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The GAO’s Whitewash on the Social Cost of Carbon

The Government Accountability Office (GAO) has released its report on the Obama Administration Working Group’s development of “social cost of carbon” estimates. As we at IER have explained in extensive detail—in our formal comment submitted to Office of Management and Budget (OMB), at our conference last summer, and in testimony before the Senate—there are serious problems with the procedure by which the Administration derived these estimates. Yet the GAO report conveniently ignores all of these problems, at times actively misleading the innocent reader.

In this post, I’ll review two of the most obvious red flags: the OMB, which oversaw development of the social cost of carbon estimates, ignored two of its own procedural guidelines, namely the use of domestic (not global) calculations, and inclusion of a 7 percent discount rate. Had the OMB obeyed its own rules, the official social cost of carbon estimates would have plummeted, thereby ruining efforts to justify new federal regulations that restrict carbon dioxide emissions.

GAO Admits It’s a Whitewash

The GAO “audit” of the Administration’s procedure is comparable to a 4th grader’s book report, in which the young student merely summarizes the plot without offering any independent analysis. Indeed, GAO comes right out and admits as much when it declares in its introductory remarks:

You [Senator David Vitter et al.] asked us to review the interagency working group’s development of social cost of carbon estimates. This report describes the approach used…to develop the 2010 and 2013 social cost of carbon estimates for regulatory impact analysis.

To address this objective, we reviewed pertinent requirements and guidance, including executive orders and OMB guidance; the Technical Support Document and its 2013 update; published materials…and related GAO reports. We interviewed current and former federal officials or staff…. Through this process, we interviewed over 20 individuals who participated in the working group to develop the estimates in the Technical Support Document or its 2013 update, or both. We also corresponded with researchers who developed key academic materials the working group used. Our review describes the approach the working group used to develop estimates of the social cost of carbon; evaluating the quality of the approach is outside the scope of this review. [GAO report, pp. 2-3, emphasis added.]

So there you have it: The Government Accountability Office is merely going to describe how the OMB came up with its estimates of the social cost of carbon; it won’t evaluate whether that approach was accountably good or bad.

Yet even though officially the GAO is washing its hands of the sordid matter, it nonetheless implicitly endorses two key decisions that OMB made, when it came to ignoring its own guidelines. We’ll explain those two key decisions in the rest of this post, but first we need to review the context of the OMB guidelines.

OMB Guidelines for Cost/Benefit Analysis of Federal Regulations

The federal government’s various agencies issue all sorts of proposed and enacted rules. In order to assess these rules in a uniform and consistent way, the Office of Management and Budget (OMB) has issued guidance to the agencies in the proper way to conduct cost/benefit analyses. Here we quote from the recent GAO report itself, to summarize the situation:

In 2003, OMB issued Circular A-4 to provide guidance to federal agencies on the development of regulatory analysis as directed by Executive Order 12866. Circular A-4 states that it is designed to assist agencies by defining good regulatory analysis and standardizing the way benefits and costs of federal regulatory actions are measured and reported. In particular, the guidance provides for systematic evaluation of qualitative and quantitative benefits and costs, including their monetization. Circular A-4 also provides guidance on the selection of discount rates to adjust the estimated benefits and costs for differences in timing. According to Circular A-4, a regulatory impact analysis should include an evaluation of the benefits and costs of the proposed action and any reasonable alternatives, as well as a description of assumptions and uncertainty. [GAO report, p. 4]

So now we see that the GAO report itself holds up OMB’s Circular A-4 as the relevant body of guidelines that should be followed for the purposes of federal regulatory cost/benefit analysis. Since the whole point of developing social cost of carbon estimates was to give federal agencies a consistent number to plug into their computations regarding emissions, surely the GAO would alert the reader if the Circular A-4’s guidelines were ignored? Alas, that’s not what happened, as we document in two separate cases below.

Working Group Ignored Requirement to Include a 7 Percent Discount Rate

In a footnote to the last sentence from the block quote above, the GAO report further elaborates on the OMB’s guidelines for choice of discount rates in regulatory analysis:

9 Circular A-4 states that agencies should discount future benefits and costs using rates of 3 and 7 percent but notes that agencies may, in addition, consider a lower discount rate if a rule will have important intergenerational benefits or costs. [GAO report, p. 4]

In case there is any doubt, I invite the reader to look again at that footnote. There is no wiggle room here. Circular A-4 clearly states that agencies “should discount future benefits and costs using rates of 3 and 7 percent” and that they may in addition consider lower rates. But nowhere does it give federal agencies the freedom to omit analysis using a 7 percent discount rate, for example if the rule involves intergenerational effects.

Yet the Obama Administration’s working group—in both its initial 2010 estimate and its 2013 update—simply ignored this requirement. As the GAO report explains:

OMB staff stated that the technical presentations focused on the academic materials cited in the Technical Support Document, including dozens of peer-reviewed journal articles….Several participants said that a significant amount of the group’s discussions focused on selecting discount rates that best reflect the most current academic literature, while also comporting with OMB’s guidance in Circular A-4. The Technical Support Document cites guidance from Circular A-4 in its discussion of many technical topics, including its selection of discount rates….

The Technical Support Document states that the working group decided to calculate estimates for several discount rates (2.5, 3, and 5 percent) because the academic literature shows that the social cost of carbon is highly sensitive to the discount rate chosen, and because no consensus exists on the appropriate rate. It further states that, in light of such uncertainties, the working group determined that these three discount rates reflect reasonable judgments about the appropriate rate to use. [GAO report, pp. 14-15, emphasis added.]

It doesn’t get much plainer than that: We have quoted from the GAO report (footnote 9 on page 4) to show that OMB Circular A-4 clearly requires inclusion of a 7 percent discount rate. We then quote from the GAO report eleven pages later, where it admits that the working group did not include a 7 percent discount rate. GAO refers to participants who claim they wanted to be faithful to the academic literature “while also comporting with OMB’s guidance in Circular A-4.” Is this legitimate? As Bill Clinton might say, “It depends what your definition of ‘comporting’ is.”

Note that this isn’t some minor triviality. We know full well why didn’t include the required 7 percent rate: To do so would have rendered the social cost of carbon estimates too low to provide justification for aggressive government rules. To see what I mean, consider that the Heritage Foundation re-ran two of the three computer models used by OMB to generate its estimates, holding everything else equal but with a 7 percent discount rate. It found that the social cost of carbon estimates fell quite drastically—even becoming negative in some cases—by simply complying with the OMB guideline.

Specifically, when using the DICE model, Heritage found that the social cost of carbon in the year 2020 was $37.79 per ton at 3 percent (the “central” discount rate emphasized in official summaries), but at a 7 percent discount rate it collapsed to a mere $5.87 per ton. Even more interesting, when Heritage re-ran the FUND computer model, the 2020 social cost of carbon was $19.33 per ton using a 3 percent discount rate, but was actually negative 37 cents when using a 7 percent discount rate. Yes that’s right: Using one of the computer models chosen by the Obama Administration, and holding all other parameters the same as the working group chose, simply by “comporting” with Circular A-4, the result was a negative social cost of carbon emissions in the year 2020. That means—in the world of the computer model—that on the margin additional emissions confer spillover benefits on humanity in that year. (To understand how this could be possible, read the relevant section on pages 3-6 from my written testimony.)

Similar Story With Domestic versus Global Calculations

As we saw above, it is crystal clear that the OMB did not follow its own guidelines when it came to the choice of discount rates; we only needed to quote from the GAO report itself to prove this.

We can do the same with another guideline, this one regarding domestic versus global calculations. Once again the GAO report admits the truth, though here too it buries the crucial information in a footnote:

14 The benefits and costs of reducing most greenhouse gas emissions, including carbon dioxide, differ from most other benefits and costs in at least two respects: (1) greenhouse gas emissions can contribute to global damages even when emitted in the United States…and (2) these emissions generally remain in the atmosphere for years, causing subsequent long-term damages. While Circular A-4 states that agencies should generally estimate domestic benefits and costs of regulations, it also provides latitude to include global economic effects resulting from regulations when relevant and states that such effects should be reported separately and in addition to domestic effects. [GAO report, p. 6, emphasis added.]

Here the GAO explains that agencies are required to report their cost/benefit analysis from a domestic perspective and then, if they think the rule has important global effects that should be included, they can separately report that information. Circular A-4 is even more crystal clear on the issue of domestic benefits than the GAO lets on. Circular A-4 states, “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” [emphasis added]. It’s not merely that agencies should be reporting their results from a domestic perspective for every proposed rule, but that domestic costs and benefits should be the focus. This makes sense, after all: The American public is presumably interested to know how proposed federal rules will impact Americans.

Yet that’s not what happened. The working group did not “focus on benefits and costs that accrue to the citizens and residents of the United States,” instead the official social cost of carbon figures are global ones. Indeed people are lucky that the working group’s reports even give a hint on how one would convert to domestic figures. The GAO report tells the story:

[A] participant told us that he raised concerns about whether the Technical Support Document provided adequate information on domestic measures of the social cost of carbon. The participant said that, in response to this feedback, the working group decided to include a separate discussion in the Technical Support Document on estimating domestic benefits and costs. The Technical Support Document states that reported domestic effects should be calculated using a range of values from 7 to 23 percent of the global measure of the social cost of carbon, although it cautions that these values are approximate, provisional, and highly speculative due to limited evidence. [GAO report, pp. 12-13, emphasis added.]

Well, it’s a good thing at least one participant in this whole process was concerned enough about allegedly “comporting” with Circular A-4 to bring up the fact that the current version of the document gave no information about how to convert the domestic figures from the reported global ones. In response to this concern, the reader can see how the group provided the formula for calculating domestic costs and benefits in a way that made the domestic figure seem dubious. But this still misses the point. The point is that the “focus” should be on domestic costs and benefits, not that the reader is equipped with the formula by which he or she can personally compute that information, transforming the official figures that the working group issued.

Now we have to ask: Why would the committee be so reluctant to obey the clear guideline of Circular A-4 when it comes to domestic versus global benefits? The answer is provided in the block quotation above: The domestic figures for the social cost of carbon are at most 23 percent of the global figures, and could be as low as 7 percent. Complying with Circular A-4’s guideline on reporting domestic estimates could therefore cut, say, the 2013 issue’s reported 2020 “central” figure of $43/ton down to a mere $3/ton. You can’t justify aggressive regulations with only a $3/ton estimate of the social cost of carbon, and so that’s why the working group pooh-poohed actually complying with Circular A-4 on this guideline as well.

Conclusion

The shenanigans and skullduggery involved in climate change regulation are so blatant that all we need to do is read the government’s own reports to see what’s going on. In this post, I’ve quoted just from the recently issued GAO report itself to show that the Obama Administration Working Group simply ignored two clear OMB guidelines on how to conduct regulatory analysis. Not coincidentally, either of these guidelines would have slashed the officially reported estimates, and therefore pulled the rug out from cost/benefit justifications for new restrictions on carbon dioxide emissions. By now it should be clear to any reasonable observer that there is a bias among various government agencies—including legislative agencies such as GAO—to simply ignore rules and regulations in order to get to an answer they like when it comes to the “social cost of carbon.”

Source: IER

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

Founded in 1989 from a predecessor organization, IER is a public foundation under Section 501(c)(3) of the Internal Revenue Code and is funded entirely by tax deductible contributions from individuals, foundations and corporations. No financial support is sought for or accepted from government sources.

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