[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
EXAMINING THE OBAMA ADMINISTRATION'S SOCIAL COST OF CARBON ESTIMATES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON ENERGY POLICY,
HEALTH CARE AND ENTITLEMENTS
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
__________
JULY 18, 2013
__________
Serial No. 113-55
__________
Printed for the use of the Committee on Oversight and Government Reform
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Available via the World Wide Web: http://www.fdsys.gov
http://www.house.gov/reform
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
DARRELL E. ISSA, California, Chairman
JOHN L. MICA, Florida ELIJAH E. CUMMINGS, Maryland,
MICHAEL R. TURNER, Ohio Ranking Minority Member
JOHN J. DUNCAN, JR., Tennessee CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina ELEANOR HOLMES NORTON, District of
JIM JORDAN, Ohio Columbia
JASON CHAFFETZ, Utah JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan JIM COOPER, Tennessee
PAUL A. GOSAR, Arizona GERALD E. CONNOLLY, Virginia
PATRICK MEEHAN, Pennsylvania JACKIE SPEIER, California
SCOTT DesJARLAIS, Tennessee MATTHEW A. CARTWRIGHT,
TREY GOWDY, South Carolina Pennsylvania
BLAKE FARENTHOLD, Texas MARK POCAN, Wisconsin
DOC HASTINGS, Washington TAMMY DUCKWORTH, Illinois
CYNTHIA M. LUMMIS, Wyoming ROBIN L. KELLY, Illinois
ROB WOODALL, Georgia DANNY K. DAVIS, Illinois
THOMAS MASSIE, Kentucky PETER WELCH, Vermont
DOUG COLLINS, Georgia TONY CARDENAS, California
MARK MEADOWS, North Carolina STEVEN A. HORSFORD, Nevada
KERRY L. BENTIVOLIO, Michigan MICHELLE LUJAN GRISHAM, New Mexico
RON DeSANTIS, Florida
Lawrence J. Brady, Staff Director
John D. Cuaderes, Deputy Staff Director
Stephen Castor, General Counsel
Linda A. Good, Chief Clerk
David Rapallo, Minority Staff Director
Subcommittee on Energy Policy, Health Care and Entitlements
JAMES LANKFORD, Oklahoma, Chairman
PATRICK T. McHENRY, North Carolina JACKIE SPEIER, California, Ranking
PAUL GOSAR, Arizona Minority Member
JIM JORDAN, Ohio ELEANOR HOLMES NORTON, District of
JASON CHAFFETZ, Utah Columbia
TIM WALBERG, Michigan JIM COOPER, Tennessee
PATRICK MEEHAN, Pennsylvania MATTHEW CARTWRIGHT, Pennsylvania
SCOTT DesJARLAIS, Tennessee TAMMY DUCKWORTH, Illinois
BLAKE FARENTHOLD, Texas DANNY K. DAVIS, Illinois
DOC HASTINGS, Washington TONY CARDENAS, California
ROB WOODALL, Georgia STEVEN A. HORSFORD, Nevada
THOMAS MASSIE, Kentucky MICHELLE LUJAN GRISHAM, New Mexico
C O N T E N T S
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Page
Hearing held on July 18, 2013.................................... 1
WITNESSES
The Honorable Howard Shelanski, Administrator, Office of
Information and Regulatory Affairs, Office of Management and
Budget
Oral Statement............................................... 4
Written Statement............................................ 7
APPENDIX
The Honorable Jackie Speier, a Member of Congress from the State
of California, Opening Statement............................... 32
EXAMINING THE OBAMA ADMINISTRATION'S SOCIAL COST OF CARBON ESTIMATES
----------
Thursday, July 18, 2013
House of Representatives
Subcommittee on Energy Policy, Health Care &
Entitlements,
Committee on Oversight and Government Reform,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:43 p.m., in
Room 2247, Rayburn House Office Building, Hon. James Lankford
[chairman of the subcommittee] presiding.
Present: Representatives Lankford and Speier.
Staff Present: Joseph A. Brazauskas, Majority Counsel;
Sharon Casey, Majority Senior Assistant Clerk; Ryan M.
Hambleton, Majority Professional Staff Member; Scott Schmidt,
Majority Deputy Director of Digital Strategy; Jaron Bourke,
Minority Director of Administration; Beverly Britton Fraser,
Minority Counsel; Devon Hill, Minority Research Assistant; and
Safiya Simmons, Minority Press Secretary.
Mr. Lankford. The committee will come to order.
I would like to begin this hearing by stating the Oversight
Committee mission statement. We exist to secure two fundamental
principles. First, Americans have the right to know that the
money Washington takes from them is well spent and, second,
Americans deserve an efficient, effective Government that works
for them.
Our duty on the Oversight and Government Reform Committee
is to protect these rights. Our solemn responsibility is to
hold Government accountable to taxpayers, because taxpayers do
have a right to know what they get from their Government. We
will work tirelessly in partnership with citizen watchdogs to
deliver the facts to the American people and bring genuine
reform to the Federal bureaucracy. This is the mission of the
Oversight and Government Reform Committee.
Again, I apologize for starting a little bit late. We had
votes on the Floor, then came over as quick as we could. There
will be other members that will join us in the moments that are
ahead.
A few years ago, a small group of Government employees from
various agencies gathered for a series of meetings on the
social cost of carbon. These agency representatives determined
that earlier estimates on the social cost of carbon were
incorrect. The previous estimate, done three years before, was
wrong, apparently by 50 percent. In 2010, the Government
believed that carbon emissions cost the Nation $22 per ton. Now
the interagency working group believes the cost is $33 per ton.
It takes many mathematical calculations to arrive at a
social cost of carbon estimate, and we are not here today to
make sure that the interagency working group knows how to do
its math. Rather, we are here today to determine how they
arrived at the updated social cost of carbon, if the process
was transparent, and how this updated cost will be used.
When the rules and the cost estimates change, typically
agencies release data for review and comment. Federal agencies
do not and cannot know everything. This review process provides
an essential opportunity for them to gain synergistic wisdom of
the Nation, especially something that will have great effect on
the economy.
The social cost of carbon will affect the cost of
electricity, every home and business, the cost of our cars and
trucks, the cost to heat our homes, the cost of food, the cost
of every product that is manufactured and transported in
America. This is no simple rule change with little effect; this
has especially serious consequences for everyone on a fixed
income and anyone with limited resources.
While I assume some will try to deflect my questions of why
and how this cost has changed for every American with rhetoric
that Republicans just want dirty air and dirty water, and we
want children to have breathing problems and global
catastrophes, the facts could not be further from the truth. I
want a healthy environment for everyone. But I also think
everyone must follow the law.
Today is a conversation with the Administration's lead
regulator on the rulemaking process and authority possessed by
this Administration to change the cost of every product in
America. I do not think it is unreasonable to ask how this rule
changed, why it changed, what is the science behind the change,
who made the rule, and why it came out right now.
I hope that today's hearing, and any that may follow, will
bring into light how this Administration sets the social cost
of carbon so that the American people and this Government can
be partners in creating a Nation that can power itself
effectively, efficiently in the future, and on our own
environment.
With that, I yield to my ranking member, Ms. Speier.
Ms. Speier. Mr. Chairman, thank you for holding today's
hearing, and thank you to Mr. Shelanski for being here to
respond to questions that we may have.
Americans are feeling the impacts of climate disruption,
from destructive and deadly storms like Hurricane Sandy,
floods, droughts, and some of the largest wildfires in history.
It is almost biblical. Cleaning up after climate-driven
disasters cost nearly $100 billion last year, one of our
largest non-defense, discretionary budget items. That works out
to be an average of over $1100 per taxpayer. It is clear we not
only have a moral obligation to protect future generations from
climate change; we must do it for sound economic reasons.
Despite what some may say, there is sound science behind
the impact of carbon in climate change. According to the
National Academy of Sciences in 2011, climate change is
occurring, is caused largely by human activities, and poses
significant risk for a broad range of human and natural
systems. The preponderance of the evidence points to human
activities as the most likely cause for most of the global
warming that has occurred over the past 50 years.
This year, the non-partisan experts at GAO added the issue
of climate change to their biannual high risk report. Now, this
is truly significant. The GAO is independent, it is
nonpartisan, and it placed climate change in its high risk
category for us to review. The high risk report details the
most pressing fiscal challenges facing the Federal Government.
GAO found that climate change poses particularly
significant financial risks to the Nation's economy, warned
that our Government ``is not well positioned to address this
fiscal exposure,'' and recommended a ``Government-wide
strategic approach with strong leadership and the authority to
manage climate change risks.''
Laura Tyson, of the Haas School of Business at UC Berkeley
and a former chairwoman of the Council of Economic Advisors
under President Clinton, wrote in The New York Times in May,
``There is much debate about what the proper social costs of
carbon might be, but there is no debate that carbon emissions
are seriously underpriced.''
Today's hearing examines part of the Obama Administration's
effort to listen to the best available science to create a
monetary estimate of the cost of CO2 emissions and incorporate
that scientific knowledge into a Government-wide approach to
manage climate change risks, as the GAO recommended we do.
Prior to 2008, reductions in CO2 emissions were not valued
at all in the federal cost benefit analysis. The process of
establishing a social cost for carbon was actually begun in the
Bush Administration, after the 9th Circuit Court, in a
challenge to a regulation, chastised the National Highway
Traffic Safety Administration, in 2007, for assigning a social
cost of carbon of zero dollars in setting fuel economy
standards. The court noted that the NHTSA's failure to account
for carbon contrasted starkly with its willingness to quantify
equally indeterminate costs and benefits like traffic noise and
energy security. The court declared the rulemaking arbitrary
and capricious.
In 2010, an interagency panel consisting of prominent
scientists and economists from the Department of Agriculture,
Commerce, Defense, Environmental Protection Agency, among
others, developed the first estimate of the social cost of
carbon. In May 2013 that figure was updated and, not
surprisingly, the cost estimate rose. The interagency working
group explained the reason for the increase, that is, what the
best available science now tells us.
In listening to the best available science, the interagency
working group was simply complying with the law, which states,
quoting from the Executive Order 12866 in 1993, ``Federal
agencies shall assess both the costs and benefits of the
intended regulation and, recognizing that some costs and
benefits are difficult to quantify, propose or adopt a
regulation only upon a reasoned determination that the benefits
of the intended regulation justify its costs and base its
decision on the best reasonably obtainable science, technology,
economics, and other information concerning the need for and
consequences of the intended regulation.''
There are those who criticize the way the estimate was
calculated. Of course, there is room for disagreement with any
process, but for those that do, I challenge them to bring their
own suggestions on how to improve the process. What I would not
agree with are those critics who advocate that we make no
estimate. That would be a colossal mistake for any of us in a
position of responsibility to make.
If we fail to adequately prepare for climate change,
billions of dollars in Federal, State, and local investments in
public infrastructure will be threatened. I am proud that
California has been a leader in reducing CO2 emissions. In
fact, while in the State senate, I voted for AB-32, the Global
Warming Solutions Act of 2006, which set the 2020 greenhouse
gas emission reduction goal. That bill was signed into law by
Republican Governor Arnold Schwarzenegger. One State cannot do
it alone.
I have already exhausted my time, so I will complete my
testimony and extend my remarks for the record.
Mr. Lankford. That would be just fine. Any other members
can also have seven days to submit opening statements for the
record.
We have one panel and one individual on the panel today.
The Honorable Howard Shelanski is the Administrator of the
Office of Information Regulatory Affairs, the Office of
Management and Budget. Been there a very long time, eight days
now, I believe, is that correct? So glad that you are here. We
are going to get you started in a good conversation here in
this way.
Pursuant to committee rules, all witnesses are sworn in
before they testify, so if you would please stand and raise
your right hand.
[Witness responds in the affirmative.]
Mr. Lankford. Thank you. You may be seated.
Let the record reflect that the witness has testified in
the affirmative.
The way this typically works, and you have been around
through confirmation hearings and everything else at this
point, but there will be a clock in front of you. Your written
testimony that you have already given us, thank you for that,
will go into the record, then your oral testimony will
supplement that as well.
You have five minutes, but we will have a conversation here
in the time to come. You don't have to worry that much about
the clock at this point. If you have additional comments, we
allow you to be able to do that. So thank you, and begin now.
STATEMENT OF THE HONORABLE HOWARD SHELANSKI
Mr. Shelanski. Thank you very much. Chairman Lankford,
Ranking Member Speier, and members of the subcommittee, thank
you for the opportunity to appear before you today. I was
recently confirmed as the Administrator of the Office of
Information and Regulatory Affairs, known as OIRA, at the
Office of Management and Budget, and I am honored to be serving
in this role. I look forward to speaking with you today about
the social cost of carbon.
When I refer to the ``social cost of carbon,'' often called
SCC, I mean the values used to calculate the monetary costs and
benefits of incremental changes in the volume of carbon
emissions in a given year. The social cost of carbon includes,
for example, changes in net agricultural productivity and human
health, property damage from increased flood risk, energy
system costs, and the value of ecosystem services lost because
of climate change.
Executive Orders 12866 and 13563 direct agencies to use the
best available scientific, technical, economic, and other
information to quantify the costs and benefits of rules.
Rigorous evaluation of costs and benefits has been a core tenet
of the rulemaking process for decades through Republican and
Democratic administrations. This fundamental principle of using
the best available information underpins the Administration's
efforts to develop and update its estimates of the social cost
of carbon.
In 2009, the Administration launched a process to determine
how best to quantify the net benefits from reducing carbon
dioxide emissions. The purpose of this process was to ensure
that agencies were using the best available information and to
provide consistency in economic analysis associated with the
rulemaking process across agencies. During the previous
Administration and at the beginning of this Administration,
agencies used a range of social cost of carbon values when
evaluating the costs and benefits of rules.
To determine how best to quantify the net benefits from
reducing carbon dioxide emissions, the Administration first
conducted a preliminary assessment of existing literature in
order to set interim social cost of carbon values while it
worked on a more comprehensive analysis. Informed by public
comments received on rules in which agencies used the interim
values, the Administration developed and released improved SCC
estimates in February of 2010 in conjunction with a Department
of Energy appliance efficiency-standard rule for small electric
motors.
Since the release of the SCC values in February 2010,
numerous rulemakings have used those values for the social cost
of carbon. Agencies using the SCC values in rulemakings
received extensive public comments, many of which focused on
the discount rates chosen and the three peer-reviewed academic
models used to develop the SCC estimates.
As explained in the February 2010 Technical Support
Document, the SCC methodology rests on three integrated climate
change assessment models: the FUND, DICE, and PAGE models.
These models combine climate processes, economic growth, and
interactions between the climate and the global economy into a
single modeling framework. These are by far the most widely
cited models that link physical impacts to economic damages for
the purposes of estimating the SCC. The SCC estimates rely on a
common set of inputs to each model and equally weigh the
outputs of the three models, as described in detail in the 2010
technical document.
Recognizing that the underlying climate change impact
models would evolve and improve over time as scientific and
economic understanding increased, the 2010 SCC documentation
committed to regular updates, and set a goal of updating the
SCC estimates within two years or after updated versions of the
underlying models became available. Since the February 2010
estimates were released, the three models that underpin the
interagency social cost of carbon estimates have been all
significantly updated and subsequently used in peer-reviewed
studies.
Many public comments urged the agencies to update the
estimates based on the latest models. It is important to note
that the only changes made in May 2013 to the SCC estimates
reflect the refinements made to the underlying models by the
people who develop and maintain those models. In other words,
all of the changes to the social cost of carbon value were the
result of updates to the FUND, DICE, and PAGE models that were
made by the model developers themselves. The Federal Government
inputs, such as the discount rate, climate sensitivity
distribution, and socioeconomic trajectories like population
growth used to develop the 2010 estimates remain unchanged.
As explained in the 2013 Technical Support Document, the
updates to FUND, DICE, and PAGE reflect, among other things,
improvements in the way economic damages from climate change
are modeled. The net result of these updates to the three peer-
reviewed models was to increase the SCC estimates. These net
changes reflect many specific changes within the three models,
some of which increased the estimates and some of which
decreased them.
Entities outside the Federal Government are using estimates
that are similar to the updated SCC values. For example, these
updated estimates are consistent with the values used by other
governments, such as the United Kingdom and Germany. Major
corporations, such as ExxonMobil and Shell, have also used
similar estimates to evaluate capital investments.
The Administration will continue to investigate ways to
improve the social cost of carbon estimates. The current
estimates will be used in the economic analysis of rulemakings,
and we fully expect comments on the SCC values in the context
of future rules. We will consider those comments to ensure that
we use the best available information to evaluate the costs and
benefits of our regulation.
Thank you for your time. I would be happy to answer any
questions.
[Prepared statement of Mr. Shelanski follows:]
[GRAPHIC] [TIFF OMITTED] T2716.001
[GRAPHIC] [TIFF OMITTED] T2716.002
[GRAPHIC] [TIFF OMITTED] T2716.003
Mr. Lankford. We are not going to run the clock, we are
going to have conversations. Is that all right with you?
Let me just talk through a couple things. Again, as I
mentioned to you before we were talking before the hearing
began, several of these things obviously, with your eight days
of long experience there in this position, you are not going to
know. Cass Sunstein was in front of this committee as well
before, so any problems that you have, blame completely on Cass
as the previous OIRA director.
But I want to talk through a couple process issues to say
how do we determine this and where do we go from here.
Who was the chair of the interagency working group?
Mr. Shelanski. The interagency working group was convened
by the Office of Management and Budget and the Council of
Economic Advisors, with the participation of a couple of
Executive Branch agencies and a number of Executive Office of
the President Policy Council.
Mr. Lankford. Right. I have a list here: the Environmental
Protection Agency, Department of Agriculture, Department of
Commerce, Department of Energy, Department of Transportation,
Department of Treasury, White House Council of Economic
Advisors, White House Council on Environmental Quality, White
House National Economic Council, White House Office of Energy
and Climate Change, White House Office of Management and
Budget, and the White House of Science and Technology Policy.
Does that sound familiar?
Mr. Shelanski. That was the list for 2010. One of the
offices was no longer in being by 2013, so the list is almost
exactly the same for 2013.
Mr. Lankford. Okay, so which one do I need to take off
there?
Mr. Shelanski. Office of Energy and Climate Change ceased
to be a freestanding office and was folded into the Domestic
Policy Council by the time of the 2013 updates.
Mr. Lankford. So were they present in this meeting or were
they just represented by the Council of Environmental Quality?
Mr. Shelanski. I would have to go back and check whether
they had their own representative.
Mr. Lankford. Are there minutes from the meetings? Are
there details about the nature of their conversation? Did they
take a vote on this process? Any of that that we can get a
chance to gather?
Mr. Shelanski. My understanding was that this was a
consultative sort of integrated process of ongoing discussions
that the various offices had. What documentation there might be
of those discussions and meetings is something I would have to
go back to check.
Mr. Lankford. Okay. We would like to get some documentation
just to see the path, the reason being is obviously this shows
up in a microwave oven rule and appears. It doesn't appear that
it had additional comment this time. As you mentioned before,
this is an update from the 2010, but it is a 50 percent
increase, if I am counting that right, just on the 3 percent
discount rate. If you are in the other rates, it is much, much
higher.
So it is a fairly significant increase from the 2010, which
raises some red flags, the first of which to say if the model
is a trustworthy model and in three years it is proved to be
wrong by 50 percent, I am not sure we would allow that with
CBO, to continue to keep score if we find out three years later
their estimates were off by 50 percent. Does that make sense?
Mr. Shelanski. Well, let me address that, because I
certainly share your concern that one needs to make sure that
one is dealing with models that are reliable. These models, at
the time that they were identified and used in 2010, it was
well understood that these were the best models available, well
peer-reviewed, but that they were also models under development
and that they would change. So these models are maintained by
teams of scientists and economists, independently of the
Government.
And the choice in 2010 was really whether not to have a
social cost of carbon estimate, not to have the best available
science and economics factor into the calculation of some
values to attach to CO2 emissions, or to deal with what was
best available with the knowledge that as those integrated
assessment models were fairly new, were beginning to be
developed, that they would change and improve.
Mr. Lankford. How were the models selected in 2010? Because
you talk about best available. Best available chosen by who, I
guess?
Mr. Shelanski. Well, the interagency working group looked
to see what models were available, and it is important to
recognize that what these integrated assessment models do is
something that is extremely difficult. There are models that
talk about the effects of emissions on climate change and there
are models that talk about economic damages under certain
assumptions. These integrated models brought together the
climate effects and economic effects to turn them into a
damages number.
So at the time that the interagency working group convened,
virtually all of the literature that was trying to come up with
social cost of carbon estimates or that was trying to come up
with integrated measures of what damages might be from CO2
emissions were using these three models; they were the most
used and most peer-reviewed.
Mr. Lankford. Was there a conversation about additional
models that may be needed for the 2013? Obviously there was
this huge shift between 2010 to 2013. Was there a conversation
among the interagency working group to say maybe this is not as
reliable as we had hoped, so let's go find some other models
that are out there?
Mr. Shelanski. I do know that the interagency working group
is always assessing the availability of other models and
whether or not there are other models that are truly integrated
assessment models that have reached the level of scientific
verification and quality through the peer review process that
the PAGE, DICE, and FUND models have reached. What specific
models may have been discussed or when is not something I am
aware of at this point.
Mr. Lankford. Right. Obviously, you are new in that. So
what I would like to do is be able to follow up and try to get
some of the notes of what are the models that they looked at,
obviously who was there in the decision-making process that
they made, any notes that they had during that process of
making those decisions, because those will be important for us
to see. The cost just shifted for quite a few things in America
based on the new microwave oven rule.
Now, if we can just step back and say with certainty this
is really reliable, this is what the cost should be, that is
different. But I think this is an opportunity for Americans to
be able to look in, as well, and say before my electricity
rates go up, before the cost of every vehicle goes up, before
my cost of heating oil goes up, and before the cost of all
transportation for all my food goes up, I would like to know
where this came from and why this actually existed.
So for us it would be very helpful to be able to bring to
light who was in part of that process, what was their
conversation. That builds trust when you see how did they
debate this, what were the decisions that were made, what were
the options they looked at, and allow us and outside groups to
be able to look at it and say, yes, I completely agree or no, I
don't agree.
The difficulty is there didn't seem to be an opportunity to
speak into this before it appeared. Do you know if a waiver was
requester to not put this in the Federal Register on this
particular rule ahead of time?
Mr. Shelanski. Well, thank you, Chairman Lankford. That is
a very important set of questions. Let me start by saying that
the social cost of carbon is not a rule. It is a not a
rulemaking.
Mr. Lankford. I understand, but it will affect everything
that I purchase in the days ahead.
Mr. Shelanski. Well, it may or may not. The social cost of
carbon will be an input into rulemaking processes.
Mr. Lankford. Correct.
Mr. Shelanski. And those rulemaking processes, any
rulemaking in which the social cost of carbon is used as part
of the cost-benefit analysis, will be subject to notice and
comment, in many cases to review by OIRA, to ensure that that
process is properly undertaken, and there will be an open
opportunity for people to comment on all aspects of that rule.
Mr. Lankford. Right.
Mr. Shelanski. Including the social cost of carbon.
Mr. Lankford. But the foundational part of it, once it is
settled, this is the foundation, now we are arguing about did
it reach the $100 million threshold to make this a major role,
is this significant, is the benefit outweighed by the cost.
Whether you are saying that to a power generation company or
you are dealing with CAFE standards in the future for a vehicle
or you are dealing with transporting fuel for food, all those
things, this is the foundational piece.
Mr. Shelanski. Well, it is an ingredient. I mean, we should
be clear that this is one piece of the cost-benefit analysis.
There will be lots of other things that are considered in the
costs and benefits of any emissions or energy efficiency
standard that would use the social cost of carbon estimate. So
SCC will be an input. There are other inputs that could be
extraordinarily important in the cost and benefit analysis, but
this is an important input into those models, which is why it
is extremely important that the public be able to comment on
every one of those rules.
Mr. Lankford. Right.
Let me get a chance to honor my ranking member, Ms. Speier,
for some time for questions as well.
Ms. Speier. Let's go to the integrated model, which sounds
really good. It sounds like what you did was include not just
the social cost, but the economic cost. So if I am
understanding you correctly, the economic damage was based on
how much more a product would cost or the economic damage was
what would happen if there was a Sandy storm?
Mr. Shelanski. Thank you, Congresswoman Speier, because I
think this gets at the heart of what social cost of carbon is
trying to get at. If there is going to be harm to our
environment and to our economy from carbon emissions, many
costs will go up; the cost of food, the cost of health care,
investment that is needed to protect against sea level rise.
There are all manner of costs, energy costs, the need for
increased energy usage for cooling. All manner of costs may go
up for society. That is why it is extremely important to have
some kind of measure of what the social costs, by which I mean
the costs to society are, of a ton of CO2 emissions.
So prior to the creation or the development of a social
cost of carbon estimate, this was sort of an imponderable. In
some cases, you referred to the 9th Circuit case where a value
of zero was deemed arbitrary and capricious, a value would just
be assumed away. In other cases people called for extremely
high values to be used.
Part of a disciplined rulemaking process is using the best
information that is out there, the best minds, the best
analysis, the best science that is out there to come up with a
rigorous cost-benefit analysis. That is a limiting principle
on, for example, ascribing endless benefits to carbon
reduction. But it also stops us from making a big mistake of
saying there are no costs to carbon reduction and creating real
harm to our economy going forward from environmental damage. So
the purpose of the social cost of carbon estimate is to get a
measure of what that harm to our society will be, what it will
cost us, going forward, to keep emitting CO2 into the
atmosphere.
Ms. Speier. But I am still not clear as to whether or not,
in that model, you fold in the additional cost to consumers in
terms of the products they buy or to the businesses in terms of
the kinds of steps they have to take to reduce their emissions.
Mr. Shelanski. Those are all things that would factor very
directly into the cost-benefit analysis of any regulation using
the SCC number. So you would look separately, after looking at
the SCC, that is to say, the benefits of not emitting the CO2,
we would require the agency or we would expect the agency to
give information about the costs to business.
Ms. Speier. Okay, so it is not included in the SCC.
Mr. Shelanski. Not everything.
Ms. Speier. All right. So let me ask you this. You
indicated that Exxon and Shell and countries like the UK have
come up with an SCC. What have they tabbed it at?
Mr. Shelanski. The estimates vary. We know from things that
have been stated publicly that Shell uses about $40 a ton for
its internal estimates as the social cost of carbon.
Governments like the UK and Germany use numbers very, very
close to the 2013 range of social cost of carbon that the
interagency working group came up with.
Ms. Speier. Like around $38, is that what you are saying?
Mr. Shelanski. You know, there are a range of values,
depending on time period and discount rate, but quite
commensurate values. I could get back to you on what their
exact numbers are.
Ms. Speier. So the chairman indicated the issue about
tagging this on top of a microwave regulation, and I must tell
you I agree with that. We are all about transparency, so why
wouldn't this have been, even though it is not a rule, subject
to input from the general public and maybe people that are of
the belief that carbon has no cost to it, just so that it would
be fully digested and evaluated?
Mr. Shelanski. So let me answer both the general question
about the process by which the interagency group worked and
then talk about the microwave oven rule in which this new value
first came to light, if you will, in a regulatory process.
The models that underlie the social cost of carbon estimate
are not maintained or owned or created by the Federal
Government. In fact, they are created by independent scientists
and economists. And what is very important about these models,
because I think otherwise it would be very hard to use them, is
that they are publicly available, the source code and the
workings of these models are available on the internet. Anybody
can go and see how the models work.
The second thing is that these models are constantly being
subject to peer review through the normal scientific process.
Journals publish articles that have results and inputs
resulting from these models. Those articles are rigorously
reviewed and then published and subject to debate and attack.
So these are very well-tested models that have been quite
publicly aired and that are publicly available.
Now, as for what the Federal Government selected as some of
the inputs that would go into the models, things like discount
rate, population growth and other socioeconomic variables and
those values, those values, first of all, are discussed in
great detail in documents made public, the 2010 Technical
Support Document and then the 2013 Technical Support Document,
just noting, by the way, that nothing changed in those inputs,
those Federal Government-selected inputs, from 2010 to 2013.
And those inputs certainly are something that anybody can
see, can comment on, can challenge when those inputs and the
social cost of carbon are used in a rulemaking. And I would add
that the discount rates really are quite consistent with the
discount rates that have been aired for quite a number of years
through OMB guidance documents like Circular A-4, which go to
the agencies and counsel them on discount rates and other
inputs into their cost-benefit analysis.
Ms. Speier. Is it true that this model changed in part from
2010 to 2013 because of sea level rise?
Mr. Shelanski. It is. If one goes back to the 2013
Technical Support Document, which explains, to some degree,
what the changes were in the models, and certainly if one goes
to the model documentation that is freely available from the
developers of those models and online, one of the big changes
was a more detailed accounting for and a correction for the
effects of sea level rise.
Ms. Speier. And was there some dollar amount attributed to
sea level rise as part of this social cost?
Mr. Shelanski. I cannot answer exactly what the translation
was from the modelers' inputs about sea level rise to a dollar
value; that is something I would have to go back and ask about.
But it certainly is the case that the sea level rise variable
did lead to a higher dollar amount, just as other adjustments
to the model, I might add, for example, certain adjustments
related to short-term agricultural productivity and certain
adjustments related to space heating requirements actually had
a negative sign in the sense that they actually pushed down on
the social cost of carbon estimate. So the inputs worked in
different directions but led to, on the whole, a sizeable
increase in the estimate of the social cost of carbon.
Ms. Speier. I yield back.
Mr. Lankford. We are going to be bold enough, since there
are three of us talking, that we are just going to leave all
mics on and let's just have a conversation. So we will freely
interrupt each other and pretend that we are actually going to
have a conversation. Is that good with you?
Mr. Shelanski. That is fine with me, Mr. Chairman.
Ms. Speier. We get lots more questions in that way.
Mr. Lankford. Yes, we do. And we will be able to interact
more on it.
Ranking Member Speier's question about sea level rise and
the revision on that, was that based on the models actually
seeing actual rise in sea level or their change in their
estimate of sea level rise?
Mr. Shelanski. I would have to go back and see which of
those it was. It certainly had to do with the scientific
literature.
Mr. Lankford. Right. I understand. I am just trying to
figure out when you talk about sea level rise change and
revising a number, I just want to know have they actually seen
a rise in the sea level in the last three years, and so we have
to update that, or is this a revised estimate of some future
time period and when they expect to see a sea level rise and
what that amount might be.
I come back to, in college, one of my field experiences in
a geology group was to actually go out and do a dig, and I am
in central Texas, just outside of Austin, and we went down
about three feet and I pulled up shark teeth. Now, I don't know
when the last time sharks were in Austin, but it has probably
not been recently, and I don't think it was in the industrial
age.
So movement of sea is obviously something that has
historically happened. Now, I understand there is great debate
on whether that is accelerated based on carbon usage or not,
but we have had, on North America, a significant amount more
water on top of us than what we have right now, so what I am
trying to figure on that is are they tracking some significant
gain in sea rise that is occurring or are there models out
there estimating it. Does that make sense?
Mr. Shelanski. I understand the question, Chairman
Lankford. I am not prepared to testify on the underlying
climate science.
Mr. Lankford. Okay. The statement you made about Shell, as
well, does Shell actually have a social cost of carbon estimate
that you said is $40 a ton, is that right?
Mr. Shelanski. I believe it is $40 a ton, yes.
Mr. Lankford. Okay. Is their estimate of social cost of
carbon based on regulations? What are they estimating?
Mr. Shelanski. That is an estimate that they use internally
when, from what I understand, when they are setting their
investment strategy going forward.
Mr. Lankford. That is what I am trying to figure out. Are
they assuming this is the detriment to the environment at $40
or are they assuming if we put out a ton of carbon, we are
going to have $40 in regulations come down on us? I am trying
to figure out the difference there.
Mr. Shelanski. What I think it is, and I want to be clear I
can't testify with certainty as to this, so I am giving you my
best understanding as I sit here today, but I could go back and
check further, is that this is the number they use because they
believe it is the number that will factor into regulation going
forward.
Mr. Lankford. Okay, so that is a regulation number more
than it is an assumption that the company makes if we put out a
ton of carbon, it will have $40 worth of damage.
Mr. Shelanski. But, to be clear, it is not an estimate of
what they think their costs per ton will be for complying with
regulation, it is what they believe the number will be that
guides regulatory policy going forward. But, again, I really
shouldn't say more on that because I need to check.
Mr. Lankford. You brought up the discount rate issue as
well.
Mr. Shelanski. Yes.
Mr. Lankford. And said it was fairly consistent. I am not a
professional on all the discount rates, but as I pull through
several it looks there is a 3 percent and a 7 percent number.
The 3 percent number seems to be the one that was landed. And
when I looked through this I didn't see the 7 percent as a
factor that laid on it. Is there a reason why on that?
Mr. Shelanski. Yes. So what discount rates are are
basically, particularly when we are talking about long-term
effects like climate change, they are measures of how much we
value the future; how much we value future consumption, future
investment, indeed, the quality of life and the prosperity of
our children and grandchildren. That is what we use a discount
rate for.
A high discount rate, a discount rate of 7, and I will come
back to what that is usually used for, just to be clear about
what that would mean, it would mean that we are valuing the
prosperity, that is to say, the consumption and well-being, of
Americans just 60 years into the future at zero; that we
basically would be saying we should not factor into our policy
today any well-being of Americans just at the time that my
grandchildren, hopefully, will be growing up.
So what a high discount rate does is effectively devalues
future consumption, future prosperity.
Mr. Lankford. But in the microwave oven rule that is
released it has a 3 and a 7 percent, just in that rule, but it
doesn't for the social cost of carbon statement.
Mr. Shelanski. Right. So these are two very different
things.
Mr. Lankford. Which is part of our confusion why they were
released together, I guess.
Mr. Shelanski. Well, I will come back to that in a moment.
The social cost of carbon, we are trying to get a measure
of what the cost to society will be over time of a ton of
carbon emissions, and we could ask ourselves, well, what would
the effect be on the rate of return to private investment, and
typically 7 percent is used as a discount rate because it
roughly approximates the rate of return to business investment;
real estate, small business, corporate investment. We don't use
7 percent when what we are interested in understanding are
effects on future consumption by individuals, by consumers, by
citizens.
What we are trying to get at with the social cost of carbon
is what carbon emissions will mean for the expenditures and the
quality of life and the standard of living of every American
going forward. So consistent with OMB guidance, we would want
to use the 3 percent number, which OMB says what is appropriate
for consumption effects rather than investment effects.
Now, that said, just two things. To be sure, 7 percent was
not used in the range of numbers given for social cost of
carbon because of the belief that it was inappropriate to
discount to zero intergenerational effects, effects that would
occur one or two generations in the future. And, indeed, that
is consistent with the OMB guidance document A-4, which states
very clearly that when intergenerational effects are at issue,
lower discount rates, perhaps even lower than 3 percent, should
be used.
And, in fact, there is an emerging body of thought amongst
leading economists that for climate change the 3 percent number
is too high and should be declining over time. There is a
forthcoming article in Science magazine by a number of the
leading economists of the past half century that make this
argument.
What the working group did in 2010 and again in 2013 was to
provide a range, 2.5, 3 percent, and 5 percent. Now, that 5
percent number is quite a high number if you look at what it
implies for future generations, and it also happens to be a
blend of considering the consumption effects at 3 percent, or
can be thought of, and the investment effects at 7 percent.
So while it is clearly the case that a separate 7 percent
number was not listed, and we generally do, where appropriate,
ask regulatory agencies to include that in rulemakings, for the
purpose of this estimate, which was not a rulemaking, it was an
input to rulemakings, the judgment was reached that 7 percent
was not appropriate.
Mr. Lankford. But the challenge of it is, as far as the
input to rulemakings, I know you have said every time it is
used there will be opportunity for reply there, but the
challenge is that now every time it is used it has to be
fought, rather than discussing it the first time. Americans did
not have large-scale input on the first time it is used to say
is this appropriate, does this line up, can we see the science,
can we talk about it, instead of dealing with it the first time
and coming to an agreement and revising it, as is normal, where
there will be review and comment, there will be letters.
I know you mentioned before that there were letters that
encouraged you to update this now that the models had changed;
people were writing you or contacting you and saying this needs
to be updated. I would be interested to see those letters if
they were on both sides and what the mechanism was for
receiving those letters, or if they were just informally people
were writing and saying, hey, the models changed, you ought to
change this, or was there an open statement to say, hey, the
models have changed, should we update this and allow review and
comment. But the same on this. That is typical.
If we put out a new rule, if we put out a change, if we put
out something that is significant, people have input on it the
first time, rather than saying here it is; every time it used,
you are going to have to fight it now from here on out.
Ms. Speier. And I guess to add to that question, to what
extent is the social cost of carbon incorporated in various
bids that are put forth or requests for proposals? I am
presuming this is all within the Federal Government, right?
This would be something we would ask, we would have people fold
into their bids relative to various projects that they would be
competing for?
Mr. Shelanski. I don't know the extent to which the social
cost of carbon would factor into our procurement policies or
other kinds of bid situations. The main purpose for the
interagency working group was so that agencies passing
emissions and energy efficiency standards would have some kind
of value that they could use in calculating the benefit side of
the cost-benefit analysis.
So if we are going to impose a regulation on business, if
we were going to ask business to undertake certain kinds of
costs or ask the American economy to adjust to a different
world in which there were lower carbon emissions, what are we
getting in return?
So the purpose of the SCC number was really as an input
into the regulatory process. And, Chairman Lankford, to come
back to the transparency point, I agree with you completely.
Mr. Lankford. It seems odd. It seems like you wouldn't put
this in a microwave oven rule, which is a relatively small as
SCC; you would put it into a rule dealing with power plant
generation or something that is really large and significant to
say, okay, we are putting a stake in, this is very significant,
we need to debate this rule, let's put it out for comment.
Mr. Shelanski. Well, the SCC would be used in any rule that
would affect carbon emissions.
Mr. Lankford. Right. I understand. But you have to admit in
a microwave oven rule I think we are very fairly small SCC
footprint on that one.
Mr. Shelanski. Well, you know, nonetheless, it is very
interesting. I might add, by the way, that the updated social
cost of carbon value from 2013 did not drive the standard in
that rule; that standard was justified under the 2010 numbers
as well.
Mr. Lankford. Right. I understand. But it is released in
that.
Mr. Shelanski. It is released, and what the agency did, in
an effort to be transparent and to say, hey, we, out counseled
by OMB, as required under the executive orders, are using the
best technical, scientific, and economic information that is
available. Here is some information that is available. We are
going to want our calculations using not just the 2010 numbers,
but the 2013 numbers as well, therefore, making it clear here
these numbers are now out there and these are going to be used
in rulemakings.
And I actually think that when you think about the
opportunity to comment on every rule that might use the social
cost of carbon estimate, whether it is an energy efficiency
rule or an emissions rule, that leads to more ongoing input. I
liked your reference in your talk about the synergistic input
that comes from people all over this Country. That can happen
in every rulemaking procedure.
Mr. Lankford. Right. It definitely creates more input, but
it creates more input and more activity because you are chasing
down 100 issues now, rather than dealing with the first one. It
is the difference between if I have a problem with hornets in
my backyard, trying to kill each hornet one at a time or
actually going to the hornet's nest. If you are settling the
issue of what is the social cost of carbon, and it is typical
for us as a Nation to say our Government is servant of the
people and there is interaction, that synergistic wisdom that
we gain from the outside, that there is a sense that we want to
have input from everyone at the very beginning.
And if you are going to be affected by this rule, you
should have an opportunity to comment on it, at least, and to
be a part of this. And I know you keep saying it is not a rule,
but it is going to be used all over the place and it will be
consistently applied across a wide variety because, as you
mentioned before, the SCC now is not different in each agency,
it will be unified across all agencies and there will be a
multitude of these battles that repeats over and over again,
rather than dealing with it the first time, the right way.
Mr. Shelanski. So one thing that would have happened, that
could happen if you have one big proceeding just to focus on
the social cost of carbon is that proceeding happens and that
becomes locked in. It then becomes something, you know, you had
your opportunity to comment, now we are going to use it until
we decide to update it again.
What is great about the fact that this is an input into
rulemaking that people can comment on at any rulemaking in
which they have an interest is that as new knowledge comes into
being, as new science is published, as new models come in,
somebody can come in and say, you know, you are using that
social cost of carbon value from the 2013 technical support
update; that is out of date, we have information that there is
a better value you should use.
And you don't have to participate in every rulemaking in
order to do that; in any rulemaking, if in just one rulemaking
significant information comes to the attention of the
regulatory agency and to the Government, that will feed into
the ongoing process that was promised in 2010 of revising the
social cost of carbon.
Ms. Speier. So how about in 2010, how was this kind of
previewed? Was it attached to yet another rule?
Mr. Shelanski. Well, it was. So there is a little bit of
history to what happened. After concern arose about the
disparate range or the range of values that was being used by
different Government agencies for the social cost of carbon,
the administration sat down and said, okay, we need a process
for coming up with a more rigorously determined and consistent
number.
Ms. Speier. Okay, let's back up, then. You just said there
was a different range of SCC used throughout the Government. So
did SCC start during George W. Bush's administration or was
that when it was first identified because of the court case?
How did we first come to use SCC in rulemaking?
Mr. Shelanski. Well, I think the concept has been around
for a while. My understanding is that the first use by Federal
agencies in rulemaking of SCC was in, I believe, 2008. So it
was during the Bush Administration.
Mr. Lankford. Was that due to a court case or due to an
administration decision? Where did that originate? I guess part
of her question.
Mr. Shelanski. I do know that there was a 2007 court case.
I have no knowledge of whether the reasons that agencies, for
example, other than the NHTSA used social cost of carbon was
because of that court case or because of a policy decision.
Ms. Speier. Or does it date back to the Clinton
Administration, when cost-benefit analysis was deemed
appropriate with any new regulation?
Mr. Shelanski. Well, so social cost of carbon I don't think
you could tie back to that. It was something that was developed
in order to make sure that as regulation aimed at emissions,
climate change through emissions control and energy efficiency
standards, that the requirement of rigorous cost-benefit
analysis, where possible, would be met.
So it certainly was some of the motivation for developing
the number comes out of that mandate for cost-benefit analysis,
where possible and where legally permissible. A social cost of
carbon number specifically, I have no knowledge of whether that
was contemplated or considered during the Clinton
Administration.
Ms. Speier. So in 2008 the first value of an SCC was what?
Mr. Shelanski. There were different values used by
different agencies. I would have to check to get back to you,
but there was no single number.
So when the Obama Administration decided to convene a
process to come up with a social cost of carbon number, they
first developed interim values that were culled from existing
peer-reviewed academic and scientific literature, and came up
with interim values that were put out for comment, and while
those were put out for comment, and, by the way, agencies use
those values and said, look, we are going to use these values
and they were part of the comment and the rulemaking procedure,
the Obama Administration interagency working group, the
Administration group, continued to work on coming up with the
2010 number.
When they did come up with the 2010 number, they released
it as part, I believe, of a rule related to the efficiency of
small electric motors and received comment on the 2010 number
as part of that rulemaking, and then subsequently, and I would
have to double-check the exact number, I believe that 18 to 23
rules since that time have used the social cost of carbon.
Maybe it is 18 final and 5 proposed rules. I need to go back
and check the exact numbers, have used the social cost of
carbon number and have received comments on the social cost of
carbon analysis.
Ms. Speier. So you said 18?
Mr. Shelanski. It is 18 to 23.
Ms. Speier. Okay. And of how many? What is the universe we
are talking about, thousands of rules? You are saying it has
been used in 18 to 23 rulemakings.
Mr. Shelanski. Rulemakings. Those were individual rules.
Those were regulations.
Ms. Speier. But there are thousands of rules that are made
every day in this Country, right, by agencies?
Mr. Shelanski. Right.
Ms. Speier. So this is a very small, I guess what I am
trying to understand is how large an impact has it had to date.
It sounds like it has impacted 18 to 23 rules. Now, some of
those rules may be very widespread in their impact.
Mr. Lankford. Can you give some examples of some of those
rules?
Mr. Shelanski. I don't have the list in front of me. I am
sorry, Chairman Lankford.
Ms. Speier. Maybe you can make the list available to us.
Mr. Shelanski. The list is very easy to obtain. I will go
back and ask if it is possible to turn that over. But what I
would say is, yes, the number of rules may be small in the
universe of Federal rulemaking. There is no doubt that the
social cost of carbon will be used in some very economically
significant rules.
Mr. Lankford. Right. And that is the concern. You start
dealing with power generation, transportation, manufacturing,
it gets up in a hurry, as far as increasing or decreasing
costs, when regulation can come down and say, no, this is not
economically significant because of the social cost of carbon,
we decrease this so now it is under 100 million in economic
impact. We suddenly get into a whole different debate about
this, or to say I am aware that this will cost your company $1
billion, but we think it will have $1.1 billion in gain in the
social cost of carbon. Now it gets really significant.
Mr. Shelanski. So let me address a couple of things. The
social cost of carbon number, if used in a benefit calculation
to offset a cost calculation, would not be able to be used to
evade review of the rule. So let me make that clear. The
designation of an economically significant rule focuses on the
costs to the U.S. economy, and that rule would still be----
Mr. Lankford. Minus benefits.
Mr. Shelanski. No.
Mr. Lankford. Just cost, period.
Mr. Shelanski. When it comes whether a rule is economically
significant, we look at whether it will cost the U.S. economy
$100 million a year or more. So that is not a net benefit
calculation. It is definitely, and I want to be very clear
about this, the social cost of carbon number is not at all to
be used to evade review by my office, by OIRA. The cost-benefit
analysis in the Federal review process can't be evaded through
use of some number that erodes cost. If the costs are there and
it is economically significant, it is going to get reviewed.
What the social cost of carbon number does do, as you
correctly pointed out, is allow those costs to be put in the
context of expected economic benefits to society by monetizing
the cost to society of putting an additional ton of CO2
emissions into the atmosphere. And one of the reasons it is so
critical that this number be updated and that it be correct
insofar as science and economics will allow is because we don't
want people declaring, well, there is an unlimited benefit to
reducing CO2 emissions and then imposing any cost whatsoever on
society today because of the regulation. There has to be a
meaningful analysis of what those benefits are. So the social
cost of carbon number, while some may think it is much too low
and others may think it is much too high, does act as a
limiting principle on the benefits calculation.
The other thing I might add, just to go back to the ability
of people to come back and critique the number and to provide
input on whether or not a revision is necessary, it is
important to recognize that this number is not by any stretch
of the imagination generated by a black box. The number that is
in the 2010 document and the number that is in the 2013
Technical Support Document comes from models that are
available.
Anybody who has the expertise, and the expertise is fairly
widespread, can use these models, can use different
assumptions, can see what those models would generate, and
could come back and say we wish to challenge these assumptions
that underlie the benefits calculation in this particular
regulation and show you why you think you got it wrong. That
will prompt a serious analysis of that regulation.
Ms. Speier. So one of the points you make is that since it
is now part of a rule and not part of rulemaking, it can
change. But that can be also a thorn in businesses' side if,
all of a sudden, this month it is $38 and next year it is $58.
So there is no certitude to it. Is this somewhat of a fixed
number for a period of time, or can this be changed because the
model is available and people can make some assumptions and
come up with a better determination?
Mr. Shelanski. So let me give you two answers to that. One
is what is happening out there outside of the Government, in
the world of the scientists and the economists who work on
this, and the other is what happens inside the Government. The
models are always, to my understanding, being adjusted,
reviewed, and worked on by the model developers. Now, that
doesn't mean that every month they are releasing a new version
of the model.
Ms. Speier. These are Government employees?
Mr. Shelanski. No, these are not Government employees
Ms. Speier. Okay.
Mr. Shelanski. Absolutely not. These are leading
scientists, scholars, people who are in the employ of think
tanks, research centers, universities. They are not Government
employees. These are independently developed, peer-reviewed
models. And they are always working on the models, from my
understanding, and periodically they release new versions of
the model.
That does not mean that the Government would reconvene the
interagency working group every single time there is a new
version. I think that, as the 2010 Technical Support Document
said, every two years or so it is worth taking a good look and
seeing if a revision to the number is warranted.
Now, I will acknowledge that it is a number that can
change. On the other hand, there is a choice that the
Government faces: to use the changed number that reflects the
most up-to-date science and economics or simply to cover our
eyes and say, well, we are going to stick with what we have
because, well, it is what we have been using and we don't want
to change things.
Ms. Speier. So here is a problem, though. The cost of
living has gone up. But because we are in sequestration,
because we have a debt and a deficit, we have not increased the
salaries of Federal employees; they are frozen. In fact, they
have been reduced because they are being furloughed. So I don't
know if we can be totally purists in dealing with the science
of an SCC, just like if you are being a purist, the salaries of
Federal employees should have gone up over the last three or
four years, and they have been static or declined.
So we have to create some certainty for the business
community that is going to be subject to rules that come down
the pike from various Federal agencies that will be utilizing
the SCC in analysis, correct?
Mr. Lankford. Could I add something? I could not agree
more. Part of this is the certainty issue.
Ms. Speier. About that?
Mr. Lankford. About that part, yes, one. That is a big part
of this, is that it is done in 2010 and then it shows up in a
microwave rule in 2013; it has gone up by 50 percent. There
doesn't seem to be any outside communication on it other than
just in the future we can take this on a rule at a time. And
while you said this was not done in a black box, I don't know
the names of the people that were involved in this; I don't
know the minutes of it; I don't know the conversation that
occurred; I am not aware if they looked at other models; I
don't know if there was a conversation to say, gosh, this model
changed 50 percent in three years, maybe we should get a
different model.
So while you say it wasn't done in a black box because
there are these studies that are over here and everyone should
have known the studies were changing and of course we are going
to change this as well, there wasn't comment from the outside
and there wasn't interaction with the United States Congress,
House or Senate side. So suddenly, while people are trying to
prepare, think, and especially people that deal with energy,
those folks have to think 10, 15 years ahead. You don't plan to
do a major power plant or an export facility or any other
refinery and think, okay, three years from now we are going to
do X. That was 10 years ago when they started that process of
planning that, and now to know that every three years this
could change is a very, very difficult dynamic for them.
Mr. Shelanski. Well, you know, I think that if there is
evidence that the costs that are being caused by emissions are
changing up or down over time, regulation going forward needs
to take account of it.
Mr. Lankford. Okay, I don't mean to interrupt you on that.
You said that kind of thing a couple times. My fear of that is
that you have these science-based models that are out here from
a group of scientists that agree on this one principle. The
principle way is there if you disagree with this rule, then go
make your own model. If you go get your own model and get a
group of scientists together that may disagree with this model,
create your own model and come compete with the models that we
have.
So, you are basically saying to industry these are the
models that we are going to use, these are the folks that we
like, these are the folks that are doing a model on the social
cost of carbon, so to States, to counties, to any kind of
business group, whatever it may be, if you want to be in this
and play ball, go get a group of scientists, go create your own
social cost of carbon model, and then come compete with our
models.
Mr. Shelanski. So let me respond to that, because that
would be worrisome, and it is certainly not the case. I don't
know whether we like the people who are developing these models
or not. What we like is the fact that these are models that are
being developed by groups of people whose work is constantly
peer-reviewed, that their results are constantly published;
and, very importantly, anybody can dig in and say, you know,
there is a problem with the science in this model, there is a
problem with the assumptions. These are things that people have
the opportunity to inform the Government about.
Mr. Lankford. Right. But I would assume in peer review
there were some people that pushed back on it as well; they
were just, I am going to make up numbers. There were 10 people
that peer-reviewed it; 7 of them liked it, 3 of them didn't. So
the impression is these three over here that don't like the
model, go create your own model and come compete for this one,
and then they can also get 10 people to peer-review it and get
7 people that like it and try to compete. You see what I mean?
The reason I struggle with this is this is a very difficult
number to get your hands on.
So if the sea level rises a half inch 10 years from now,
what effect does that have on Naples, Florida? If we have a
tenth of a degree of climate change, what will that mean in
wheat crops in Kansas? What will that mean to the sea? How much
will the sea absorb the heat? How much will it take off the
heat? All these are very, very difficult things where there are
a lot of assumptions that are built into it.
And, yes, you can get any model that anyone can look at and
get any group of peers to be able to say, and publish in
different documents, you know what, that is a model; I like
part of it, I don't like part of it; write arguments, write
journal articles, and it is out. But this gets really difficult
to settle when it is moving all the time and it is uncertain,
and when the models update, then suddenly it changes our SCC as
well.
Mr. Shelanski. Chairman Lankford, to respond to your
question, I think all I can say is that if we don't have faith
in the scientific process of peer review, which is very
different from a popularity vote of 3 like it and 7 like it; it
involves replication, it involves a much more rigorous process.
If we don't have that, then the whole concept of using the best
available science, economics, and technical detail is one that
would be very difficult to implement anywhere in any kind of
regulation.
Mr. Lankford. I could not agree more, except in this area,
because climate science can't be replicated the same way that
you do with other science; it is a lot of guesstimates and
modeling and things that you look back on the past and you dig
cores and you examine how much carbon was in the ice. And I
guess the process on it, but it is modeling future based on our
best guess. So it is not a science that you can go and just
replicate and say, okay, we did this, so we can go look at it
and five other people can look at it the same way; they are all
just looking at a mathematical formulation, and say I agree
with your math. But do we agree with the assumptions?
Ms. Speier. Except we do that all the time. I mean, pension
plans anticipate that we are going to have 7 percent returns
and, therefore, on that basis, that is what is going to be
taken out of your check and that is what the employer is going
to contribute. So we do do that.
Mr. Lankford. No, I couldn't agree more, but that is what I
am saying, it is not a science at that point, it is a best
guess, because it is a forward-looking. I am not trying to
denigrate the scientists that are in the middle of it, that is
not what I am trying to do, but a lot of what this does is look
back in history and then try to look forward on it. That is why
it makes it very difficult to be able to process this, which is
why I think it needs as much sunshine in the process as
possible, which is why we are here today, because it appeared
and none of us had input and we don't really know the process,
the names of the people that processed the whys, the how, the
minutes; it just showed up.
Ms. Speier. So what kind of commentary have you received
from people since it was attached to the microwave rule?
Mr. Shelanski. I would have to go back and look and see
what the range of comments were that came in on that particular
microwave rule. I can tell you that since social cost of carbon
came into being and was attached to the small electric motor
rule in 2010 there has been significant comment on social cost
of carbon. And one of the reasons for the 2013 update was
commentary saying you are using a number that is too low, that
is out of date.
And I will tell you that a lot of the criticism of the
social cost of carbon number is that it is too low, that it is
underestimating the effects, that our discount rates are too
high. And the interagency working group, the Administration is
trying to take, to not have a number seems like a very bad
course of action.
Mr. Lankford. That is not the debate today, to not have a
number.
Mr. Shelanski. Right.
Mr. Lankford. The debate is the number went up 50 percent
in three years. The model was that far off. We are trying to
figure out why and how.
Ms. Speier. Well, and I think the other part of this
discussion is should there be a more kind of open process by
which there is a healthy debate or discussion about the social
cost of carbon.
Mr. Shelanski. So to be clear, though, about the number
going up from 2010 to 2013, that had nothing to do with
anything that anybody in the Government did.
Mr. Lankford. I know, it is our model.
Mr. Shelanski. It is the models. The inputs that the
Government chose haven't changed.
Mr. Lankford. Can you tell me three years from now the
model doesn't go up another 50 percent?
Mr. Shelanski. I can't tell you what the model is going to
do.
Mr. Lankford. I know. That is what I am saying. So there is
no predictability.
Mr. Shelanski. But predictability is certainly not the only
value. If the model is based on good science and economics, or
the best available science and economics, and does show another
50 percent increase, we think it would be irresponsible not to
factor that cost to society of carbon emissions into future
rulemakings.
Ms. Speier. Well, here is the dilemma, though. If you look
at the minimum wage right now in this Country, it is painfully
inadequate. But we have not done anything significant to
increase it in many years, and the result is that you have to
really have two or three jobs if you want to just survive on
the minimum wage.
You are saying that we have a responsibility to factor in
the social cost of carbon, and I agree with you. But if it were
to jump another 50 percent in three years, I think you have to
allow policymakers to evaluate whether or not, at this
particular point in time, we can afford to have the SCC go up.
Mr. Shelanski. So let me address that. The SCC going up
doesn't cost anybody a penny.
Mr. Lankford. It is every rule that it is applied to.
Mr. Shelanski. It is an input into rules. And those rules
will get evaluated on their costs and benefits. And it is an
absolute priority of the Obama Administration to make sure that
regulation reflects a common sense balance between the needs to
protect the health, safety, and welfare of the American people,
and the American people yet to come, and prosperity, jobs,
economic growth for the current generation. Those things are
absolutely at the core of regulatory decision-making in the
Obama Administration.
Mr. Lankford. Can you tell me what the next administration
will do with that?
Mr. Shelanski. I cannot tell you what the next
administration will do with that.
Mr. Lankford. Neither can we. That is the problem. We are
setting a path that this changes 50 percent with an
uncertainty.
Ms. Speier. Well, maybe not.
Mr. Shelanski. But what I can tell you is that the next
administration will have the same executive orders.
Mr. Lankford. Or they could take it straight back, or they
could say, no, we will go back 50 percent.
Mr. Shelanski. They will have the same executive orders
and, I would hope, the same obligation to do rigorous cost-
benefit analysis. The concern that we really have to take into
account why this is different from the minimum wage is if the
social cost of carbon is some certain number out there, and
maybe it is much higher than what we have calculated to date or
what the models have calculated; maybe it will turn out to go
down as more information comes up.
One thing is clear, though. Suppose there is a 50 percent
jump in three years and that the best available science and
economics says we weren't quite there the last time, we have
more information, it is higher than we thought. To turn our
backs on that is to say those costs, let's remember what the
social cost of carbon is; it is a measure of the cost to
society of emitting a ton of CO2 into the atmosphere.
Mr. Lankford. Long-term.
Mr. Shelanski. Long-term. What we are willing to say is,
you know, we have some current costs and, believe me, those
current costs need to be taken very, very seriously. I do not
for a minute question their effect or take lightly their effect
on current consumers, on current business, on anything. We
would be saying we don't care what the costs are for our
grandchildren. That would be the statement that, yes, they went
up 50 percent.
The best available science and economics, which, by the
way, is good science and economics, says that it has gone up 50
percent, but, boy, that is just another big change and that
seems problematic, so we are going to impose those costs on
future generations and not worry about reducing those carbon
emissions. That would be contrary to the best information
available to do a current cost-benefit analysis.
Mr. Lankford. I have a little bit of an issue with that
just for us and our economy, and let me just voice this, and
you can see if you want to jump in on this or not. The United
States, our carbon emissions have gone down in the last five
years. The last seven years, I think it is, even our carbon
emissions have gone down. We are switching over to using more
natural gas. A lot of things have occurred and our CO2 levels
are now down to our 2007 time. I think it is maybe even 2006
time.
So we have watched that occur while it is still rising in
other parts of the world. And what happens is we continue to
layer on and say, okay, this is occurring, this model is
occurring, though we are bringing down our carbon emissions,
the United States, it is still going up in other areas of the
world, so we anticipate this is going to happen so we hit the
American economy one more time with a penalty and it is not
happening in other areas.
So China continues to elevate that, continues to win
economically, continues to put out more and more carbon is that
is the model that is here; we continue to denigrate more and
more. This is not a good cycle for us and it is driven based on
a rule that, again, I would love for us to agree to know who is
in this interagency working group and anything about their
meetings, to be able to get their notes, the people, the votes,
anything about it, because this black box that you say doesn't
exist seems to be kind of a black box to us.
Mr. Shelanski. Well, just to repeat, social cost of carbon,
again, is not a rule.
Mr. Lankford. I know, but it is applied to every rule. I
get that.
Ms. Speier. It is not applied to every rule, though.
Mr. Lankford. But it is applied to key rules that will be
very impactful on energy and production of food and
transportation.
Mr. Shelanski. And just to say a word about the global
impacts, what we are measuring are the global costs of American
carbon emissions. And I don't know, as I sit here today,
whether, as we produce less, others are producing more because
we are producing less. If we produced more, it would be more
carbon emissions, and we are taking account of those costs. It
is a global problem, and it seems much easier to exercise
global leadership and to get other countries around world to
recognize the social costs of carbon if we are doing so
ourselves.
Mr. Lankford. I sat down with a quick pen to try to
determine, based on this new rule of $33, if we take the middle
range on that, what China puts out and how that affects our
economy. It is about $268 billion, is what I would estimate,
based on China's production of carbon for the most recent
numbers that I could find. And add to it this $33 a ton.
So with that, if we were to layer that principle on it, we
would say, okay, China, we need to hit them for $268 billion
worth of tariff at some point to make up what they have done to
our economy, because they seem to be punishing our economy as
they are producing it because it is a global problem.
If we get into that and begin to apply this rule in those
areas, now suddenly it is like, okay, India, here we are, we
are going to have to apply more tariffs to you because you have
this, and it is suddenly this sudden rise. I just have some
concerns on how it is going to be used. Obviously you don't set
that, but those are issues that we will have to take on in the
days ahead. But the number is extremely important to us because
it doesn't seem to differentiate where it occurs. So if you
have carbon produced in western Oklahoma, where you have
relatively few people, or in Los Angeles, there is no
difference in that, is that correct?
Mr. Shelanski. That is correct, because carbon emissions
travel.
Mr. Lankford. Right. So we are in the same issue with that.
And I don't know if that is where the Administration is headed
towards this or what the plan is, to say, China, you produce
too much carbon, you produce X amount, we are going to do $268
billion worth of tariffs on you to make sure that we balance
out what you have done to our economy. Or worldwide. It was
right at a trillion dollars of total cost to our economy based
on the carbon that is in the atmosphere right now produced
worldwide. So do we find some way to be able to hit every
country in the world to make sure that we get a trillion
dollars worth back into our economy for the damage that they
have done? Does that make sense?
Again, that is not something that you are going to have to
resolve today, but those are issues we have to look at. Those
are policy issues, but this is a policy thing that has been set
in this black box that we want to be able to allow some
conversation into.
Ms. Speier. I don't know that I would call it a black box,
just for the record.
Mr. Lankford. Okay. We don't know who, we don't know when,
we don't know how often they meet, we don't know where they
meet, we don't have notes of it.
Mr. Shelanski. But we do know what.
Mr. Lankford. We do know the result as it came out in the
microwave rule.
Ms. Speier. It is sort of like Wikipedia, you know? People
can go in and change things that reflect reality and more
people look at it.
Mr. Lankford. But the interagency working group, we know
the agencies, but do we know who attended the meetings from the
agencies?
Mr. Shelanski. I have no personal knowledge of that.
Mr. Lankford. Again, we are back to we know the agencies,
but we don't know who, we don't know how the decisions were
made, we don't know how they addressed the science, we don't
know if they looked at other models. We don't know and we
weren't a part of any of the conversation, but it is going to
affect our economy significantly.
Mr. Shelanski. But the numbers that they used as inputs
they selected and the models they used are ones that are fully
available to be challenged.
Mr. Lankford. Right.
Ms. Speier. And peer-reviewed.
Mr. Shelanski. And tested.
Mr. Lankford. We get that. So we are back to the same
thing: if you don't like it, get your own model and bring it
and be a part of the process.
Mr. Shelanski. Or pull apart the models that were used,
because they are in the Internet, and explain what is wrong
with them.
Mr. Lankford. Do you know if they looked at other models?
Mr. Shelanski. As I said, the interagency working group, my
understanding is that they considered all models that could
achieve what the interagency working group wanted to achieve,
which was the social cost of carbon. There are lots of models
that do much more limited things that would not have been
relevant.
By some measures, these models are the ones that are used
in virtually all, well into the nineties percent of research
that is done on social cost of carbon.
Mr. Lankford. Do you have additional questions?
Ms. Speier. I don't.
But I want to just thank you for taking these rapid-fire
questions and handling them so well, and for your
participation.
Mr. Chairman, I am going to have to leave.
Mr. Lankford. I know, we want to honor your time as well.
This is what all of your hearings will be like from here on
out; they will all be just like this.
Mr. Shelanski. That would be fine. Thank you.
Mr. Lankford. So that would be great. I appreciate your
coming. We will have some additional follow-ups. We will try to
follow up formally with a letter that I will make sure the
ranking member is also aware of as we send it out with just a
list of some of the things we talked about today that you
obviously don't have in eight days' experience to be there of
some of the people to process interagency working group, the
functionality of how the decision is made, and then we may even
follow up on where the social cost of carbon rule even came up
at all. As we discussed before, we are not aware of where it
originated, so we can actually find out and get the history of
it and bring it up.
Mr. Shelanski. Thank you very much, Mr. Chairman.
Mr. Lankford. Thank you very much.
With that, this meeting is adjourned.
[Where upon, at 4:00 p.m., the subcommittee was adjourned.]
APPENDIX
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Material Submitted for the Hearing Record
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