Economists find flaws in federal estimate of climate damage

Economists find flaws in federal estimate of climate damage
July 13, 2011

A new report concludes that each ton of carbon dioxide emitted in the atmosphere inflicts as much as $900 in environmental harm - almost 45 times the amount the federal government uses when setting regulations. The gap, advocates say, disguises the true value of emissions reductions.

By Douglas Fischer

Uncle Sam's estimate of the damage caused by each ton of carbon dioxide is fundamentally flawed and "grossly understates" the potential impacts of climate change, according to an analysis released Tuesday by a group of economists.

The study found the true cost of those emissions to be far beyond the $21 per ton derived by the federal government.

The figure, commonly known as the "social cost of carbon," is used by federal agencies when weighing the costs and benefits of emissions-cutting regulations, such as air conditioner efficiency standards and greenhouse gas emissions limits for light trucks.

A truer value, according to the Economics for Equity and the Environment Network, an organization of economists who advocate for environmental protection, could be as high as $900 per ton - equivalent to adding $9 to each gallon of gas. Viewed another way, with the United States emitting the equivalent of close to 6 million tons of carbon dioxide annually, the higher figure suggests that avoiding those emissions could save the nation $5.3 trillion annually, one-third of the nation's economic output.

'Dramatic simplifications'
A second, separate report released Tuesday buttressed the argument, finding that the government routinely underestimates the benefits of avoiding climate change when conducting cost-benefit analysis on regulations aimed at reducing greenhouse gas emissions.

This second report, published jointly by the World Resources Institute, an environmental think tank, and the Environmental Law Institute, found that government models on climate impacts often contain "dramatic simplifications and assumptions" - such as when calculating the social cost of carbon - that underplay the benefits society gains by curbing emissions.

Together, the two reports suggest policy makers are looking at a distorted picture as they assess the economic impacts of climate regulations.

The issue has gained urgency as efforts to create a cap-and-trade system or impose a carbon tax have stalled in Congress and federal rules - via the U.S. Environmental Protection Agency - become the primary vehicle for reducing emissions.

"Based on what we know today, the government's current range of social costs is very likely a serious underestimation of what we think those costs will be," said Kristen Sheeran, executive director of the E3 Network.

"It does not reflect the urgency of the climate crisis," she added. "It could lead to a degree of inaction on climate change that frankly is not supported by either the economics or the science at this point."

Costly impacts missed
A lower social cost of carbon - particularly when combined with an underestimate of the benefits of reducing emissions - makes justifying expensive emissions-cutting regulations much harder, advocates say.

But how to value the cost of climate change has proven to be a contentious issue.

Computer models attempting to assess the economic impacts of climate change are, in many cases, streamlined affairs that can only look at impacts broadly - at a scale of hundreds of miles, instead of, say, at a particular watershed, township, or even state.

Economists at the E3 Network, an umbrella group of about 200 economists, contend many potentially costly impacts are missed: Sweltering inland temperatures are averaged with cooler coastal weather. Or an intense, deadly rainstorm never shows up in a monthly average rainfall tally.

That leads to considerable uncertainty about the severity of the damages. For example, a global model used in part by the federal government to derive the $21-per-ton price finds that a 4.5ºF (2.5ºC) temperature rise will cost 1.8 percent of the world GDP. But University of California, Berkeley, economist Michael Hanemann, conducting a detailed review of that estimate as it applies just to the United States, found it should be four times as large.

Inflated assumptions
The point, say E3 economists, is that when the latest science on cost of climate extremes, the pace of global change, and how to account for those damages in the future are incorporated into the federal government's mathematics, the picture changes dramatically.

"Now that we know how much we could end up paying to endure the impacts of climate change, investing in reducing our emissions is clearly the prudent option," Frank Ackerman, an economist with the Stockholm Environment Institute and one of the report's two authors, said in a statement. "It's the difference between servicing your car, or waiting for it to break down on the highway."

Officials at the EPA were unavailable for comment Tuesday evening. Michael Greenstone, the Massachusetts Institute of Technology Professor who led the federal effort to price the cost of climate impacts (pdf), was similarly unavailable.

In an interview earlier this year, however, Greenstone said the federal panel charged with pricing impacts did consider several studies that pegged the social cost of carbon closer to $3,000 per ton of carbon dioxide. But those higher values were based on unlikely assumptions, Greenstone said. When the panel held those assumptions and variables constant, the picture changed dramatically, and the federal estimate fell within the mid-range of the published literature, he said.

The federal panel published its $21-per-ton figure in February 2010 with a promise to reassess its work within two years. Sheeran noted 18 months have passed, with no evidence the estimate is being revised.

"It does not appear to be a priority within the administration," she said.

[READ THE ORIGINAL ARTICLE HERE]