What to do about the “Social Cost of Carbon” metric? — Part 2

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The models used to calculate a Social Cost of Carbon for use in estimating the benefits of reducing carbon emissions fall far short of including a wide range of expected damages from global climate disruption. Using an SCC metric, or any cost-benefit approach, in making project-by-project decisions on U.S. government permits creates a bias in favor of approving fossil fuel development. What alternatives are needed for challenging the status quo and holding government accountable?

Earlier post: What to do about the “Social Cost of Carbon” metric? — Part 1

What climate change impacts criteria should government use in decisions on coal leasing on federal lands, in particular in the Powder River Basin in Wyoming, as well as in Appalachia and other regions? For oil and gas leasing on federal lands? For deepwater drilling for oil in the Gulf of Mexico? In the Arctic Ocean? For permitting oil exploration off the Atlantic Coast? For the decision on permitting the Keystone XL tar sands pipeline? For regulating shale gas fracking? What about export terminals for coal and liquefied natural gas?

The Social Cost of Carbon metric is deeply flawed and almost certainly substantially underestimates the climate change impacts of fossil fuel burning and the benefits of avoiding carbon emissions. In general, cost-benefit analysis for climate change-related regulatory policy and project-by-project fossil energy project permitting are almost certainly inadequate when adverse impacts are not monetized, or even monetizable, and can occur far into a future that is heavily discounted in cost-benefit analysis.

Bell and Callan, in a paper issued by the Environmental Law Institute and the World Resources Institute (More than Meets the eye The Social Cost of Carbon in U.S. Climate Policy, in Plain English), provide a concise primer on the SCC metric, why it has been required and how it is developed and used. Although the paper doesn’t take a position on whether the SCC and cost-benefit analysis are appropriate tools for use in climate-related policymaking, it raises concerns about the use of the SCC in decisionmaking and about the assumptions and limitations of the models used in calculating it.

In terms of rulemaking related to climate change, the SCC essentially puts a de facto ceiling on the stringency of executive-branch regulation of carbon dioxide. If analyses of specific rules produce SCC figures indicating the rule might impose costs outside the range currently established as acceptable by the federal government interagency working group … the regulatory agency faces a tough burden of intra-governmental persuasion. In such cases, the choice of SCC can result in weaker control of greenhouse gases…

The difficulty with these seemingly rigorous numbers is that they mask a series of choices and value judgments made by the people who run the economic models that produce the final figures. …

In a paper for the Cost of Carbon Project (Omitted Damages: What’s Missing From the Social Cost of Carbon), Peter Howard looks at the Integrated Assessment Models used in estimating the Social Cost of Carbon, and discusses at length and in detail what is missing due to their limitations in including many of the significant impacts of climate change.

In general, the more difficult a climate impact is to estimate in the natural sciences (which measure the physical impact) and/or value in economics, the more likely that climate impact is to be excluded from IAMs…. With respect to the natural sciences, damages corresponding to more certain (that is, known) climate trends (for example, average temperature increases and sea level rise) are included in IAMs; bounded trends, that is, climate change for which a range and/or distribution is specified, such as extreme weather events and weather variability (for example, droughts, floods, storms, and so on), are less likely to be included; and abrupt changes, in general, are the least likely to be included because they are the effects characterized by the greatest uncertainty.

With respect to economics, damages that are easier to value are more likely to be included, such that many more market damages are included than non-market damages. Environmental goods and services are more likely to be omitted from IAMs by analysts than market damages because the former does not have observable market prices and instead must be valued by the analysts. … Socially contingent damages (for example, famine, political unrest, migration, and so on), which are often the result of multiple stressors, are usually omitted because they are difficult to quantify, predict, and value….

The paper concludes that there is thus a downward bias in current estimates of the SCC due to the omitted damages that have not been included in the models. It suggests how future versions of the models might be made more inclusive.

On a pragmatic note, and with an eye to the gauntlet that proposed regulations must run through the White House Office of Management and Budget and other policy gatekeepers, the paper concludes:

While there is a downward bias to the federal SCC estimates, this report advocates that the Office of Management and Budget (OMB) and other executive branch agencies should move forward to finalize proposed rules with the 2013 IWG’s current SCC estimates, as measuring at least some of the costs is better than assuming there are none. In doing so, the OMB should emphasize more strongly the downward bias of the current U.S. SCC estimates and commit to addressing them in future updates of these estimates.

But my overall impression is that there is no way the SCC metric can even come close to quantifyng economically the likely impacts, nor the potential disastrous impacts, that could result from, for example, abrupt climate changes or crossing tipping point threshholds in the Earth system.

MacCracken and Richardson, in an illuminating paper on “Challenges to Providing Quantitative Estimates of the Environmental and Societal Impacts of Global Climate Change” (from a Pew Center on Global Climate Change Workshop Proceedings), talk about how the Earth system and its relationship with society create fundamental challenges for conventional economic analysis of climate change impacts:

Evaluating impacts requires information on the rate, magnitude, and location of changes in the broad set of factors that define the climate. Unfortunately, developing such estimates reveals many complexities in the climate system that greatly increase the uncertainty of cost‐benefit analyses. Among the most important are the following:

1. Both climate change and the resulting impacts typically have a strong local component, making generalization difficult. …

2. Greenhouse gas emissions cause impacts in both the near and long term, but different greenhouse gases persist in the atmosphere for different time periods. …

3. Response of the climate system lags behind actual emissions, and response time differs among systems. …

4. Impacts result from natural climate variability in addition to human­induced climate change. …

5. A number of impacts of climate change are projected to be irreversible or virtually irreversible. …

6. The climate system is nonlinear, and thresholds are likely to be exceeded beyond which damages increase dramatically. …

7. The complex and nonlinear nature of the climate system increases the likelihood of surprises. …

8. Weather, not climate, is what is actually experienced at a given location and time; historical extremes, and worse, will become more commonplace as the climate changes. …

9. Climatic regimes are shifting, causing extreme weather events in unlikely places and rendering the historical record useless in predicting future climate in some places. …

10.The ocean is becoming more acidic as a consequence of absorbing excess atmospheric CO2, with potentially severe consequences for marine life and associated effects for society.

In addition, MacCracken and Richardson note:

Developing realistic estimates of the costs and impacts of climate change and mitigation policies is challenging due to the long lifetime of greenhouse gases and investments in infrastructure, along with complex linkages between society and the environment. Among the most important are the following:

1. Global environmental and social systems are both very complex and interdependent, and ecological services are often assumed to be substitutable by technology. …

2. Increasing atmospheric concentrations of greenhouse gases and the resulting changes in climate and ocean acidification are not the only human influences on the environment. …

3. The impacts from climate change will be complicated by human decision making. Projection of societal development is predicated on a set of emissions and behavioral scenarios. …

4. The effects of climate change raise serious equity issues—geographically, socio­ economically, and generationally. …

5. The potential for adaptation must be considered in estimating impacts. …

6. The impacts of climate change also depend on rates of societal change and technological improvement. …

7. Geoengineering has the potential to limit impacts, but very little is known about the potential for adverse side effects.

Drawing from four extensively reviewed scientific impacts assessments, MacCracken and Richardson give an overview of the most important consequences likely to affect the United States:

The selected impacts provide a minimum set for consideration in evaluating the relative merits and effects of various policy actions … The consequences that are likely to be most disruptive and economically costly for the United States (including its states, tribal lands, territories, and trusts) include the following:

1. An increase in extreme weather.

2. Increased inundation in coastal regions. …

3. Increased stress on water resources, storm runoff, and sewage systems. …

4. Accelerating changes in land cover. Land cover provides society with a wide variety of ecological services and economic benefits and is affected by climate change. …

5. Increasing stress on wildlife and biodiversity. …

6. Ocean acidification. …

7. Increasing health risks. …

8. Impacts on Indigenous Peoples and cultures. …

9. Risks to the economy and to national security.

Is that enough of an argument against conventional economic analysis of climate change impacts? But wait, there’s more:

While these impacts might represent a minimum set, there are at least two key problems in using this information for the type of cost‐benefit study done in the past. First, because of the inertia of the climate system, these impacts will only be avoided by very large policy actions, and the benefits of the policy will only be seen well in the future; therefore, even moderate discounting can make the level of policy required appear not to be cost effective, even if the likely impacts include socially unacceptable outcomes. Second, being only a minimal set of impacts, there is significant potential for the actual impacts to be well above this minimum, especially because of the very real possibility that thresholds, tipping points, and surprises lie ahead. As Weitzman (2009) makes clear, even very low probabilities of very large impacts can significantly affect the conclusions that emerge from comparative analyses of costs and benefits.

The paper is well worth reading in its entirety. MacCracken and Richardson conclude:

With the unprecedented speed of the changes in atmospheric composition caused by the burning of fossil fuels, the consequences could quite plausibly overwhelm the biosphere and human society. Therefore, it seems essential that implementation of policies to limit emissions not be delayed by requests for the impossible—namely, for precise and detailed cost‐benefit analyses.

It seems clear the White House, the federal agencies, and the courts need to be pushed to come up with an alternative approach to incorporating the threat of global climate disruption into decisionmaking on policy, regulatory impact analysis and rulemaking, environment impact statements and permitting, and litigation. MacCracken and Richardson contend that “an alternative approach such as risk management is likely to be much more appropriate for use in climate policy analyses, limiting the role of integrated assessment models to comparative evaluation of the suitability of alternative policy approaches aimed at meeting particular reduction goal.”

So how, specifically, would we formulate and argue a risk management approach in the current, ongoing context, when challenging policy and budget decisions, regulations, and permitting decisions that promote continued fossil fuel development — in terms that could be used and would be applicable in these arenas — by the White House, the federal agencies, Congress, the courts? Is there risk management language that can win in suing the government on the next coal leasing, fracking, or export terminal decision?

Earlier posts:

Federal coal mining permit blocked for failing to consider climate change impacts

Deep Decarbonization: Truly facing the climate challenge

Koomey: Moving beyond benefit-cost analysis of climate change

Comments to the State Dept on the Keystone XL pipeline Draft Supplemental Environmental Impact Statement

On climate change impact statements: What would be a showstopper?

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