Calculating The Social Cost of Horse Manure

Imagine the following: It is the year 1700 and growth in the American colonies is threatening an economic and environmental catastrophe. Human and equine populations are expanding rapidly in tandem. The horse is integral to the economic engine that drives all economic output. But there is an unaccounted cost: manure. The horses are fed fuel (hay), do work, and out comes waste (manure). Harvard scientists have extrapolated that based on current trends there will be so many horses that manure will cover the colonies to a depth of three feet by the year 2000! Something must be done! There is clearly an unaccounted cost to all this manure lying about. The only solution to stem the tide: a manure tax.

Hopefully this seems a bit silly – it was meant to be. However our betters (those in government) are in engaging in similar sophistry. They make pie in the sky predictions cloaked in an aura of mathematical certainty concerning the “social costs of carbon” up through the year 2300. To wit: to little media fanfare the White House Working Group recently released an update to its estimates of the Social Cost of Carbon. Why is this notable?  The revised figures were up to two times larger than the previous “estimates” made by the same office only 3 years ago. Is the problem of climate changing getting worse? Hardly. The White House has merely “updated” its numbers in a climate cost-analysis model that has enough variables in it to send an algebra student screaming into the night.

These “equations” are nothing so scientifically resolute as E=mc2. No, rather they are a mathematical house of cards that can be manipulated to yield any desired value. For example, one of the key variables is something known as the “discount rate”, that is, the interest rate one would need to invest a dollar today in order to earn some amount in the future. So, if we invest $1 today that grows to $40 in one hundred years and we assume by then there will be $40 in economic losses due to one pound of carbon, then we say the cost of one pound of carbon today is $1. This is the “social cost of carbon”. The goal then is to spend $1 today to clean up one pound of carbon, thus averting $40 in damage in one hundred years. We would not spend $2 to clean it up because it would be more profitable to earn $80 and incur the $40 cost. If the social cost of carbon is low, then it is difficult to justify expensive remediation efforts, whereas if it is high then imposition of costs on the populace is that much easier to rationalize.

All we can do is pile assumptions on top of estimates of cherry picked data.

Of course the rub is how does one actually figure out the cost of environmental “damage” in 100, 200 or 300 years? All we can do is pile assumptions on top of estimates of cherry picked data. For example, loss of tourism dollars at ski slopes is counted as a cost, however the shifting of those dollars to newly more temperate regions is not counted as an offsetting benefit.

Even if we assume the science is ironclad and the calculations of the costs are solid, there is still the problem of the discount rate. It is the logarithmic volume control on the stereo of climate economics. Small changes have dramatic effects. For example, a discount rate of 2.5% yields a cost of $98/ton but 5% yields only $27/ton. Curiously the WHWG ignored the government’s own Office of Management and Budget (OMB) directive to also include a value of 7% in the analysis. It is estimated that at a 7% discount rate the Social Costs of Carbon would likely have been nearly $0 or even negative (meaning that CO2 actually confers a net benefit, not cost). It is also telling that the White House Working Group also ignored the OMB directive to only integrate domestic costs into their models, not global costs, an apparent “oversight” which further tends to push the Social Costs of Carbon estimates upward. This is what is known as “stacking the deck” in your favor.

So, back to our horse manure tale. What would the outcome have been had such a tax been implemented 300 years ago? Money would have drained from the economy, thereby lowering people’s standard of living while simultaneously retarding capital growth. This lack of capital would have had a deleterious effect on future generations’ economic output. Just as people in the year 1700 never could have conceived of the technological marvels that would make their hypothetical fear moot, so should we not be so conceited as to believe future humans will not make similar discoveries that will render our fears of climate catastrophe about as realistic as drowning in a sea of manure.