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How Obama’s Climate Rules Might Unravel

Matthew Philips , Mark Drajem , and Jennifer A Dlouhy, Bloomberg

Obama used an arcane number to craft his regulations. Trump could use it to undo them.

In 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 Social Cost of Carbon underpins a large portion of Obama’s climate policies

On Dec. 7, the Department of Energy received a memo from the Trump transition team asking a litany of questions, many of which focused on identifying agency employees and contractors who worked on climate rules. Among its 74 questions, the memo includes a number of detailed requests about the Social Cost of Carbon: who worked on it, what methodology was used to calculate it, and what e-mails and materials could be provided that were associated with it. (A Trump transition official later disavowed the memo, telling CNN it “was not authorized.”)

Trump can’t undo the SCC by fiat. There is established case law requiring the government to account for the impact of carbon, and if he just repealed it, environmentalists would almost certainly sue. “Unfortunately, you can’t just pull this thing up by the roots,” says Marlo Lewis, a senior fellow at the Competitive Enterprise Institute (CEI), a free-market think tank in Washington. “While that might actually be a great idea on the merits, you have to address the court cases that will be litigated.”

There are other ways for Trump to undercut the SCC. By tweaking some of the assumptions and calculations that are baked into its model, the Trump administration could pretty much render it irrelevant, or even skew it to the point that carbon emissions come out as a benefit instead of a cost.

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.”

Greenstone, who left the White House in 2010 and now teaches economics at the University of Chicago, insists that his team operated under a self-imposed “veil of ignorance” and made decisions without trying to make the final cost of carbon higher or lower. He concedes there is a broad range of values to ascribe to carbon but says that, if anything, they were too conservative in their cost estimates, and that it should be higher than it is. “Just because it can’t be written on the back of a napkin doesn’t mean the Social Cost of Carbon is not real,” says Greenstone.

Most serious policymakers believe the SCC is a valid concept, says Jeff Holmstead, a former senior EPA official under George W. Bush. “The problem is that the number is so malleable, you can almost put it wherever you want.” Putting a specific value on it, Holmstead says, “gives artificial precision to something that is highly uncertain.”

Another issue for those who question the Obama administration’s SCC: It estimates the global costs and benefits of carbon emissions, rather than just focusing on the impact to the U.S. Critics argue that this pushes the cost of carbon much higher and that the calculation should instead be limited to the U.S.; that would lower the cost by more than 70 percent, says the CEI’s Lewis. But to some, it makes sense to use a global estimate for the SCC, since climate change is worldwide. “This gets at a very basic economic concept of protecting the global commons and the natural resources we all share,” says Kenneth Gillingham, who served as senior economist at the Council of Economic Advisers in the White House in 2015 and now teaches economics at Yale.

Still, by narrowing the calculation to the U.S., Trump could certainly produce a lower cost of carbon. Asked in an e-mail whether the new administration would raise the discount rate or narrow the scope of the SCC to the U.S., one person shaping Trump energy and environmental policy replied, “What prevents us from doing both?”

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