Determining the Proper Scope of Climate Change Benefits

Earth
by Ted Gayer & Kip Viscusi
June 04, 2014

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Abstract

Although benefit assessment principles are well established for defined populations, there has been very little attention to how one defines the scope of the pertinent population for the assessment. Whose social welfare matters and whose benefits should be included in the assessment? Should there be any linkage between the benefits and the political jurisdiction whose citizens are paying for the policy? For national regulatory policies, the norm has been to assess benefits to U.S. citizens. This article reviews the norms for the scope of benefit assessment base on executive orders and the laws governing risk and environmental regulations. Recent assessments of climate change policies have shifted to a worldwide benefits approach, leading to a substantial increase in the estimated benefits. In 2010 the Obama Administration’s Interagency Working Group on Social Cost of Carbon developed the guidelines that provide the basis for the assessment of the benefits associated with reductions in carbon dioxide emissions. Based on the estimates in one integrated assessment model that permitted a U.S. analysis, the estimate of the average U.S. benefit is about 7 to 10 percent of the global benefit. Alternatively, if one does not rely on a direct benefit estimate but assumes that the domestic share of the benefits is proportional to the current U.S. share of the global GDP, then the domestic benefit is 23 percent of the global benefit. This article reviews specific examples of such practices for energy efficiency regulations and the broader benefit assessment guidelines that have been developed for greenhouse gas initiatives, including the CAFE rule for passenger cars and light trucks, the carbon pollution rule for existing power plants, the clothes dryer rule, and the phase out of general service incandescent lamps.

Conclusion and Implications

Examination of the justification of benefits assessments for GHG emission reductions suggests that government officials have gone outside the typical practice for defining the scope of benefits assessment. The justifications offered by the Interagency Working Group on Social Cost of Carbon offer weak justification for this approach. Our review suggests more convincing justification in which explicit reciprocity would justify giving economic standing to citizens of other countries and demonstrable feelings of altruism would justify partial economic standing to citizens of other countries.

It is important to note that granting the GHG benefits to non-citizens equally to the benefits to citizens represents a dramatic shift in policy, and if applied broadly to all policies, would substantially shift the allocation of societal resources. The global perspective would likely shift immigration policy to one of entirely open borders, as the benefits to granting citizenship to poor immigrants from around the world would dominate any costs to current U.S. citizens. It would suggest a shift away from transfers to low-income U.S. citizens towards transfers to much lower-income non-U.S. citizens, elevating policy challenges such as eradicating famine and disease in Africa to the most pressing concerns for U.S. policymakers, trumping most domestic efforts in terms of their impact on social welfare. And a shift in policy towards fully counting the costs and benefits towards citizens of all other countries would suggest a drastic change in defense policy. A shift in policies to foster such efforts, while in many cases worthwhile, would not be consistent with the preferences of the U.S. citizens who are bearing the cost of such programs and whose political support is required to maintain such efforts.

Rather than adopt a global or narrow domestic perspective on benefits, there should be increased emphasis in trying to distinguish what the pertinent value of the global impacts of SCC reductions are from a domestic perspective. This effort will also entail a related task of obtaining a more meaningful estimate of the domestic share of the SCC benefits over the pertinent time frame for policy assessment. Addressing these benefit issues is not infeasible, but requires a stronger empirical foundation and a stronger theoretical basis than assuming that global benefits are tantamount to domestic benefits.

Should there be a shift to a global benefit-cost perspective despite the many attendant problems, there would need to be a much more rigorous and balanced evaluative structure. If global benefits are counted, one should also count global costs. At present, the GHG policy assessment experience is one in which agencies apparently are permitted to pick and choose what perspective to take and which benefits and costs to count. As a result, there will be an incentive to engage in cherry picking whereby agencies will count global effects that are favorable to the agency’s agenda and ignore global impacts that put the agency’s concerns in an unfavorable light.

Explicit, well-defined guidance is needed to replace the recent movement to a rudderless policy assessment approach. This guidance also must specify how the distributional weights applied to global effects will be determined rather than assuming a default value of a weight equal to effects for the U.S. citizenry. If global consequences are permitted to govern the terms of the benefit-cost analysis, then the selection of policy initiatives likewise should be governed by global considerations, subject to compliance with U.S. law. Whether it makes sense to routinely expand the scope of the assessed policy impacts beyond the citizenry of the nation bearing the costs is highly problematic. What is clear at this juncture is that the recent expansion of GHG benefit assessments to include global impacts merits much more scrutiny and justification than it has received to date. There should be a thorough evaluation of the broader implications of this fundamental restructuring of policy assessment practices before jettisoning the current emphasis on the valuation of domestic benefits and costs. 

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