Economy

Hahn and Passel fail to count carbon's cost in NYTimes editorial

In Monday’s New York Times editorial section, Robert Hahn of the American Enterprise Institute and Peter Passel of the Milken Institute wrote that drilling for oil in the Arctic National Wildlife Refuge (ANWR) and on the outer continental shelf (OCS) would make so much money for the U.S. treasury that it would enable huge swaths of other territory to be set aside as wilderness. In essence, let’s sacrifice ANWR and the OCS in order to save other sensitive areas around the country. And in support of this argument, Hahn and Passel used some basic economic calculations: at $100 per barrel, the total 18.5 billion barrels estimated to be in ANWR and in the OCS are worth $2.1 trillion (including some peripheral benefits in addition to the actual per-barrel price), and with $400 billion set aside for environmental recovery, that’s still $1.7 trillion that Congress could allocate for other environmental projects, such as the aformentioned wilderness areas.

There’s only one problem – the $400 billion they allocated only includes “the expected costs of developing all that oil, including cleaning up environmental damage….” There doesn’t appear to be any costs estimated for the carbon dioxide that will be put into the air in the process of combusting all that oil and the resultant damage to the global climate. Let’s do those calculations.

The Energy Information Administration keeps data on all the petroleum inputs and products produced on a monthly basis. According to this data, 564,629,000 barrels of refinery and blender products were produced in June, 2008 (the latest year the EIA has available). The EIA also has a list of definitions that you can use to determine what of those various products are used as fuels of one kind or another, and an estimate of how much carbon dioxide (CO2) each of those fuels produces per barrel combusted. Using that data, I was able to put together the table below (click on it for a full-size and more readable image):

The graph also has, based on the EIA data, how much carbon we can reasonably estimate as being put into the atmosphere if all the oil in ANWR and the OCS is combusted. It’s just over 8 billion tons of CO2. For comparision, the EIA estimates that the entire world put only 28.2 billion tons of CO2 into the air in it’s most recent year, 2005.

Now, if we apply cost estimates, in dollars per ton of CO2, to the total number of tons of CO2 acquired from the first table, we get the following table of costs:

By all means, check my numbers.
Chicago Climate Exchange
Carbon Tax Center 10/10 hybrid plan
Social Cost of Carbon (SCC) estimate
UK DEFRA estimate
Lower Stern estimate
Upper Stern estimates (price for 2% is from DEFRA above, modified for 5% and 20% as “cost of doing nothing”)

Now, it’s a fair question why the price per ton of CO2 varies so greatly. It’s a function of different policies, different assumptions in different economic models, and, in the case of the Chicago Climate Exchange, a market failure as a result of an oversupply of trading credits.

I personally feel that the arguments put forth by Stern, as supported by Jim Hansen and others, are more likely estimates of the damage as a result of the “cost of doing nothing” than the lower estimates produced by the Carbon Tax Center, the lower end of the SCC, or skeptics like Bjorn Lomborg. For that reason, I expect that the likely cost of the carbon in ANWR and the OCS will be somewhere between the $681 billion and $6.81 trillion. In either case, however, it’s clear that the overall costs of extracting the oil from ANWR and the OCS is much more than the $400 billion estimated by Hahn and Passel. Instead, the total costs will be between $950 billion and $5.85 trillion.

In the first case, the U.S. might make a total of about $1.2 trillion ($2.1 income minus $950 billion costs), and then we have to ask ourselves agian whether that amount of money is enough to justify drilling if a lot of it is used for wilderness protection elsewhere in the U.S. – maybe it is, but maybe it isn’t. But if the CO2 costs are as high as $1.4 trillion (the 5% GDP level from the Stern review, not the 20% worst case), then the straight economic costs of drilling in ANWR and the OCS very nearly outweighs the income generated by the oil sales (there would be only $300 billion in profits).

And that’s not even trying to put a price on so-called “the loss of the intangible benefits Americans get from knowing that the Alaskan refuge and outer continental shelf have been left untouched.”

9 replies »

  1. Brian, again thanks for dismembering all this information into realistic, usable stuff for those of us with neither the time nor the inclination to do it ourselves. I, for one, appreciate it greatly.

    Even using the Hahn/Passel assumptions, i question it. How many years would that $1.7T be spread over? Sure, that’s a bundle of money, but if it takes 10, 15, or 20 years to come out then it will be in much more easily squandered increments.

    Or we could look at as less than five years of military expenditures (and that’s using official budgetary figures that don’t count multiple theaters of engagement or all the other places that the DoD hides its money)

    I realize that they’re trying to make the numbers look so good that only a fool would say “no”, but i worry that most people won’t realize how hard they are trying to make the numbers look big. This, of course, is before we even start dissecting how small they attempt to make the costs look.

  2. I didn’t think that it was an oversight, or failing, of the post, Brian. You were approaching it from a different, and probably more significant, angle.

    I was just rambling on about what my initial thoughts tend towards when i hear numbers like that come from a study like that.

  3. Totally fair analysis, but you use the wrong numbers. The Stern report has been thouroughly debunked by the economics community. Just picking the stern report estimates and ignoring all other economists is akin to those climate deniers who pick one report that finds no man-made climate change and ignoring the consensus of pretty much everybody else. Most economists would probably agree on a value between $10 and $50. Putting the costs still well well below the expected the benefits.

  4. Also, I tried to check your numbers using the links provided. The upper stern report link you sent don’t mention any carbon prices. The lower stern report link you sent, suggests a range of between $20 and $85 per ton CO2. I have no idea where you got your numbers from which seem wildly inflated.

  5. First, from the criticisms of the Stern Review that I’ve read, it seems that the argument boils down largely to a disagreement over the correct discount rate. Stern assumes a lower discount rate than most other economists. The “correct” discount rate is something that Nobel-winning economists argue about, so the Stern Review’s is as valid as the economic analyses of, for example, Bjorn Lomborg.

    In addition, the choice of a high or low discount rate is an ethical, perhaps even moral, decision, as discussed in this article in Scientific American (excellent read, BTW). Economists who value their own and their children’s personal prosperity higher than some hypothetical future grandchild’s prosperity will choose a high discount rate, while economists who value their hypothetical grand children’s prosperity higher will choose a lower discount rate. In other words, it’s not a question of debunking, it’s a question of ethics, and seeing as ethical considerations are dramatically more subjective than mathematical, scientific considerations, they’re arguably impossible to “debunk” as such.

    As for my numbers, page 9 of the lower Stern link has the cost per ton of equivalent CO2 (tCO2e) as $30 assuming a cost o 1% of global GDP (the Stern Review’s original estimate of what it would cost to address global heating if we started in 2005). Stern himself is now estimating that, with two more years of scientific data, the cost today is more like 2% of GDP, or $60/tCO2e. It’s still not $68 like I said, so I’ll need to correct my spreadsheet tonight when I get home – I must have found a different number somewhere and lost track of where.

    How I got the $170 and $680/tCO2e was I assumed a linear relationship between $/tCO2e and percentage of global GDP required to fix the problem. So if Stern’s original estimate was $30/tCO2e for 1%, then that would be $150/tCO2e for 5% or $600/tCO2e for a 20% reduction in global GDP. I’ll add a better explanation of my math tonight as well.

  6. Yeah, I have also read that scim article. It is also biased. And out of step with economic consensus. (I’m also not saying Lomborg is, but he’s a lot closer).

    Nordhaus (leading environmental economist) points out:

    Suppose that scientists discover that a wrinkle in the climatic system will cause damages equal to 0.01 percent of [global] output starting in 2200 and continuing at that rate thereafter. How large a one-time investment would be justified today to remove the wrinkle starting after two centuries? The answer is that a payment of 15 percent of [the] world’s consumption today (approximately $7 trillion) would pass the [Stern] Review’s cost-benefit test. This seems completely absurd.

    The larger problem with the Stern report though is that it is internally inconsistent. He chooses to weight the income of those living today about equally with those living 100 years from now. BUT, he also weighs the welfare of those living in Bangladesh more heavily than those living in the US. This is quite reasonable. It makes perfect sense to think that a $1 is much more valuable to a Bangladeshi than to an American because Americans are much wealthier. BUT, the same is also true when comparing with people today and people in 2100. The people in 2100 (assuming a 4% gdp growth rate) would be 64 times wealthier than us. Losing a $1 for them is a lot less than losing a $1 for us.

    Yes, choosing a discount rate is a matter of ethics, but even if we weight the future equally with today, you still wouldn’t use Stern’s discount rate (if you properly account for inequality). If you add in uncertainty, Stern’s estimate becomes even less tenable.

    Again, you can choose to believe the Stern report, just like some people choose to believe the few scientists out there that maintain global warming does not exist. Both are reasonable opinions. But they are both out of line with the consensus.

    Also, on a technical note, while a linear adjustment may be reasonable, it also might not. Depends how those numbers were calculated, as there are many non-linearities in the macro-economy.

  7. Doesn’t this also assume that oil was going to stay at $100 per barrel? It’s now around $60 or so right? We have to be wary of anything that is based on some static assumption of the oil market.

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