The Social Cost of Carbon: It’s Not What You Think

Kirby Lawrence / August 03, 2015

The social cost of carbon (SCC) is a metric that the Obama administration uses to justify increased regulations across the energy sector of the economy. It is derived using various statistical models that try to measure the extent and impact of climate change.

Any statistical model, however, is based on assumptions and must be critically analyzed before being used for policymaking. Kevin Dayaratna, Heritage’s senior statistician, recently testified before the House Committee on Natural Resources on the use of SCC estimates in energy policy.

Dayaratna argued that while the statistical models “might be interesting for academic exercises, they are far too sensitive to the modeler’s assumptions to be legitimate tools for regulatory policy.”

Dayaratna testified that his research, based on a variety of simulations performed with some of the same models used by the U.S. government Interagency Working Group (IWG), revealed some obvious and serious problems with the IWG’s assumptions. These included:

1. Projections 300 years into the future, far beyond a reasonable time frame, and selected seemingly to make the size of potential damages to the economy as large as possible. Our Founding Fathers had no idea what the American economy would look like today. It is sheer nonsense to believe that policymakers can make projections that far into the future.
2. An outdated equilibrium climate sensitivity (ECS) distribution published nearly a decade ago that exaggerates the impact of carbon dioxide emissions on climate variables. Since then, a number of newer ECS distributions have been published with far more modest claims.
3. The use of artificially low discount rates of 2.5 percent, 3 percent, and 5 percent, ignoring the Office of Management and Budget’s guidance that a 7 percent discount rate be used.

Added together, these questionable assumptions account for almost all of the potential damage from climate change. Tellingly, according to Dayaratna, when more realistic assumptions are incorporated in the model, the SCC can even be negative—suggesting there might be net benefits to carbon dioxide emissions.

For the complete testimony transcript, please click here.

Kirby Lawrence is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please click here.