Based On a Theory, Obama Attempts To Remake the Energy Industry

Based On a Theory, Obama Attempts To Remake the Energy Industry
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While Congress has shown little interest in re-igniting the debate over climate change, the Obama administration has been aggressively moving a regulatory agenda that is potentially as costly as the failed cap-and-trade legislation. Importantly, relying on regulations bypasses the need for votes. To facilitate this process, the Office of Management and Budget just released technical corrections to an interagency attempt to establish a "social cost of carbon"(SCC). OMB announced it will open the study to public comment in the near future; consumers and businesses should make their voices heard, because the SCC calculations will underpin the justifications for billions in new regulations.

Based on its 2009 "endangerment finding"-in which the Environmental Protection Agency (EPA) concluded that greenhouse gases pose a threat to the health and welfare of current and future generations-the agency launched a series of rulemakings targeting fossil fuels, a major source of CO2 emissions. These rules are expensive and will impose substantial costs on the economy. Federal agencies are required to perform cost-benefit analysis on rules that will cost $100 million or more, so the EPA is tasked with producing the economic analysis that demonstrates that the regulations provide more benefits than costs before they are implemented. The social cost of carbon provides a cushion that pumps up benefits, making it easier to meet the necessary threshold to take action-without having to demonstrate that the actions will have the desired effect of reducing global temperatures.

The official SCC was introduced quietly in the appendix of a Department of Energy rule covering efficiency standards of microwave ovens. Prior to its creation, social costs were not included in the cost-benefit analysis justifying rules. The social costs of carbon are sweeping in scope, covering everything from relocation costs due to rising sea levels to losses to recreation and fishing sectors of the economy. And that is one of the major problems with this approach: the benefits are nebulous and can mean whatever researchers deem important for their models. These limitations are recognized by those developing the SCC, who claim that periodic review by the interagency working group will increase the accuracy of SCC estimates over time.

Beyond the trouble with identifying and quantifying social benefits, there are concerns about discount rates, which attempt to reflect the value of benefits that occur far in the future in today's dollars. Many of the social costs of carbon occur far in the future, so assumptions about technological innovation and economic growth can have significant impacts on the SCC. As one study put it: "And if, as we suspect, the models differ in large part because their authors chose arbitrarily different damage functions, then the SCC just reflects the average of three arbitrary guesses." The limitations and uncertainties surrounding the SCC only amplify similar debates over the science of climate change.

Despite such concerns, the SCC is increasingly being used in regulatory analysis. One report found that it has been incorporated into roughly 30 regulations already. Further, small tweaks and technical adjustments to the SCC can have significant impact on the outcome of the cost-benefit process. The report found that adjustments made last May to the 2010 SCC estimates added 10 percent to economic benefit calculations.

The Clean Air Act was not made to regulate something as ubiquitous as carbon dioxide, and relying on the Act to regulate greenhouses gases is problematic. But after the Supreme Court opened the door to its use for CO2 regulation, the Obama administration quickly latched onto the Act as the most politically expedient tool for reducing CO2 emissions. Unlike health care, no cantankerous legislative fights are necessary; just the standard rulemaking process and necessary regulatory analysis. The SCC will play an important role pushing rules over the necessary cost-benefit hurdles.

The Obama administration is undertaking a top-to-bottom makeover of our energy sector-8 percent of our economy-that ultimately may have no impact on the Earth's atmosphere. America's competitiveness is under threat as jobs and production move offshore to nations such as China and India, which have indicated they are not willing to hobble their economies with tough new climate regulations. Careful economic analysis and sound science are critical to avoiding unnecessary regulatory burdens. The EPA, and all other federal agencies, must be held to the highest standards, given the potential impact of these regulations. A review of the SCC may be a good starting point for improving the process.

 

Wayne Brough, Ph.D is Chief Economist and Vice President of Research at FreedomWorks.  

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