Rep. Jenkins, along with Reps. Culberson, Womack, LaHood, and Mullin, recently introduced H.R. 5668, the Transparency and Honesty in Energy Regulation Act of 2016 (THERA). This bill would stop the use of the Social Cost of Carbon (SCC) and the Social Cost of Methane (SCM) in regulatory rulemaking. As explained many times before, the SCC and SCM are too flawed to be used in the rulemaking process.
The SCC is estimated using Integrated Assessment Models (IAMs). These models try to assess future climate and economic impacts of climate change. According to economists, the models are “close to useless.” Here is MIT Professor Robert Pindyck:
…I would argue that calling these models “close to useless” is generous: IAM-based analyses of climate policy create a perception of knowledge and precision that is illusory, and can fool policy-makers into thinking that the forecasts the models generate have some kind of scientific legitimacy. IAMs can be misleading – and are inappropriate – as guides for policy, and yet they have been used by the government to estimate the social cost of carbon (SCC) and evaluate tax and abatement policies. [Pindyck 2015, emphasis added.]
It turns out that neither theory nor data to back up how these models work. As Pindyck goes on to explain:
One of the most important parts of an IAM is the damage function, i.e., the relationship between an increase in temperature and GDP (or the growth rate of GDP). When assessing [the climate’s sensitivity to emissions], we can at least draw on the underlying physical science and argue coherently about the relevant probability distributions. But when it comes to the damage function, we know virtually nothing – there is no theory and no data that we can draw from. As a result, developers of IAMs simply make up arbitrary functional forms and corresponding parameter values.[Pindyck 2015, emphasis added, footnotes removed.]
The SCC is fatally flawed not only because it lacks statistical and theoretical justification, but it also violates the basic principles that the federal government has set out to produce cost-benefit analyses. The SCC fails to comply with OMB guidelines in two major and irreconcilable ways. First, OMB Circular A-4 clearly states that any regulation should assess the costs and benefits as realized domestically:
Your 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 Interagency Working Group ignored this requirement. The Technical Support Document for the SCC states “the interagency group concluded that a global measure of the benefits from reducing U.S. emissions is preferable,” which is precisely what Circular A-4 directs not to do. The administration could have included both the domestic and global values, but they did not.
Agencies have put this into practice. In the EPA’s final Regulatory Impact Analysis (RIA) for its “Clean Power Plan” (CPP), the agency uses the SCC to assess climate benefits on a global scale, while accounting only for domestic costs. In its own breakout of benefits throughout the RIA, the agency admits “[t]he climate benefit estimate in this summary table reflects global impacts from CO2 emission changes and does not account for changes in non-CO2 GHG emissions.” This is an apples to oranges comparison that explicitly flies in the face of OMB guidance.
Further, agencies manipulate discount rates to produce favorable results using the SCC. Discount rates are intended to calculate the present value of regulatory action on the future economy. Essentially, it’s a way to account for costs and benefits down the road. Per OMB guidance, agencies should use a discount rate of 3 and 7 percent. Yet in the CPP RIA, the EPA admits:
…several discount rates are applied to SC-CO2 because the literature shows that the estimate of SC-CO2 is sensitive to assumptions about discount rate and because no consensus exists on the appropriate rate to use in an intergenerational context. The U.S. government centered its attention on the average SC-CO2 at a 3 percent discount rate but emphasized the importance of considering all four SC-CO2 estimates.
Again, the SCC violates Circular A-4, which states “For regulatory analysis, you should provide estimates of net benefits using both 3 percent and 7 percent.” The Obama administration’s Interagency Working Group used the 3 percent discount rate, but not the 7 percent discount rate. A 7 percent discount rate would have lowered the SCC.
This same process has been employed with the SCM metric. The SCM is very similar to the SCC, except targeted at methane emissions mainly associated with oil and natural gas development. In 2015 the Environmental Protection Agency published its final rule for emissions standards for new and modified oil and gas sources, which is the first regulation to use the SCM. In fact, the rule was justified solely using the SCM.
These metrics are arbitrary, unscientific, and misleading. It is irresponsible to use them to justify economically significant regulations, as those regulations–if abused–ultimately hurt the people they are designed to protect. Fortunately, THERA would end this practice and protect American taxpayers from further harm. By prohibiting the SCC and SCM from being deployed, and reviewing regulations that use them as justification, Congress would be taking a significant step in combatting flawed and detrimental agency overreach and overregulation.
Rep. Jenkins should be applauded for his effort to tackle this deeply flawed and damaging bureaucratic exercise. THERA should be supported by all Representatives who believe in transparency, accuracy, and a bureaucracy accountable to the American public.