October 17, 2017 Reading Time: 5 minutes
power plant

EPA Director Scott Pruitt has announced last week the end of the Obama administration’s Clean Power Plan — a bureaucratic scheme intended to drastically reduce the consumption of fossil-fuel energy in the name of cutting CO2 emissions. After the administration failed to secure the requisite votes in Congress for enacting cap-and-trade legislation, it went instead with an executive order, hoping to achieve the same goal by administrative fiat.

Hence, instead of putting an artificially high price on CO2 emissions and then leaving it to the companies to trade with the very scarce and expensive emission “permits,” Obama’s diktat used a different route to achieve the same end: imposing standards of “energy efficiency” that essentially required coal power plants and other fossil-fuel energy producers to increase their costs to the point of bankruptcy. Within this plan the states received different options to reduce their CO2 footprint, which included combining subsidies for “wholesome” and “renewable” industries such as wind and solar, shifting from coal to natural gas, increasing the “efficiency” standards for CO2-intensive power-generating industries, and so on.

All technical differences notwithstanding, in both cases the plan was the same and very simple: to bankrupt cheap energy producers that emit CO2, to save the planet. Obama himself was perfectly honest about it even before he was elected. The Trump administration is now moving to dismantle the whole boondoggle, and environmentalist crusaders are not happy. We hear every day that this is “genocide,” “raping the planet,” and the whole predictable litany of apocalyptic quasi-religious fear-mongering.

However, the modern environmentalist apocalypticism incorporated “science” as well into its doomsday narrative, quite in the tradition of US “progressive” religious revivalism of yore. Hence, Pruitt is not only the destroyer of the planet, paid for by fossil-fuel lobby, he is a “climate-change denier” and a know-nothing pumpkin unfamiliar with the basics of “climate science,” as official Pravdas and Izvestias of the DC-New York media complex daily and relentlessly describe him.

Why is Pruitt a denier? Simply because he thinks that the Obama administration’s assessment of “social cost of carbon” does not make much sense. Which it doesn’t. This is very easily seen if we pay minimal attention to how the administration made its “carbon cost” estimate. There are three major elements you have to deal with to achieve this estimate, and in all three areas Obama administration used the models that are extremely sensitive to very small changes in assumptions and those based on dubious, outdated science or on arbitrary, or simply wrong, economic assumptions.

The first element worth noting is climate sensitivity: how much the atmosphere is expected to warm as a consequence of doubling the CO2 concentration. The Interagency Working Group (IGW) created by the Obama administration to prepare the rationale for the plan used completely obsolete data and analysis to arrive at drastically inflated calculations of climate sensitivity. The equilibrium climate sensitivity (ECS) they posited, based on outdated pre-2010 estimates, was about 3 degrees K, with a significant possibility of catastrophic warming (95th percentile value of 7.14K). The new literature published after 2010 finds dramatically lowered ECS estimates, about 2 degrees K, with drastically lowered probability of catastrophic warming (95th percentile of 3.5 K). This factor alone would have lowered the social cost of carbon between 30 percent and 80 percent, depending on the model!

How and why this happened is very simple. Even before 2010 there was a huge mismatch between the models and observations: typically models based on the dominant role of CO2 in climate produced two to three times as much warming as observations showed. Instead of lowering their climate sensitivity estimates to account for this mismatch, the modelers were using the uncertain estimates of aerosol cooling to claim that the “missing warming” is actually cancelled out by aerosols. Essentially they were employing the aerosols as a “fudge factor,” an adjustable parameter that can do whatever you need it to do to align the models with the observations.

However, since 2010, the much-improved aerosol estimates have shown that the aerosol cooling effect (as well as uncertainty associated with it) was much lower, so this escape route was cut off. In a series of papers by more than 50 researchers, the sensitivity estimates were updated using this new data, and the new estimates were just below 2K, some much lower. The Obama administration simply ignored this new scientific evidence and used the old, false, and outdated estimates instead.

The second major problem is the calculation of the balance between the costs and benefits of warming. Just two ingredients will suffice to demonstrate the procedure the Obama administration used: first, they almost completely ignored the positive effects of CO2 fertilization for agricultural productivity! The fact that elevated levels of CO2 will increase dramatically the crop yields was not counted as a benefit of global warming. Just one model included any estimate of this effect and claimed it was approximately 3 times lower than in published literature! Other models used ignored it outright.

Then there is their use of discount rates. A lower discount rate means that present goods are relatively less valuable vis a vis future goods. This means that lower discount rate will lead to the higher estimate of the future costs of carbon emissions. The EPA climate models calculated carbon cost for 2.5, 3, and 5 percent discount rates, contrary to the explicit guidelines by the Office of Budget and Management which required that the 7 percent rate be included too. Economist Kevin Dayaratna from the Heritage Foundation used the same models to calculate the cost of carbon for this rate and found out that it was … negative. So, yes, if the discount rate is 7 percent the US government should be subsidizing instead of taxing and regulating the fossil-fuel industries.

Now, nobody knows what the “true” discount rate should be exactly. How much should the current generations sacrifice for the benefit of future generations? It is not a “scientific” issue, it is a philosophical and political question for the people and their elected representatives to sort out in a democratic political process. Yet, the faceless bureaucrats in the EPA took on their heroic shoulders this heavy burden to relieve us stupid rubes of the trouble of wrestling with the problem. They decided, completely “scientifically” in our name, to use the “central estimate” of 3 percent as relevant for public policy, and that 7 percent discount rate is not even worth reporting, let alone seriously considering.

Finally, there is the very curious fact that the EPA used their global carbon-cost estimates (however they got them) to inform the US domestic policy! Ted Gayer of Brookings Institution, not exactly known for its “climate-change denying” agenda, said that this was absolutely unjustified: the social cost of carbon for the US is 4-14 times lower than the global cost (even with the dubious assumptions about climate sensitivity, CO2 fertilization, and discount rates) and even smaller than the benefits of mitigation for the United States! In Gayer’s view, using the global cost of CO2 to inform the US domestic policy would have been justified only if it were used “to support the development of a global system of reducing greenhouse gases, in which US actions are completely reciprocated.” Since this is not the case, the EPA approach leads to creating benefits that “largely accrue to foreign citizens … at odds with the intent of long-standing executive orders and authorizing statutes.”

So, to summarize, the Obama administration first calculated an inflated estimate of global carbon cost using obsolete science and arbitrary assumptions about the discount rates, and then used this flawed global estimate to inform their domestic policy of de-carbonization, while at the same time they were aware that their own analysis had shown the carbon cost for the USA was negligible, in some models even negative!

It was high time for Scot Pruitt and EPA to start the process of abolishing this harmful and irresponsible program, aimed at crippling domestic energy production and inflating the energy bills that hit disproportionately the poorest and most vulnerable — all for no clear benefit for anyone, except the selected groups of activists and business lobbies that profit from the creation of an artificial demand for their products. Nobody else has any reason at all to lose sleep over this program’s demise, as long as the Trump administration is serious about abolishing it.

Image: Hugo.

Ivan Jankovic

Ivan Jankovic

Ivan Jankovic is Assistant Professor of Economics at the University of Mary in Bismarck, North Dakota, USA. His background is in economic theory and the history of political and economic ideas. His latest book is Mengerian Microeconomics. His previous book “The American Counter-revolution in Favor of Liberty – How Americans Resisted the Modern State 1765-1850” was published by Palgrave Macmillan in 2018.

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