Test-Driving the EPA's Carbon Models

By David W. Kreutzer & Kevin Dayaratna

When you switch on the kitchen light tonight, how will it affect Captain James T. Kirk and the intrepid crew of the Starship Enterprise?

Captain Kirk is a fictional character, of course, but the question -- thanks to the EPA -- is all too real. The agency calls it the "Social Cost of Carbon." In the SCC they claim to have an estimate, measured in dollars per ton of CO2, for all the damage that your free-and-easy light-switching today will impose on the world from now until the year 2300, at which point Captain Kirk would be 77. To save Kirk and the rest of future Earth from a panoply of speculative, incremental horrors, the EPA has plans to nudge your carbony little fingers away from that switch and many others.

The agency plans to do that through new energy regulations. Since these policies are likely to impose trillions of dollars in compliance costs and economic losses, the EPA will lean pretty heavily on its SCC estimates to justify its actions. We tried out the computer models employed by the EPA -- except for the one whose proprietor does not allow independent use and evaluation -- and found them unfit for regulatory application.

Though sophisticated and creative, these programs (called Integrated Assessment Models, or IAMs) model scientific and economic relationships that are not well understood. Harvard professor Robert Pindyck, whose prescribed climate policy is much different than ours, savaged the IAMs, saying they are "close to useless as tools for policy analysis" and have "no theoretical or empirical foundation."

While we agree with criticism such as Pindyck's, we cannot help but notice the EPA still uses the models. So we decided to subject the models to a few more tests, investigating their sensitivity to reasonable changes in a few variables.

Like the EPA, we ran the DICE model (created by William Nordhaus) and the FUND model (by Richard Tol). But we used more recent peer-reviewed estimates of CO2's impact on world temperature (here and here), and we ran the models using a 7 percent discount rate (that is, the rate at which we value short-term effects over long-term effects), as stipulated by the OMB and curiously ignored by the EPA, which used 2.5 percent, 3 percent, and 5 percent.

The simple substitution of the discount rate drops the SCC estimate by more than 80 percent in the DICE model and pushes it to zero or even negative for the FUND model. (Here it might be appropriate to observe a moment of sympathetic silence for Richard Tol, a lead and convening IPCC author, who was recently excoriated by his former brethren for publicly stating the painfully obvious: Some impacts of warming are good.)

Updating the estimates of CO2's impact on temperatures drops the SCC estimates by 40 to 80 percent. When the 7 percent discount rate is used in conjunction with the updated CO2 impacts, the FUND model indicates a better-than-even chance the SCC is negative.

That is, using more up-to-date numbers renders a range of estimates so broad that it is not clear whether CO2 emissions should be restricted or subsidized. Are these changes debatable? Absolutely. Is the debate on these topics over? Absolutely not. We cannot calculate how today's trip to the grocery will harm humanity in three centuries. Nevertheless, the EPA is forging ahead with regulations employing a SCC of about $40 per ton for the near term.

While some might apply such squishy estimates cautiously and narrowly, our government is not so timid. The breadth of the intent to regulate energy is exposed by the title of the very first rule that uses the new SCC: "Energy Conservation Program: Energy Conservation Standards for Standby Mode and Off Mode for Microwave Ovens."

That's right. Washington now regulates how much electricity microwave ovens use when they are not being used. Those four-watt energy-hog digital displays need to be swapped for two-watt models, which in the Department of Energy's own lab tests caused a 50 percent failure rate for the ovens.

The SCC will "nudge" dishwashers into longer and longer wash cycles, minivans into something more like a Priuses, and coal miners to the welfare office. Proponents will say even that's not enough.

Why use flawed models to justify economically harmful regulations? Unless, of course, more accurate estimates undercut your case. Perhaps it's time someone asked the EPA what it's got against appliances that work.

David Kreutzer is the research fellow in energy economics and climate change, and Kevin Dayaratna is a research programmer and policy analyst, at the Heritage Foundation's Center for Data Analysis.

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