ECONOMICS:

Obama administration weighs the costs of doing nothing

Economists have sparred for years over what price tag to put on the societal danger of carbon dioxide emissions. Now the Obama administration is quietly struggling to reach its own conclusion.

The answer promises to weigh heavily on a slew of future regulations that directly and indirectly combat climate change.

"This has huge potential. So many decisions the government makes have an influence on greenhouse gas emissions," said Michael Livermore, executive director of the Institute for Policy Integrity (IPI) at the New York University School of Law.

So what exactly is it worth to stop the spewing of a single ton of carbon? How much should society pay to, bit by bit, stave off drought in the southwestern United States or rising seas on the Atlantic Seaboard?

No one will ever have the one right answer. Disagreements have touched on everything from climate science and risk psychology to societal ethics and the interest rates of government bonds.

The ultimate cost, scientists and economists have found, essentially turns on how people value their future, and more controversially, their grandchildren's future. That decision, they say, plays a major role in setting the emissions cuts the world is willing to make.

As a result, more than 200 published estimates of the long-term bill of damages wrought by a ton of carbon run the gamut from less than nothing to several hundred dollars, according to one recent review.

The Obama administration is running an interagency work group, headed by the White House Office of Management and Budget (OMB), tasked with figuring out an answer.

A Reagan legacy

Oddly, the group's first public airing of the debate came in an obscure rule about soda vending machines.

In it, officials put a temporary placeholder -- a range of $5 to $55 a ton -- that will be up for grabs as they decide on an ultimate verdict. In September, the values surfaced as part of a major joint U.S. EPA and Transportation Department proposal to increase motor vehicle fuel efficiency and set the first greenhouse gas emissions limits.

September's fuel efficiency standards, for example, could have ranged anywhere from 15 to 70 miles per gallon, depending on the carbon benefit value chosen within their range, according to Gary Yohe, a climate economist at Wesleyan University. Eventually, DOT decided on 35.5 miles per gallon by 2016.

EPA estimated it would be worth $20 to avoid belching 1 ton of tailpipe emissions into the atmosphere -- a value Livermore called a lowball estimate within an already conservative range. Other economists say the price tag to society is far higher. A survey of 144 top climate economists, set for release by IPI today, found that many believed the costs to be about $50 or $60 a ton, though the answers varied widely.

The eventual value could decide the carbon cuts gained by future federal regulations. It could also justify tightening other regulations, like air pollution standards at power plants, that have the side effect of cutting carbon emissions.

Former President Reagan first required all federal agencies to weigh the overall costs and benefits of potential regulations and create a balance sheet to guide their decisions. The relative influence of these dollars-and-cents analyses varied by agency administration. President Clinton formally solidified the prominent role of economic reviews today.

Experts say the cost-benefit studies have been particularly fraught in the context of environmental regulations, where the full monetary benefits of saving an endangered species or reducing asthma deaths are harder -- some even say impossible -- to pin down.

Climate legislation: a $1.5 trillion benefit?

During the George W. Bush presidency, environmentalists accused the administration of justifying lax standards using a scale weighted to the cost side of the equation.

That's where the so-called "social cost of carbon" enters the scene.

Until recently, agencies did not gauge the climate benefits of their rules. That was true even if the regulation would directly slash emissions, like a fuel economy standard imposed on light-duty trucks in 2007. If the Transportation Department had weighed carbon, a tighter miles-per-gallon requirement might have been justified, economists said.

Eventually, in fact, a court forced the agency to redo its analysis. Since then, a smattering of different rules have taken haphazard stabs at a number. The Obama administration formed the interagency group to come to a coordinated decision.

Despite the interim task force numbers, however, EPA notably declined to insert a dollar estimate of the benefits of the House and Senate climate bills when it number-crunched the costs for Congress.

Some advocates argue that such an effort might help Democrats combat the barrage of criticism over the bills' overall price tags. But other experts worry that it's too soon for fledgling attempts to price the full costs of climate inaction in the context of such major economywide legislation.

"Any one number you put out is a slow moving target for anybody that wants to shoot at it," said Yohe.

Livermore, meanwhile, is calling for EPA to analyze the benefits of the bill, a task NYU carried out in a recent report. The analysis estimated, using the interagency group's numbers, about a $1.5 trillion benefit of the House-passed bill over the next four decades.

Using the wider range of carbon emissions values, however, the benefits ranged anywhere from $383 billion to $5.5 trillion.

'Science, economics and ethics'

The debate over costs and benefits comes as President Obama's team prepares a promised executive order to overhaul the regulatory review process. But with Cass Sunstein, a staunch advocate of cost-benefit reviews, as Obama's point man on the issue at OMB, experts say a significantly diminished emphasis is unlikely.

For climate change, cost-benefit analysis will matter less if Congress dictates emissions targets in a cap-and-trade plan instead of leaving EPA to regulate on its own. But still, experts say, these balance sheets will frame many details of the bill, especially where agencies have discretion to set technology standards and efficiency targets.

That still leaves the administration to haggle out a price tag. "Economists will argue about this until they are blue in the face," said Frank Ackerman, a senior economist at Tufts University.

The arguments, according to the administration, raise an avalanche of "serious questions of science, economics and ethics." Even some climate economists say answering these questions might be an exercise in futility.

"You can't really quantify the social costs of carbon with any degree of confidence. You can get just about any number you want to, depending on the assumptions you use. That's why EPA struggles so much," said Yohe.

EPA and DOT, in their vehicle rule, say the number hinges on four assumptions: future economic growth rates, scientific assessments of the Earth's response to rising emissions, economic modeling procedures, and -- most significantly -- choices about how to value the future.

But some climate risks inherently defy dollar figures, said Stephen Seidel, a policy analyst at the Pew Center on Global Climate Change. These might include the destruction of a native Alaskan village, the extinction of an endangered species, or the threat to U.S. national security if droughts destabilize other nations, for example.

Putting a price tag on the grandkids

Most estimates of the costs of inaction, the task force work emphasizes, entirely miss these consequences.

Some economists, such as Tufts University's Ackerman, have moral qualms about any efforts to put them in. "One impossible question leads to another. This is true for all cost-benefit analysis. But for climate change, it is worse ... you have the same impossibility, but on a larger scale," he said. Instead, he would like to see cost-benefit analysis thrown out the window as a way to guide climate policies.

Unlike with most U.S. government regulations, the benefits of preventing climate change are spread out across the globe and across many generations.

So far, the administration has decided to value the benefits of carbon reduction on the global scale -- a departure from most previous cost-benefit practices. That action increases the benefit estimates by more than 10 times.

Another major oversight is that economic models may not properly value the consequences of a climate catastrophe. Harvard University economist Martin Weitzman argued that dollar value estimates must also include insurance policies for these unlikely, but devastating, risks.

The most difficult issue is how much to weigh future benefits and costs against money spent today. Typical economic wisdom would frown on investment to mitigate climate change if more overall wealth would be created by depositing that same money in a bank or investing it in a bond.

The choice of what market rate to use as a basis for comparison has the biggest influence on pricing climate change. Unlike most other policies, climate policies are somewhat unique because the group that bears the costs will not have to see the worst damages.

Some say the rate should be close to zero, making the world's future grandchildren count nearly as much as their grandparents do today. Others want it as high as 7 percent, effectively meaning society would rather create more wealth for future generations while also letting them deal with the major impacts of climate change. EPA and DOT chose a middle ground of 3 and 5 percent, though many climate economists are pushing for even lower values.

It's technical and complex, but economists say determining the rate essentially answers whether America wants to spend the money now to save Florida from disappearing in 200 years or to prevent drought-induced crop failures in Africa in 50 years. But determining the number is fraught with difficulty.

Said Ackerman, "There's no bank offering a 90-year loan which you can commit your grandchildren to paying off."

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