Going backward.

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Making Sense of Trump's Order on Climate Change

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.”
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Contrary to numerous reports, President Donald Trump’s executive order on climate change does not come even close to eliminating President Barack Obama’s legacy with respect to greenhouse-gas reductions. Most of that legacy, involving dramatic emissions cuts in the transportation sector and from household appliances, remains intact.

Nonetheless, the order is massively important and, in some respects, reckless. In addition to mandating reassessment of the Clean Power Plan, which regulates coal companies, Trump jettisoned, all at once, the Obama administration’s “social cost of carbon,” which has been the linchpin of national climate policy since 2009. But he did not say what the Trump administration will replace it with. On that count, he punted -- which is not the worst thing, and which leaves some crucial decisions open for his staff.

Some background: Since the Ronald Reagan administration, federal agencies have been required to calculate the costs and benefits of their regulations, and to show that the benefits justify the costs. The analysis of benefits and costs tells agencies how stringent their regulations should be -- and whether to regulate at all.

But what are the benefits of a regulation that cuts greenhouse-gas emissions? The answer comes from the social cost of carbon -- the dollar figure that is designed to monetize the harm from a ton of carbon emissions.

Until 2009, different agencies gave wildly different numbers. To eliminate the inconsistency, the Obama administration created a technical working group, consisting of representatives from numerous offices and departments within the federal government. (Disclosure: As administrator of the Office of Information and Regulatory Affairs, I helped to convene the working group.)

The group’s meetings were numerous, lengthy, often boring, painstaking, and dominated by discussions of abstruse issues in science and economics. After many months and extensive public comments, the group produced its technical analysis, which has been periodically updated over the years, ultimately yielding a monetary figure of $36 per ton.

In 2014, the General Accounting Office vouched for the integrity, transparency and nonpolitical nature of the process. In 2016, a federal court upheld that figure. And that $36 number has turned out to be extremely important. It has been central to the assessment of the benefits of numerous regulations, including fuel-economy rules, energy-efficiency rules for refrigerators and clothes washers, and the Clean Power Plan itself.

The judgments of the working group have hardly escaped controversy. Some analysts have argued that the likely damage from climate change is far more serious than the Obama administration foresaw -- and that the social cost of carbon should be over $200.

More specifically, the $36 figure reflects the global rather than purely domestic damage from carbon emissions. If the United States is imposing harm on China, India or France, that harm is fully incorporated in our regulatory decisions, leading to more aggressive regulation than would be justified with the purely domestic figure.

The $36 figure also reflects harm done to future generations, while using an annual “discount rate” of 3 percent -- meaning that in monetary terms, damage in 2080 is going be valued a lot lower than damage in 2017. The theory behind the use of a discount rate is that money today is worth a lot more than money in 50 years, because you can invest today’s money and watch it grow. The higher the discount rate, the lower the value of benefits that you get in the future.

Which brings us to Tuesday's executive order. Disbanding the working group and withdrawing every one of its public documents, Trump offered no number of his own. Instead he said that in monetizing the benefits of greenhouse-gas reductions, individual agencies should follow OMB Circular A-4 (an excellent document issued in 2003, during the George W. Bush administration, that still binds agencies within the executive branch), and especially its guidance on “domestic versus international impacts” and “appropriate discount rates.”

That’s both technical and vague, but it appears to mean three things. First, individual agencies are now on their own; it’s up to them to come up with a social cost of carbon. Second, they should emphasize the domestic rather than global damage (because OMB’s 2003 circular favors that approach). Third, they should use discount rates of 7 and 3 percent (as also directed by OMB’s circular).

The upshot is that the social cost of carbon could be cut way down, possibly below $5 -- which would mean that on cost-benefit grounds, restrictions on greenhouse-gas emissions would be much harder to justify.

If this reading is correct, then Trump’s approach doesn't make a lot of sense. Any administration needs to have coherent policies and hence a uniform number. It would be ridiculous to have disparate ones from the Environmental Protection Agency, the Department of Energy and the Department of Transportation.

The global number is the correct one to use. Americans are going to be hurt, a lot, if other nations (above all China and India) use the domestic number to decide how much to scale back their emissions. Use of the global measure by the world’s leading nation sets the right example for others -- and is (by the way) the right thing to do from the moral point of view.

A discount rate of 3 percent is hardly too low -- and under current economic conditions, it might even be too high. Interest rates have fallen significantly since the Office of Management and Budget issued its guidance in 2003, as have long-term forecasts.

In the intergenerational context, there are compelling technical as well as ethical reasons to choose a relatively low rate, so as to avoid treating our children and grandchildren as if they are worthless. Use of a 7 percent rate would be pretty ridiculous -- and should be struck down, in court, as arbitrary.

The good news is that because Trump’s executive order is not specific, his administration has an opportunity to make the best of it. In a nutshell: The Office of Information and Regulatory Affairs should get to work toward producing uniform, government-wide numbers, continuing with a discount rate of 3 percent, and presenting both global and domestic figures.

That would result in not one but two social costs of carbon -- most likely something in the vicinity of $36 (the Obama figure) and roughly $6 (the Obama figure, adjusted to include only damage to the U.S.).

True, there’s a big gap between those two numbers, and in some cases, agencies would have to choose one or the other. I have argued that the global figure is better, but because the Trump administration will not be issuing a lot of new climate-change regulations, and because many regulatory decisions are not going to turn on the precise number, the choice between the two is not going to come up often. And if the administration fairly presents both, it will accomplish a neat trick, which is to remain faithful to Trump’s order without embarrassing itself in terms of international affairs, morality, science or economics.

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

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

To contact the editor responsible for this story:
Katy Roberts at kroberts29@bloomberg.net