive impact on summer water skiing. Other models would include additional deaths from summertime heat while excluding the reduced deaths from the cold in winter.

Although the models have improved in this regard, we emphasize as a general principle that researchers should attempt consistency and symmetry in their choices, rather than tilting the reported outcome in a favored direction.

Conclusion

To the extent that the U.S. regulates greenhouse gas emissions, the evaluation of costs and benefits should include clear communication with policymakers and the public on the subjective assumptions and selected variables that comprise the social cost of carbon. Among the key factors to be respected and communicated are considerations of symmetry, the discount rate, and the global vs. domestic discrepancy.

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