Your daily source for regulatory news, analysis, and opinion

How Geographic Boundaries Determine the Social Cost of Carbon

| Jan 17, 2017 | Opinion

    A recent article in Science warned that the incoming Trump Administration will try to revise the Social Cost of Carbon (SCC), a metric that federal agencies use for cost-benefit analysis of a variety of regulations concerning global warming. The current SCC is on the order of $50 per ton. Trump Administration officials could change two calculation assumptions to reduce the figure substantially: the discount rate and the geographic scope. A change in the 2020 discount rate from 2.5 percent to 5 percent could reduce the 2020 SCC from $62 to $12. A change in the geographic scope from the world, which is used now, to the United States alone could have similar if not larger effects. These two changes together could lead to estimates that would make many current regulations appear to have costs that exceed their benefits.

    In this essay, I take up the question of geographic scope in determining the SCC—and I will assume, for the sake of analysis, that monetary cost is the appropriate measure to measure the impact of emissions, even though money itself has different utility to different people as a function of their ability to pay for things. (In a separate essay, I assess the effect of the discount rate.)

    ThinkstockPhotos-622008232-compressorTo begin, it is important to note that the regulation of carbon is done to prevent harm. It is analogous to the precautions that polluters take to prevent pollution. Tort law usually holds polluters liable if they are negligent in taking too little care. The usual test of negligence is that the care taken is less than optimal. Optimal care means that increases in care up to this point have greater benefit than cost, and increases beyond this point have greater cost than benefit. In other words, the benefit per dollar declines as the amount spent in care increases.

    One issue in calculating the SCC involves identifying who suffers the effects of climate change. In fact, the victims are spread around the world. If we abandon the global scope, we will end up with less regulation, and, as a result, we will harm more people, both inside and outside the United States. The money saved by limiting the geographic scope to the United States presumably will benefit U.S. residents only, so they might be adequately compensated. But the foreigners will not be. The result of using the national rather than global scope is that we harm foreigners, by using the lower level of regulation. Undervaluing the social cost of carbon is, in a way, an aggression, from the perspective of foreign policy.

    From a utilitarian point of view—again, assuming that money is an adequate replacement for utility—using the global scope is a no-brainer. Psychologically, however, people may not perceive this sort of harm as morally wrong. The way individuals think about harm depends on how it is framed. In a recent paper, I report that people think it is especially wrong to hurt co-nationals by acts or by omissions, and to hurt foreigners by acts. But psychology scholarship reveals that people find hurting foreigners by omission is not so bad. It is as if we are not responsible for the well-being of people living abroad in the same way we are responsible for co-nationals.

    Thus, if people think of choosing the lower level of regulation—or lowering the social cost of carbon—as an omission, they will not think it is so wrong to harm foreigners in this way. They might also think of raising the level of regulation—or increasing the social cost of carbon—as an action hurting co-nationals, and hence find it objectionable. Hence, this framing would pit a “wrong” harmful action against a “not wrong” harmful omission, and would lead to opposition to the higher level of regulation.

    Other psychological framings of the SCC issue pit a wrong action against a wrong omission. The harm from action would probably dominate. Although “failing to reduce the level of regulation” could be seen as harming co-nationals by omission, hence wrong, the alternative option of “reducing the level of regulation” would be harmful to foreigners, hence even more wrong because it is an act. Likewise, if people think of “emitting more carbon” as the act of interest, then this act would harm foreigners, and thus be considered wrong. The omission of “not emitting more carbon” would harm co-nationals by raising costs, but this would count as a less harmful omission. From a practical perspective, framing the situation these ways would be more conducive to using a global scope for the SCC.

    The choice about the geographic scope of SCC can also be understood as a question of cooperation or defection in a social dilemma. Other nations are faced with the same choice. It is in each nation’s interest to use its own national scope in calculating its social cost of carbon, but it is in the overall interest of the world to use the global scope. And this conclusion takes into account the global cost of regulation as well as the benefit, because the total cost of the regulation over the world would not exceed the total benefit, even if every nation used the global SCC.

    Again, a psychological factor becomes relevant. Although the analysis just described does not depend on the number of cooperators, empirical studies demonstrate that people feel a greater obligation to cooperate when they believe that a greater number of others will cooperate as well. As a global power, the United States may have an even greater effect on these perceptions than most other nations will have. And, in this case, the degree of cooperation is public for the most part, so we cannot hide any failure to cooperate very easily.

    Because of the likely effect of our cooperation on others, the national benefit of the United States maintaining a global scope when calculating the SCC could be quite a bit higher if we take into account the effect of our behavior on other nations. If we pay X dollars to directly prevent the emission of Y tons of carbon, the actual reduction would be Y times some factor, because other nations would be affected by what we do. The multiplier could be greater than two, depending on which nations are influenced, and by how much. The influence on other nations’ behavior occurs regardless of whether we aim for a national or global SCC. Because of it, the benefit-cost ratio is greater than it would be in the absence of imitation by others, therefore, increasing the optimal amount of regulation for the United States.

    I doubt that this imitation is effect is considered in any analysis. The reason it is not considered is that it is very difficult to estimate the multiplier. When numbers are difficult to estimate, people tend to give up and assume some default—in this case assuming no impact of imitation, or, in other words a multiplier of one. But the multiplier is surely higher than that, and important. Some estimate is surely better than an estimate that practically insures substantial under-regulation.

    In sum, we definitely should not use the national SCC calculated as if the behavior of others were independent of choices made by U.S. authorities. From a moral point of view, we should calculate the social cost of carbon using the global scope. If we choose to think of it this way, use of the global scope for calculating the SCC ensures that we are not committing an act of aggression against the rest of the world.

    Tagged: , , , ,