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What’s the real cost of CO2? ‘The EPA relies on sloppy science in a new CO2 cost estimate’

NOTE: This post was inspired by economist David Friedman, who alerted me to the issue. Also, more Covid coverage is coming soon!

The EPA has proposed a massive increase in the cost estimate of CO2

The EPA is considering dramatically increasing the estimated social harm from CO2 greenhouse gas emissions from $51/ton to $190/ton.

That would lead to stricter regulation across the board, because the higher estimate would lead cost-benefit analyses to come out in favor of all kinds of new regulations.

Some will think, “good — I want stricter regulation!” but in reality, it’s harmful to set a cost of carbon that’s either too high, or too low.

Setting a cost estimate that’s too low would lead to higher economic growth, but at the cost of too much warming.

Setting an estimate that’s too high would lead to less warming, but it would excessively deprive people of the things they want in life.

So ideally, regulators would be serious about this, and find something resembling the true cost.

Is the increase politically-motivated?

Here’s the history of the EPA’s estimate: The Obama administration set it at $51/ton.

Then the EPA under the Trump administration lowered that to $1/ton.

Now the EPA under the Biden administration has reverted to $51/ton, and is proposing raising it to $190/ton.

Those are some dramatic ups-and-downs! That’s what one would expect of politics — not of technocratic, science-based adjustments.

What happens when one really digs into the numbers?

First, what does the EPA base their proposed change on?

In a supplemental document attached to a major regulatory filing, the EPA proposes dramatically higher costs of carbon, ranging from $120/ton to $340/ton, with a midpoint of $190/ton.

The EPA’s $190/ton midpoint is right in line with a finding of $185/ton in a forthcoming Nature study by Rennert et al., which attempts to estimate the cost of CO2 all the way out to the year 2300 — nearly 300 years in the future. Most of the estimated costs come after the year 2100.

The EPA’s proposal to change their estimated cost of carbon leans heavily on the Rennert study, citing it 17 times, and it also cites a similar (but non-peer-reviewed) Brookings report by Rennert an additional 11 times.

Rennert calls the EPA’s proposal to adopt his paper’s estimate “an important milestone.”

So, does his study make good arguments?

David Friedman’s critique

Economist David Friedman, author of the classic books Machinery of Freedom and Hidden Order has done an analysis on Rennert’s study.

Friedman first summarizes where Rennert gets the $185/ton costs from warming.

$90 of is due to increased mortality from higher temperatures, $84 to reduced agricultural output, $2 to sea level rise and $9 to energy costs

Friedman then argues:

the numbers for mortality and reduced agricultural output are substantial exaggerations due to multiple unrealistic assumptions …

What are the unrealistic assumptions?

First, the paper ignores how, as the world gets richer, people can better protect themselves from extreme weather.

That’s a critical issue, Friedman writes, since global income has been growing dramatically:

The economic model in Rennert implies per capita [income] roughly tripling by 2100, increasing about eleven-fold by 2300 … Rennert ignores the effect of that increase on temperature-related mortality

Secondly, the Rennert paper also failed to consider that, according to the UN’s IPCC:

Increases in temperature due to [human-caused] climate change … are greater in winter than in summer.

I didn’t know that, but it is true. A major reason winters are warming faster than summers seems to be that when there’s some warming, there’s less snow/ice to reflect heat back up into the atmosphere — and so the reduction in snow/ice then creates an additional warming effect that doesn’t apply to summers.

Friedman notes that a more recent paper (Carleton et al. 2022) did take those factors into account, and it found a cost of $17.1/ton “for a moderate emissions scenario (RCP 4.5)” which is the closest scenario to what Rennert’s paper is about.

Friedman then further notes two other factors that Rennert fails to address: technological progress, and migration. It’s hard to pin down their effect, but intuitively, the study’s nearly three-century time period gives people a lot of time to mitigate costs by innovating and migrating closer to the poles.