A lively panel at The Heartland Institute’s 12th International Conference on Climate Change, held at the Hyatt Regency Hotel in Washington, DC on March 22–23, discussed the role of cost-benefit analyses in shaping climate policy and the social cost of carbon (SCC) calculation set by former President Barack Obama’s administration.
The social cost of carbon is a calculation of the marginal cost of the emissions of a ton of carbon dioxide put into the atmosphere. Essentially, it is the price of the global “damage” caused by releasing an extra ton of carbon dioxide, and it is used for determining prices for carbon taxes. An Interagency Working Group set up by the Obama administration determined the SCC for 2016 to be $36 per ton.
After an introduction by moderator Craig Rucker, executive director of the Committee for a Constructive Tomorrow, Robert Mendelsohn, Davis Professor of Forest Policy at Yale University, led off the panel. He argued a universal, global price on carbon provides a cost-effective way to mitigate climate change.
Choice: SCC or Regulation?
“If you don’t pick a social cost of carbon, then you’re going to pick regulations,” Mendelsohn said. “You’re going to end up with individual rules that say, ‘You must do this, you must do that,’ and one of the things I think we all recognize is when the government gets in this business, there’s lots of things … we’re not going to like … from a market perspective, and it’s not going to be very efficient.
“If you don’t do this tax, this price on carbon, … you get individual regulators in each state, in each country, … setting different rules,” Mendelsohn said.
Mendelsohn said the $36-per-ton figure the Obama administration chose was a political decision “not justified by the science,” and it does not take into account other mitigation and adaptation efforts. Mendelsohn said he believes the true SCC is closer to $4 per ton.
President Donald Trump should “seize this issue and take it away from the climate extremists,” Mendelsohn said.
Possible Net Carbon Dioxide Benefit
The presentation by Heritage Foundation Senior Statistician Kevin Dayaratna examined the integrated assessment modeling used by the Obama administration to quantify SCC. These models, he noted, are “grounded in assumptions,” such as what the economy of the planet will look like 300 years from now. He also said they are “extremely sensitive to reasonable tweaks” in the assumptions.
Dayaratna went on to demonstrate how making just a few of these tweaks to the assessment models used to establish the SCC shows increased carbon-dioxide emissions provide a net benefit to the world, rather than a net loss.
Dayaratna cited a Heritage Foundation report that found a carbon tax based on the Obama administration’s models and assumptions would result in 400,000 lost jobs, a 13–20 percent increase in household electricity prices, a $20,000 total loss of income per family of four, and an aggregate $2.5 trillion loss in gross domestic product by 2035, while providing a “negligible change in global temperatures” of just 0.2 degrees Celsius.
SCC ‘Uses, Abuses’
Concluding the panel was Ross McKitrick, professor of economics at the University of Guelph. McKitrick spoke on the “uses and abuses” of SCC estimates.
“[Using] real-world settings, the [SCC] is never the appropriate rate to use for taxes or regulations, [because it] purposefully ignore[s] the social benefits of activities that generate [carbon] emissions,” McKitrick said.
McKitrick said any estimate of SCC should at least include the social benefits of carbon fertilization and warming temperatures, yet most models “assume these are zero.” Another problem with these estimates, McKitrick said, is they do not take into account how this policy “interacts with the rest of the tax system.”
“Based on mainstream science and economics,” said McKitrick, “the [SCC] is pretty low, likely below $15 a ton and may not even be above zero.”
Instead of a carbon tax based on Obama’s SCC calculation, the “ideal alternative” would include the removal of all current carbon-dioxide regulations and the implementation of a “temperature-indexed” carbon tax, McKitrick said. This tax would start very low, only increasing if warming happened. If temperatures decreased, so would the tax.
Timothy Benson ([email protected]) is a policy analyst with The Heartland Institute.
Robert Mendelsohn, Kevin Dayaratna, and Ross McKitrick, “Cost-Benefit Analysis and the Social Cost of Carbon,” 12th International Conference on Climate Change, March 23, 2017: http://climateconferences.heartland.org/iccc12-panel-2b-qa-cost-benefit-analysis-and-the-social-cost-of-carbon/