Climate Economists Need to Get Their House in Order

On The Limited Value of the Social Cost of Carbon

In my latest post, co-authored with Patrick Brown, we argued that Adrien Bilal and Diego Känzig’s recent intervention into the social cost of carbon (SCC) literature was bad enough: explicitly activist, self-consciously outlandish, and methodologically nonsensical. What was worse, we wrote, was that many of the experts who have long maintained the validity and usefulness of the SCC were more than happy to throw that framework under the bus in favor of more eye-poppingly alarmist research. The apparent lack of rigor and guardrails within the expert climate research community revealed, once again, how powerful the narrativization of climate science has become.

Some observers took this to mean that Patrick and I were endorsing a scholarly consensus on the SCC. “I thought you guys were defending the mainstream consensus of climate economics,” inquired Heatmap’s Rob Meyer, “which holds that there are technically accurate ways to approach these problems without recourse to pure politics.”

In the broadest sense, I suppose we do defend the mainstream view on the social cost of carbon. We believe that a ton of carbon dioxide emitted into the biosphere creates impacts and harms that are worth mitigating and addressing—hence our careers in climate research and advocacy. But Meyer’s description of “mainstream consensus” provides a good summary of the SCC framework, and why we’ve stopped short of endorsing it, either as an epistemological pursuit or, more importantly, as an input into policymaking.

And this is only the latest controversy over the social cost of carbon which, at the very least, suggests a need for a more honest reckoning over the utility of the metric among climate economists.

The most strident attacks on the SCC, William Nordhaus’s DICE model, and other conventional climate economics frameworks are, to be sure, crazy. They imply that there are no benefits to fossil fuel exploitation to balance against climate risk in a cost-benefit analysis. On the other hand, identifying a precise cost-benefit equilibrium estimate for the social cost of carbon is, fundamentally, impossible. And it’s not just the fat tails of climate risk distribution, the controversies about the discount rate, or the other long-standing hurdles to a more robust SCC consensus. It’s that climate change is a slow-moving and massively complex global threat. We simply have no access to essential information, such as the size of the global economy decades from now and its resilience to climate impacts or even the exact sensitivity of the climate to emissions, that would inform a robust cost-benefit analysis.

So it’s fair to say that climate policy is a matter of weighing costs and benefits of fossil fuels. But that’s about as much as you can say. The questions of how to address climate change, and how to trade off climate action against other societal priorities, are ones for transparent scientific and democratic deliberation, not technocratic authority.

Indeed, what was most interesting about the reaction to our post wasn’t just the relative lack of defense of the new SCC research, but the strength of the consensus against the usefulness of the SCC.

“I think the social cost of carbon (SCC) is a ~useless metric,” tweeted UT Austin engineering professor Arvind Ravikumar. Our former colleague Zeke Hausfather called it “just a thin veneer of objectivity covering what is ultimately a naked value judgment.”

Putting the finest point on it was Columbia’s Noah Kaufman, who recently served on the Biden Administration’s Council of Environmental Quality. “The value of climate damages is not a thing we can estimate,” Kaufman wrote. “There is no consensus. Never will be.”

That, presumably, would be news to EPA’s Interagency Working Group (IWG) on the Social Cost of Carbon, which describes its charge as “developing a consistent set of SC-CO2 estimates to be used in regulatory impact analyses.” Indeed, it is the IWG’s estimates of the SCC that the EPA is currently relying upon to “estimate the global social benefits of CO2 emission reductions expected” in the agency’s proposed regulations on power plant and tailpipe emissions.

The EPA’s draft power plant rule acknowledges “limitations” to the IWG’s consensus, speculating that the estimates they use “likely underestimate the damages from CO2 emissions,” promising to “further improve SC-GHG estimation going forward.” It is surely with these future improvements in mind that economist Gernot Wagner insisted that Bilal and Känzig’s outlier SCC estimate would “change everything.” One gets the distinct sense of an activist academy, deliberately producing “more robust methodologies” (read: indecipherably convoluted models) to cook the books in favor of more stringent regulations.

After all, the EPA’s summary notwithstanding, there’s no reason to presume mainstream SCC estimates are biased asymmetrically downwards. As the economist Matthew Kahn has described it, “In the language of economics, the Social Cost of Carbon is a reduced form object that is constantly changing. It could shrink over time if we use markets, innovation and experimentation to learn how to protect ourselves and our assets from heat, floods and other weather risks.”

One wonders how reliable the economic metric could be for policymaking when estimating it has proven so vexing. And that’s exactly the conclusion many economists and policymakers have come to. “I don’t think it has any influence on the structure or stringency of the regulations,” Columbia’s Kaufman told me. “And it shouldn’t.”

So which is it? Are Bilal, Känzig, and their defenders correct that their outlier results “change everything” and “have salient consequences for decarbonization policy?” Or is the very metric these economists are attempting to influence “useless?”

If the SCC is an important concept for regulatory rulemaking, then climate economists should, at minimum, enforce more rigor in establishing its definition and level. Such enforcement would exclude transparent nonsense while including the ways in which emissions mitigation, societal resilience and adaptation, and the use of more realistic warming scenarios can decrease SCC estimates. If, however, Kaufman and Hausfather are correct, then the SCC merely provides substantively irrelevant superficial scientism into the regulatory process. And if that’s the case, the EPA should probably tell Bilal, Känzig, Wagner, and other economists trying to push the SCC ever upward that they can stop wasting their time.