Obama’s Climate Action Plan: How it miscalculates the social cost of carbon.
The Bad Math That Dooms Obama’s New Climate Plan
Eric Posner weighs in.
July 9 2013 5:03 PM

Wrong Number

Obama’s new climate plan is based on a dubious calculation and falls woefully short.

Smoke is released into the sky at the ConocoPhillips oil refinery in San Pedro, California March 24, 2012.
A ConocoPhillips oil refinery in San Pedro, Calif.

Photo by Bret Hartman/Reuters

The main contribution of President Obama’s Climate Action Plan, as Raymond Pierrehumbert explains, is its charge to the Environmental Protection Agency to regulate the carbon emissions of existing power plants. This could reduce U.S. carbon emissions significantly—but if the EPA uses the dubious set of calculations that the government has developed, its power plant regulations might be struck down in court. The story behind those calculations reveals the immense challenges the government faces as it finally addresses global warming.

Although many gases contribute to climate change, the major culprit is carbon, which diffuses into the atmosphere when fossil fuels are burned. Carbon is emitted in vast quantities and takes a very long time to dissipate. Thus, any effective regulation must take aim first and foremost at carbon.

The government cannot simply forbid emission of carbon, though—that would destroy the economy. The question is how to slow it down. Any economist would tell you that there is a simple answer. Just figure out the cost of the harm of, say, emitting a ton of carbon dioxide into the atmosphere (this is called the “social cost of carbon,” or SCC), and then impose a carbon tax equal to that amount. This is called a Pigouvian tax, after the economist Arthur Cecil Pigou.


Easier said than done! The U.S. government has long shied away from Pigouvian taxes, preferring to embed the underlying calculations in more opaque regulations. And this is what it has done so far for climate. Hardly anyone knows it, but the National Highway Traffic Safety Administration already uses the social cost of carbon to calculate fuel economy standards, which increase the cost of cars. The higher price means that people buy fewer cars, and carbon emissions rise less quickly than they would otherwise. The SCC has also been used for the regulation of new power plants and of appliances such as air conditioners and gas ranges.

So what is the SCC? The government says it is $38 per ton of carbon dioxide for the year 2015.

To understand what this means, imagine that I’m building a power plant and could install a machine that would reduce carbon emissions by 1 million tons. The EPA would force me to install the machine if it costs less than $38 million and not if it costs more. If the government used this SCC to charge drivers a Pigouvian tax on gasoline, it would translate to about 40 cents per gallon.

Where does the SCC come from? In 2010, the White House convened a group of officials from across the government to calculate this number. The group used three computer models that estimate the economic impacts of climate change, the most famous of which was created by Yale economist William Nordhaus. In May, the group updated its analysis, yielding the $38 figure above. (There are other figures based on other assumptions, but $38 will most likely be the one the EPA and other agencies use.)

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