Clean Power Plan: Revisiting EPA’s Bogus Climate Benefit Estimates

by Marlo Lewis on April 22, 2015

in Blog

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EPA claims the climate benefits of the Clean Power Plan (CPP) could exceed compliance costs by 4 to 1 or more. Specifically, EPA’s Regulatory Impact Analysis (RIA) projects incremental compliance costs of $7.3 billion to $8.8 billion in 2030 (RIA ES-7) and a mid-range climate benefit estimate of $31 billion in the same year (RIA ES-23).

In a previous post, I raised the simple question of how the CPP could possibly deliver multi-billion dollar climate benefits in 2030 when, according to the agency’s own climate model, the CPP would avert less than 0.02ºC of warming by 2100. Such a vanishingly small temperature change would make no practical difference to farmers, coastal communities, or polar bears in 2100. The climate benefits in 2030 would be even more miniscule.

In testimony before the House Oversight Committee, economist Anne Smith of NERA Economic Consulting demolishes the RIA’s climate and air quality benefit estimates. The hearing took place almost two months ago but I somehow missed Smith’s testimony until yesterday. Here’s the main takeaway:

When correctly presented, USEPA’s estimates indicate the present value of CPP [compliance] spending through 2030 will exceed $180 billion while climate benefits are not expected to exceed that cost until about 100 to 125 years after the spending has been sunk.

Indeed, Smith’s unpacking of EPA’s numbers reveals that for the United States, CPP costs will exceed climate benefits all the way out to the year 2300.

EPA calculates climate benefits using the administration’s social cost of carbon (SCC) estimates. The SCC is the projected damage from an incremental ton of carbon dioxide (CO2) emissions based on speculative modeling of how CO2 emissions will affect global climate combined with speculative modeling of how changes in climate will affect global GDP over an immense time span — from 2010 to 2300.

This blog has long argued that SCC estimation is computer-aided sophistry. I suspect Smith would agree, but her critique is devastating precisely because her quarrel is just with EPA’s misleading presentation of its “own cost and climate benefits data.” In a nutshell:

  1. EPA compares costs that will materialize in the near future to benefits that even in principle won’t materialize until many decades and even centuries later, but presents both as experienced within the same timeframe.
  2. EPA conveniently ignores the fine print in the administration’s 2010 SCC technical support document, according to which the SCC for the U.S. economy is only 7%-23% as large as the global SCC (because our adaptive capabilities are much greater than those of developing-country economies).
  3. EPA’s spreadsheets reveal that the RIA “annualizes” utility compliance costs, which has the effect of pushing out into the future costs actually incurred during 2020-2030. For example, whereas projected CPP compliance spending in 2020 is reported as $7.5 billion in the RIA, EPA’s actual estimate is $21 billion.
  4. In short, the RIA dramatically inflates the benefits EPA projects for 2020-2030 while significantly understating the costs.

Here are the bottom line results of Smith’s analysis in her words:

  • EPA’s [actual] estimates of the costs of the CPP vastly exceed its estimates of the climate benefits in the specific years 2020, 2025 and 2030. For example:
    • Benefits estimated to occur in 2020 will be less than $0.1 billion globally, compared to U.S. CPP compliance spending during 2020 of $21 billion.
    • Estimated benefits in 2030 will be in the range of $1.0 to 1.4 billion globally, while U.S. compliance spending in that year is projected to be $11 billion.
  • By 2030, the U.S. will have spent approximately $182 billion to comply with the CPP, yet the present value of climate benefits that will have accumulated by that time (globally) are estimated to be only $3.5 to 4.6 billion.
  • Even by 2050, the estimated global benefits from the spending through 2030 are projected to be less than $36 billion, at a point when all $182 billion of costs has been expended.
  • Because there are such small expected climate benefits until long after the compliance spending is sunk, the present value of accumulated net benefits does not become positive until sometime between 2131 and 2155. This implies a payback period of 100 to 125 years on a societal investment about $200 billion dollars. That is, the global societal return on the CPP investment will still be negative more than a century after the regulation has been completely implemented.
  • The ultimate present value of global benefits eventually accumulates to $214 billion, which is only $32 billion higher than the present value of costs ($182 billion). This implies an internal rate of return of less than one-tenth of one percent per year even 250 years after the $182 billion investment in the CPP has been made.
  • [Because the domestic benefit of reducing U.S. emissions] may be between 7% and 23% of the SCC values that USEPA has used. . . . .the climate benefits that will be gained by U.S. populations (now and in the future) are so much smaller that even the highest set of suggested Federal SCC values would not result in net domestic benefits greater than zero for the U.S., even by the year 2300.
  • That is, using the worst case (95th percentile) SCC and assuming at the high end that domestic damages are 23% of those estimated global damages, the net benefits of the CPP will be negative even through 2300. The RIA should present these facts to its readers but does not.


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