Figure 3 from Nordhaus (2017), modified by author. A linear extrapolation of Nordhaus’ discount rate plot implies that a 7% discount rated would zero-out the social cost of carbon.
Posted on 03/18/2017 7:38:53 PM PDT by Ernest_at_the_Beach
Guest post by David Middleton
Trump to Drop Climate Change From Environmental Reviews, Source Says
by
March 14, 2017, 1:06 PM CDT
President Donald Trump is set to sign a sweeping directive to dramatically shrink the role climate change plays in decisions across the government, ranging from appliance standards to pipeline approvals, according to a person familiar with the administration’s plan.
The order, which could be signed this week, goes far beyond a targeted assault on Obama-era measures blocking coal leasing and throttling greenhouse gas emissions from power plants that has been discussed for weeks. Some of the changes could happen immediately; others could take years to implement.
It aims to reverse President Barack Obama’s broad approach for addressing climate change. One Obama-era policy instructed government agencies to factor climate change into formal environmental reviews, such as that for the Keystone XL pipeline. Trump’s order also will compel a reconsideration of the government’s use of a metricknown as the “social cost of carbon” that reflects the potential economic damage from climate change. It was used by the Obama administration to justify a suite of regulations.
Trump’s Secret Weapon Against Obama’s Climate Plans
Tom Pyle, president of the American Energy Alliance, a conservative, fossil fuel-oriented advocacy group, welcomed Trump’s comprehensive approach, calling it essential to undoing Obama-era climate policies that “permeated the entire administration.”
[…]
President Trump’s “secret weapon” is the discount rate…
How Climate Rules Might Fade Away
Obama used an arcane number to craft his regulations. Trump could use it to undo them.
by Matthew Philips , Mark Drajem , and Jennifer A Dlouhy
December 15, 2016, 3:30 AM CSTIn February 2009, a month after Barack Obama took office, two academics sat across from each other in the White House mess hall. Over a club sandwich, Michael Greenstone, a White House economist, and Cass Sunstein, Obama’s top regulatory officer, decided that the executive branch needed to figure out how to estimate the economic damage from climate change. With the recession in full swing, they were rightly skeptical about the chances that Congress would pass a nationwide cap-and-trade bill. Greenstone and Sunstein knew they needed a Plan B: a way to regulate carbon emissions without going through Congress.
Over the next year, a team of economists, scientists, and lawyers from across the federal government convened to come up with a dollar amount for the economic cost of carbon emissions. Whatever value they hit upon would be used to determine the scope of regulations aimed at reducing the damage from climate change. The bigger the estimate, the more costly the rules meant to address it could be. After a year of modeling different scenarios, the team came up with a central estimate of $21 per metric ton, which is to say that by their calculations, every ton of carbon emitted into the atmosphere imposed $21 of economic cost. It has since been raised to around $40 a ton.
This calculation, known as the Social Cost of Carbon (SCC), serves as the linchpin for much of the climate-related rules imposed by the White House over the past eight years. From capping the carbon emissions of power plants to cutting down on the amount of electricity used by the digital clock on a microwave, the SCC has given the Obama administration the legal justification to argue that the benefits these rules provide to society outweigh the costs they impose on industry.
It turns out that the same calculation used to justify so much of Obama’s climate agenda could be used by President-elect Donald Trump to undo a significant portion of it. As Trump nominates people who favor fossil fuels and oppose climate regulation to top positions in his cabinet, including Oklahoma Attorney General Scott Pruitt to head the Environmental Protection Agency and former Texas Governor Rick Perry to lead the Department of Energy, it seems clear that one of his primary objectives will be to dismantle much of Obama’s climate and clean energy legacy. He already appears to be focusing on the SCC.
[…]
The SCC models rely on a “discount rate” to state the harm from global warming in today’s dollars. The higher the discount rate, the lower the estimate of harm. That’s because the costs incurred by burning carbon lie mostly in the distant future, while the benefits (heat, electricity, etc.) are enjoyed today. A high discount rate shrinks the estimates of future costs but doesn’t affect present-day benefits. The team put together by Greenstone and Sunstein used a discount rate of 3 percent to come up with its central estimate of $21 a ton for damage inflicted by carbon. But changing that discount just slightly produces big swings in the overall cost of carbon, turning a number that’s pushing broad changes in everything from appliances to coal leasing decisions into one that would have little or no impact on policy.
According to a 2013 government update on the SCC, by applying a discount rate of 5 percent, the cost of carbon in 2020 comes out to $12 a ton; using a 2.5 percent rate, it’s $65. A 7 percent discount rate, which has been used by the EPA for other regulatory analysis, could actually lead to a negative carbon cost, which would seem to imply that carbon emissions are beneficial. “Once you start to dig into how the numbers are constructed, I cannot fathom how anyone could think it has any basis in reality,” says Daniel Simmons, vice president for policy at the American Energy Alliance and a member of the Trump transition team focusing on the Energy Department. “Depending on what the discount rate is, you go from a large number to a negative number, with some very reasonable assumptions.”
[…]
This is worth repeating:
A 7 percent discount rate, which has been used by the EPA for other regulatory analysis, could actually lead to a negative carbon cost, which would seem to imply that carbon emissions are beneficial.
One of the most common ways of estimating the value of oil and gas revenue and reserves is called “PV10.”
PV10 is the current value of approximated oil and gas revenues in the future, minus anticipated expenses, discounted using a yearly discount rate of 10%. Used primarily in reference to the energy industry, PV10 is helpful in estimating the present value of a corporation’s proven oil and gas reserves.
Read more: PV10 Definition | Investopediahttp://www.investopedia.com/terms/p/pv10.asp#ixzz4bQb2uKyw
Follow us: Investopedia on Facebook
We generally use a 10% discount rate when deciding how to allocate current capital.
A 3% discount rate, as used in the SCC calculation, essentially assumes that the time-value of money is insignificant. I suppose that since it’s OPM (other people’s money), the government doesn’t view the time-value of money as a particularly relevant thing.
OMB’s Whitewash on the Social Cost of Carbon
The “social cost of carbon” (SCC) is a key feature in the debate over climate change as well as the principal justification for costly regulations by the federal government. We here at IER and other critics have raised serious objections to the procedure by which the Obama Administration has produced estimates of the SCC.
Last summer I did a post on the GAO’s whitewash of our criticism, and now—just before the Independence Day holiday weekend—the Office of Management and Budget (OMB) has released its own whitewash.
There are several key points on which the Administration is obfuscating, but in this post I’ll focus just on the choice of discount rates. This one variable alone is sufficient to completely neuter the case for regulating carbon dioxide emissions using the social cost of carbon, so it is crucial to understand the controversy.
[…]
Why Do We Discount Future Damages?
Present dollars are more important than future dollars. If you have to suffer damage worth (say) $10,000, you will be relieved to learn that it will hit you in 20 years, rather than tomorrow. This preference isn’t simply a psychological one of wanting to defer pain. No: Because market interest rates are positive, it is cheaper for you to deal with a $10,000 damage that won’t hit for 20 years. That’s because you can set aside a smaller sum today and invest it (perhaps in safe bonds), so that the value of your side fund will grow to $10,000 in 20 years’ time.
In this framework, it is easy to see how crucial the interest rate is, on those safe bonds. If your side fund grows at 7% per year, then you need to set aside about $2,584 today in order to have $10,000 in 20 years. But if the interest rate is only 3%, then you need to put aside $5,537 today in order to have $10,000 to pay for the damage in 20 years.
An equivalent way of stating these facts is to say that the present-discounted value of the looming $10,000 in damages (which won’t hit for 20 years) is $2,584 using a 7% discount rate, but $5,537 using a 3% discount rate. The underlying assumption about the size and timing of the damage is the same—the only thing we changed is the discount rate used in our assessment of it.
Discount Rates in Climate Policy
Generally speaking, the climate damages that occur in computer simulations don’t begin to significantly affect human welfare in the aggregate until the second half of the 21st century. In other words, the computer-simulated damages need to be discounted over the course of decades and even centuries. (The Obama Administration Working Group used three computer models to calculate damages through the year 2300.) Thus we can see why the choice of discount rate is so crucial.
In its latest revision, the Working Group estimated that for an additional ton of carbon dioxide emitted in the year 2015, the present-value of future net damages would be $11 using a 5% discount rate, $36 using a 3% rate, and $56 using a 2.5% rate (see table on page 3 here). Yet when the media refer to these numbers as “the social cost of carbon,” it obscures how arbitrary the figures are. They can range from $11/ton to $56/ton just by adjusting the discount rate in a narrow band from 5% to 2.5%.
Violating OMB’s Clear Guidance
Fortunately, OMB provides explicit guidance (in the form of “OMB Circulars”) to federal agencies on how to select discount rates. Specifically, as we carefully explain on pages 12-17 of IER’s formal Comment, OMB Circular A-4 (relying in turn on Circular A-94) states that “a real discount rate of 7 percent should be used as a base-case for regulatory analysis,” as this is the average before-tax rate of return to private capital investment.
Now it’s true, Circular A-4 goes on to acknowledges that in some cases, the displacement of consumption is more relevant to assess the impact of the policy under consideration, in which case a real discount rate of 3 percent should be used. Thus it states: “For regulatory analysis, you should provide estimates of net benefits using both 3 percent and 7 percent” (bold added).
[…]
The current SCC is based on a moronically low discount rate of 3%. OMB guidance clearly states that “’a real discount rate of 7 percent should be used as a base-case for regulatory analysis,’ as this is the average before-tax rate of return to private capital investment.”
As 7% discount rate makes the SCC negative and would mean that carbon emissions are economically beneficial.
Figure 3 from Nordhaus (2017), modified by author. A linear extrapolation of Nordhaus’ discount rate plot implies that a 7% discount rated would zero-out the social cost of carbon.
A “real world” discount rate zeroes out all of the economic benefits of carbon emission regulations. The simple application of a 7% discount rate to the social cost of carbon would falsify the EPA’s endangerment finding and obviate the agency’s court-imposed obligation to regulate CO2.
Nordhaus, William D.
Revisiting the social cost of carbon
PNAS 2017 114 (7) 1518-1523; published ahead of print January 31, 2017, doi:10.1073/pnas.1609244114
As a default position, OMB Circular A-94 states that a real discount rate of 7 percent should be used as a base-case for regulatory analysis. The 7 percent rate is an estimate of the average before-tax rate of return to private capital in the U.S. economy…
https://www.transportation.gov/sites/dot.gov/files/docs/OMB%20Circular%20No.%20A-4.pdf
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fyi
We are truly blessed. Best election ever!
Better call the wahmbulence for the gated community libs at the EPA...
The AGW and carbon nonsense was never anything but a purpose built scam.
I’d like to see everyone involved, from marketing and advertising, through the sciences and into politics and educators, hauled up and charged for grand theft.
God bless President Trump for keeping law and order and pushing back against the thieves, liars, and fascist criminals of the leftist socialist democrat party.
Carbon. O e of the most common elements in the universe. And libs want us to do what with it to protect us from it?
If we have to use complex arguments like this to oppose the Democrats’ agenda, however true the argument may be, we might as well quit and go home. The best argument is the simplest one — that man-made climate change has never been proved and that the burden of proof is on them.
Actually, the best argument to oppose the climate change agenda is to quote the words of the UN's Chief Climate Official in 2015:
"This is probably the most difficult task we have ever given ourselves, which is to intentionally transform the economic development model, for the first time in human history.
"This is the first time in the history of mankind that we are setting ourselves the task of intentionally, within a defined period of time to change the economic development model that has been reigning for at least 150 years, since the industrial revolution. That will not happen overnight and it will not happen at a single conference on climate change, be it COP 15, 21, 40 - you choose the number. It just does not occur like that. It is a process, because of the depth of the transformation."
--Christiane Fugueres, Executive Secretary of UNFCCC (United Nations Framework Convention on Climate Change)
Why these words aren't shouted from the rooftops regularly to debunk the phony climate agenda is a complete mystery to me.
Good news. Now we can stop holding our breath and breathe again, carbon dioxide be damned.
We escaped Hillary’s “carbon expelling breathing tax” on Nov. 8, 2016.
Now in her case, and that of Nancy Pelosi, we should put a tax on “cow farts”. That should cost them both a bundle.
The next ice age is coming. Whether there is a ‘little ice age’ with some cold years, followed by a little more warmth, eventually the Great Cold will return. The known Ice Age average is 100,000 years, but who is to say how long the next freeze will be. The Sun is the main driver in all this. A large ice sheet will spread down from Canada. Previously New York was under a mile of ice. Can you say brrrrrr. Sure, I knew you could.
Asking liars and cheats for proof is a waste of time. Besides, El Nino is coming back right now and it will give them ammo this summer. They have no clue whatsoever as to what El Nino is, what it does and why we are destined to have quite a few the next few years. It is beyond their comprehension capabilities to grasp the mechanisms involved. In that scenario, you just have to ignore em, press forward and prepare for war.
The problem is not the returning ice, the problem is the returning climate conditions that create the ice. We will get a stronger taste of it next winter. The PNW and California this winter were just nailed with snow. Good for drought though. Theoritically you can experience short atmospheric warm pulses as the oceans are cooling. And over all the planet could be cooling in that case since the oceans are much more dense than the atmosphere.
I’ve created a Bookmarks folder called “Obama Legacy-Obliterated” for news articles just like this one.
It’s filling up fast!
OK!! Everybody pay attention!
Lesson for today:
1. The sun is 1,300,000 times as big as the earth.
2. The sun is a giant nuclear furnace that controls the climates of all its planets.
3. The earth is one of the sun’s planets.
4. The earth is a speck in comparison to the size of the sun.
5. Inhabitants of the earth are less than specks.
Study Question: How do less-than-specks in congress plan to control the sun?
Scott Adams points out How Leonardo DiCaprio Can Persuade Me on Climate Change that the AGW issue has two parts:He goes on to say that until the climate scientists are willing to settle on a single “good enough” model and to stand or fall on the accuracy of that model over the succeeding five years - rather than merely continually tweaking multiple models to fit retrospectively, attempted persuasion of the reality of AGW is futile because that looks exactly like they are promoting a hoax (Adams insists that he does not claim that it is a hoax - only that, from a persuasion POV, that is exactly what it looks like).
- Is the phenomenon real? and
- Is the phenomenon serious?
As to the question of whether the phenomenon - if real - is serious, that relates to the discount rate topic of this thread, and is an economics question. Adams - who says he has a degree and experience in economics - asserts that it is essentially impossible to convince him of the validity of an economics model, period. And that persuasion about the seriousness of AGW (even if real) is therefore next to impossible.
Again, it looks like the discount rate is a finagle factor of the sort that makes any claim of the seriousness of AGW so deeply suspect.
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