The Achilles’ Heel of the Obama Climate Regulations

An existing executive order can be reversed with a new one — a stroke of the pen — but regulations promulgated through the formal public notice and comment processes of administrative law can be undone only with newer regulations adopted through that same mechanism. Moreover, efforts to reform or to reverse a regulatory apparatus as complex and wide-ranging as the Obama climate action plan will confront massive litigation in an effort to preserve that framework, and the judiciary will have to be convinced that the rationales for reversing the earlier finalized rules are compelling.

For those of us who believe that the Clean Power Plan, the engine efficiency standards, and all the rest are preposterous as environmental policy — all cost and literally no benefit — it is the central analytic basis of that policy that is its administrative-law Achilles’ heel. That basis is the Obama administration calculation of the social cost of carbon (SCC) — about $36 per ton of carbon dioxide–equivalent — which I have described as the single most dishonest exercise in political arithmetic that I have ever seen produced by the federal bureaucracy.

But this is the Beltway: Mere dishonesty is wholly insufficient as a rationale to undo a final regulatory rule. But a showing that proper procedures were violated is likely to prove far more fruitful, as procedures are the sine qua non of the Beltway sausage machine. And it is easy to show that the Obama derivation of the SCC was inconsistent with Office of Management and Budget (OMB) requirements (OMB Circular A-4) for the conduct of benefit-cost analysis and inconsistent with the requirements of the Clean Air Act.“Related Marching in Step on Climate Change?

Let us begin with OMB Circular A-4, which requires (p. 15) that benefit-cost analyses conducted by federal agencies consider only the benefits and costs of regulations enjoyed or borne domestically:

analysis should focus on benefits and costs that accrue to citizens and residents of the United States. Where you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.

The reason for this is obvious: In the case of effluents that have global effects, the use of domestic costs and global benefits in benefit-cost analysis means that the US would be driven to bear all of the regulatory burdens for the entire world. That is because US policies would equate marginal domestic costs with marginal global benefits: The US would reduce emissions of a given effluent to the point that such emissions would be optimal for the entire world, with only the US bearing the costs. Not only would other economies have incentives to allow the US to bear all of the attendant costs (that is, to engage in “free riding” on US policies), it would be economically efficient for them to do so; if they were to reduce emissions further, global emissions would be lower than optimal because the global marginal cost of emissions reductions would exceed the global marginal benefits.

U.S. President Barack Obama (R) shakes hands with UN Secretary General Ban Ki-moon during a joint ratification of the Paris climate change agreement ceremony ahead of the G20 Summit at the West Lake State Guest House in Hangzhou, China, September 3, 2016. REUTERS/How Hwee Young

This methodology is inconsistent also with the standard theory of efficient emissions reductions, under which the marginal cost of those reductions is equated across emitters. If the US were to equate the marginal global benefits of greenhouse gas emissions reductions with the marginal US costs, it is virtually certain that the latter would be higher than those marginal costs of other nations, a clear violation of standard efficiency principles. As an aside, this “global” orientation of the Obama climate policy is inconsistent with the obvious objective of the Obama Clean Power Plan to regionalize emissions reductions, ostensibly to equate across states the marginal costs of reducing greenhouse gas (GHG) emissions (but actually to force most states into regional cap-and-trade wealth transfer systems, the dominant feature of which would be payments from red states to blue ones).

Accordingly, the casual assertion that the global nature of anthropogenic climate change justifies the use of the global benefits of emissions reductions for US policy formulation is a non sequitur. Note that in an earlier (2010) Obama administration analysis, the domestic SCC was estimated at 7–23 percent of the global value, or about $3–8 per ton of GHG emissions. Without the including the global benefits of GHG reductions in the SCC calculation, almost all of the Obama climate policies would fail benefit-cost tests.

OMB Circular A-4 requires also that federal agencies apply both 3 percent and 7 percent discount rates to the streams of benefits and costs of proposed regulations in order to allow a comparison of the respective present values. A-4 allows a 3 percent discount rate in addition to the 7 percent rate if a consumption displacement model is deemed appropriate. That clearly is not the case for climate policies, which would affect investment flows substantially, but A-4 (p. 34) requires the use of both 3 percent and 7 percent discount rates so as to account for both the consumption and investment effects of proposed regulations, and to allow for sensitivity analysis.

The Obama Administration used 2.5 percent, 3 percent, and 5 percent discount rates, but not 7 percent. The reason for this is obvious: At 7 percent, the social cost of carbon becomes small or negative. In the DICE integrated assessment model, the SCC declines by 80 percent relative to the case of a 3 percent discount rate, from $61.72 per ton to $12.25. In the FUND model, the SCC for 2010–50 at a 7 percent discount rate declines to approximately zero or becomes negative. In the 2015 Interagency Working Group revision of the SCC calculation, the 2050 SCC is $26 per ton at a 5 percent discount rate, $69 at 3 percent, and $95 at 2.5 percent. The effect of changes in the assumed discount rate is very substantial, and it is obvious that the Obama administration’s failure to adhere to the requirements of OMB Circular A-4 is driven by imperatives heavily political rather than analytic.

Another problem is presented by the reality that the economic costs of climate policies — increased energy costs and attendant effects — are substantially more certain than the benefits, that is, the future impacts of those policies in terms of temperatures and other such phenomena as storms and sea levels. This means that the assumed benefit stream of such policies over time should be subjected to a state-options analysis, or at a minimum to a crude application of a discount rate higher than that applied to the cost stream.

Note that it is not appropriate to use a low discount rate as a means of increasing the weight given the interests of future generations. This is because future generations are interested not in receiving a bequest of, say, maximum environmental quality, but instead an inheritance of the most valuable possible capital stock in all of its myriad dimensions. Environmental quality is one important such dimension among many, with respect to all of which there are unavoidable tradeoffs. Consider a homo sapiens baby borne in a cave some tens of thousands of years ago, in a world with environmental quality effectively untouched by mankind. That child at birth would have had a life expectancy on the order of 10 years; if it had been able to choose, it obviously would have willingly given up some environmental quality in exchange for better housing, food, water, medical care, safety, ad infinitum. That is, it is obvious that people willingly choose to give up some environmental quality in exchange for a life longer, healthier, and wealthier.

This preference for a bequest of the biggest possible capital stock requires efficient resource allocation by the current generation, that is, the use of the efficient discount rate reflecting the opportunity cost of capital. If regulatory and other policies implemented by the current generation yield less wealth currently and a smaller total capital stock for future generations, then, perhaps counterintuitively, some additional emissions of effluents would be preferred (efficient) from the viewpoint of those future generations.

The SCC calculation by the Obama administration has been used to justify a number of regulations on benefit-cost grounds. The most important is the Clean Power Plan (CPP), but examination of the underlying benefit-cost analysis shows that the predicted “climate” effects of the CPP are less than half of the underlying benefits. Instead, most of the asserted benefits of the regulation are “co-benefits” in the form of reductions in ozone and, in particular, emissions of fine particulates. Indeed, these co-benefits in 2030 are half or more of the benefits (evaluated at a 3 percent discount rate) asserted for the CPP.

This co-benefit approach is deeply problematic because the Clean Air Act explicitly requires the EPA, upon making an “endangerment” finding for a given effluent, to promulgate a National Ambient Air Quality Standard that “protects the public health” with “an adequate margin of safety.” The co-benefits approach must mean one of two things: Either the existing ozone and particulate standards fail to satisfy the requirements of the law, or the CPP will reduce ozone and fine particulate emissions to levels that are inefficiently low, that is, to levels at which marginal costs exceed marginal benefits.

Consider a region that meets EPA attainment standards for fine particulates. That it does so means that it is “safe” under the law. But the benefit-cost analysis underlying the CPP assumes that further reductions in fine particulate levels would yield additional health benefits proportional to reductions from unsafe levels, an inconsistency in EPA analytics that is difficult to justify. Note also that the SCC analysis uses the assumed global benefits of reductions in GHG emissions, as discussed above, while the CPP net benefits in substantial part are created by assumed reductions in ozone and fine particulates, which are domestic pollutants. This is an inconsistency that has gone largely unnoticed in the Washington policy community.

With respect to the narrow “climate” benefits of the CPP and other regulations: The climate model used by the EPA predicts that the future temperature effects of US and international climate policies are small at most and trivial for the most part. The Obama administration climate policy called for a 17 percent reduction below 2005 levels in US GHG emissions by 2020. In addition, the U.S.-China Joint Announcement on Climate Change calls for an additional 10 percent reduction by the US by 2025. The 17 percent reduction would reduce temperatures by 15 one-thousandths of a degree by the year 2100. The additional 10 percent reduction yields another 1 one-hundredth of a degree. Given that the standard deviation of the temperature record is about 0.1 degrees, these effects would be too small even to be measured, let alone to affect sea levels, cyclones, and all the rest.

And so how can it be that such trivial temperature effects can yield such large asserted climate “benefits”? Consider the Obama administration efficiency regulations (Table VII-25) for medium and heavy trucks: The EPA claimed that the rule will reduce temperatures by between 27 and 65 ten-thousandths of a degree by the year 2100 and sea levels by between 26 and 58 one-thousandths of a centimeter. From those purported effects the EPA concluded:

the projected reductions in atmospheric CO₂, global mean temperature, sea level rise, and ocean pH are meaningful in the context of this action.

. . . the proposed standards would result in net economic benefits exceeding $100 billion, making this a highly beneficial rule.

That $100 billion+ of net benefits is derived from the SCC calculation of $36 per ton of reduced GHG emissions. The actual climate effects of the regulation are irrelevant!

Such machinations are the Achilles’ heel of the Obama climate regulations. However laborious and lengthy a process, undoing them is straightforward as a matter of policy analytics.

Benjamin Zycher is the John G. Searle scholar at the American Enterprise Institute.