What's it costing us?

Photographer: Luke Sharrett/Bloomberg

The Right Price on Emissions

Cass R. Sunstein is a Bloomberg View columnist. He is the author of “The World According to Star Wars” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”
Read More.
a | A

An executive order from President Barack Obama requires that the Environmental Protection Agency analyze the costs and benefits of its regulations. But how exactly can it measure the economic benefits of the coming restrictions on greenhouse gases? For both policy and law (including the inevitable court challenges), it's a crucial question.

This month, the administration provided a big part of the answer with a new report from its Interagency Working Group on the Social Cost of Carbon, which is intended to capture in dollar terms the damage from 1 ton of carbon emissions. (Disclosure: In 2009-2010, I helped convene the initial interagency working group on this subject.)

The central value is $36. (This is set within a range from $11 to $105, meant to acknowledge scientific and economic uncertainty.) So suppose that, next year, the EPA finalizes a rule meant to eliminate 20 million tons of carbon dioxide emissions annually. If so, the monetary value of the reduction would be calculated at $720 million. And that number would loom large in the EPA’s decision about whether the benefits justify the costs -- and in figuring out how stringent its regulation should be.

Not everyone thinks $36 is the right figure. Especially within the environmental community, many people think it's far too low, and some technical experts agree. Many others think it's far too high, and they, too, can find support from experts. The Office of Management and Budget has received thousands of public comments on the subject, touching on fundamental questions of policy, science and economics. To its great credit, the new report responds to those comments in detail.

One basic question is whether the social cost of carbon should take account of the global damage done by emissions from the U.S., or only the domestic damage -- which would significantly lower the dollar amount. Some commenters argued strongly that U.S. regulators should consider only harms to Americans, not to Ethiopians or Russians or Chinese. And indeed, that's the usual U.S. way of calculating benefits and costs.

But the working group argued forcefully that if all countries set policies only on the basis of domestic effects, their emissions reductions would end up being “economically inefficient,” because no country would take the slightest account of the harms that it imposed on others. If the U.S. adopts a global estimate, on the other hand, it “can signal its leadership” in the effort to obtain international cooperation on emissions reductions. What's more, harmful effects on the rest of the world can ultimately damage the U.S. as well by creating problems for national security, international trade and public health.

Commenters also asked how, given the uncertainty involved, there can be any adequate basis for the $36 figure. The working group explained that it relied on the three leading “integrated assessment models,” which come from the U.S., the U.K. and Germany. These models are highly technical and based on debatable assumptions, but hardly arbitrary -- and as new information comes in, they are continually updated. And the working group is asking the National Academies of Sciences, Engineering and Medicine to evaluate its use of the three models.

Another question has to do with how to value the future. The $36 figure comes from using an annual discount rate of 3 percent, which ensures that damages in 2050 or 2100 look quite low in monetary terms. Many environmentalists object that this discount rate is unfair to future generations and that a far lower rate is needed to hedge against the risk of “climate catastrophes.”

The working group responded that the 3 percent rate is itself pretty low and that the range, with $105 at the high end, reflects the risk of catastrophe.

To be sure, the uncertainties involved here are real, and reasonable people can disagree with the working group's choices and arguments. But it's also true, as a 2014 report from the Government Accountability Office concluded, that the working group has engaged in a highly technical -- rather than political -- exercise, building on existing academic research and promoting transparency about its assumptions and limitations.

Even amid the most intense partisan controversies, it seems, government can sometimes focus on the best available evidence -- and find reasonable answers.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author on this story:
Cass R Sunstein at csunstein1@bloomberg.net

To contact the editor on this story:
Mary Duenwald at mduenwald@bloomberg.net