Social Cost Of Methane: Garbage In, Garbage Out
The Trump Administration’s sweeping new Energy Independence Executive Order shifted American energy policy with a stroke of a pen. Press reports focused on the Clean Power Plan’s demise, but the inclusion of several major oil and natural gas regulations are extremely important for reorienting the government back to following the rule of law, encouraging American energy development, and putting people back to work.
The order to rescind the Social Cost of Carbon (SCC) and Methane (SCM) is also critical. The SCC and SCM were used to calculate the benefits of many of the climate regulations touted by the Obama Administration for meeting the now overturned Climate Action Plan and Paris Agreement commitments.
The SCC and later the SCM were developed as measurements of the external costs that come from the release of carbon and methane into the atmosphere. The calculations do not adequately account for the many benefits of using oil, natural gas and coal. The calculations rely on computer models that project both environmental and economic impacts out to the year 2300, and are based on numerous assumptions about the global economy and climate. Yet trying to project what will happen a lifetime from now, especially with all the variables involved, is a nearly impossible task.
Computer models are powerful tools, but as the old saying goes, “garbage in, garbage out,” and SCC/SCM models are no exception. The Environmental Protection Agency’s (EPA) New Source Performance Standards Subpart OOOOa rule, which Trump’s Executive Order marked for rescission, relies heavily on the SCM to show a benefit. The Bureau of Land Management (BLM) followed suit in its methane rule, with supposed economic benefits between $115 million and $188 million largely based on the SCM.
Even if we could credibly assume that models can accurately predict global economic and environmental conditions out to the year 2300, we still run into another problem. Regulatory agencies like EPA and BLM are biased in their assumptions, because regulators have an inherent interest in regulating. It’s tempting for them to make assumptions that overstate the benefits of new regulations.
There are specific guidelines for how agencies should conduct cost-benefit analyses to make them uniform and accurate, but agencies often disregard these basic guidelines, particularly when it comes to the use of discount rates. Discounting accounts for the time value of money. Money spent today can be worth more in the future depending on how it’s invested. A good investment will drive a stronger return and be worth considerably more in the future. A bad investment may be worth less than its value today.
Given that the supposed impacts of climate change will be felt far into the future, social cost of methane models favor low discount rates that weigh more heavily towards future financial impacts. The developers of the SCC and SCM used discount rates of 2.5%, 3%, and 5% to place emphasis on future values. However, standard cost-benefit analysis guidance from the Office of Management and Budget dictates that agencies use 3% and 7% discount rates. SCC/SCM models don’t incorporate that standard 7% discount rate for benefits, yet the agencies still analyze the costs of compliance of new rules at the 7% rate. This disproportionately favors the long-term benefits over today’s real-world costs, despite the fact that the agencies regularly admit long-term effects are highly uncertain and difficult to predict. The slanted use of discount rates put a heavy thumb on the scale in favor of yet more regulation.
Without supposed benefits from the SCM, both EPA’s and BLM’s methane rules would have net negative costs on society. We’re not suggesting the SCM is zero, merely that it’s inflated in agency analyses. So if we correct for EPA and BLM’s biased assumptions, what is a more accurate number?
NERA Economic Consulting took a look at SCM models to evaluate EPA’s methane rule. NERA corrected the flawed assumptions regarding the discount rate, radiative forcing rates, geographic inconsistencies in the analysis, and inappropriate extrapolations about future mitigation policy. NERA’s results were remarkable, showing the SCM may be 27 times too high. The SCM plummets from as high as $1,900/ton to just $69-$115/ton. For the EPA and BLM rules, the benefits crater from $1.8 billion and $384 million, respectively, to below $20 million. Since EPA and BLM also identified $530 million and $174 million in costs for their rules, respectively, the costs greatly outweigh the benefits.
America leads the world in meaningfully addressing climate change not because of overreaching regulations like those listed above that deliver little environmental benefit at huge cost, but because it is actually reducing greenhouse gas emissions more than any other industrialized country. Natural gas has been the primary reason the United States has reduced greenhouse gas emissions more than the European Union or other countries that impose top-down climate change policies.
As economist and commentator Stephen Moore recently wrote in The Washington Times: “We are growing faster than they are and reducing emissions more than they are, yet these are the nations that lecture us on polluting. Go figure.”
Without a clear-eyed and impartial comparison of costs to benefits, EPA and BLM rules cannot be credibly described as cost effective. Until the methodologies behind developing and applying the social cost of carbon and methane become more transparent and unbiased, it is entirely appropriate for President Trump to remove them from the rulemaking process.
Ryan Streams is the manager of regulatory affairs at the Western Energy Alliance. The Alliance represents the Western oil and natural gas industry and is a supporter of Western Wire.