The EPA Is Right and US Chamber of Commerce Is Wrong on Climate Change

The Environmental Protection Agency issued proposed rules for power plants last week, arguing that the extra costs of low-carbon power plants are justified by the even larger gains in avoided climate damages. The EPA measures the avoided climate damages on a global basis, meaning that it calculates not only the benefit to the US but also to the rest of the world. The US Chamber of Commerce has objected, arguing that only the US benefits should be taken into account. The EPA has done things right, both ethically and practically.

Consider an example to explain the point (I'll use illustrative numbers, not the actual EPA numbers). Let's divide the world into two economies, the US and the rest of the world, which I'll call ROW. Now suppose that the extra cost of clean energy (compared with fossil fuel) is $20 for each ton of CO2 avoided. Suppose also that the global climate benefits of avoiding a ton of CO2 emissions is $30, with the US and the ROW each benefiting $15. (The EPA calculates the Social Cost of Carbon, or SCC, as $30, as equal to the global harm of a ton of CO2 emissions, or equivalently, to the global benefit of avoiding the ton of emissions).

The EPA justifies the new regulations on the grounds that the extra cost of low-carbon energy, $20, is less than the global benefit measured by the SCC, $30. The US Chamber of Commerce claims that the EPA should compare the cost $20 with the US benefit alone, $15. Since the US costs exceed the US benefits, claims the Chamber of Commerce, the proposed regulations should be rejected.

The US Chamber of Commerce is wrong, both ethically and operationally. The Chamber's ethical position is that the US does not have to care about the damages it causes to the rest of the world. This is a special kind of arrogance certainly not unknown in the US corporate sector. "We don't care about you," screams the Chamber to the rest of the world. We feel free to wreck your climate at our whim." The US didn't feel quite the same way when a British company, BP, spilled oil in the Gulf of Mexico. Yet while the US could take legal action against BP, the rest of the world can't take legal action for US-caused climate change.

Yet operationally as well, the Chamber's position is utterly wrong when it comes to global public goods like climate change (or other public goods like ocean acidification or species extinction). The operational question is: What standard should be used by the US and other countries to set climate regulations? Suppose that both the US and the ROW use the Chamber's recommended standard: control pollution only if the costs ($20 per ton CO2) are less than the national benefits ($15 per ton CO2). Neither country will take climate action.

Suppose instead that both the US and the ROW each adopt the EPA standard: take climate action as long as the cost ($20 per ton CO2) is less than the global benefit ($30 per ton CO2). Then both countries will act, and climate change will be controlled. The benefits of avoided climate change are in fact much greater than the cost, since the benefit is $30 per ton compared with the cost of $20 per ton. The world -- including both the US and ROW -- is made better of by adhering to the EPA standards.

In essence, the EPA standard encourages the US to recognize the benefits to the ROW and encourages the ROW to recognize the benefits to the US. Both countries thereby benefit as a result of the global perspective built into the EPA standard. But of course there are 193 countries, not just two. That makes the EPA approach even more vital, since with 193 countries it is very likely that the US Chamber of Commerce narrow national approach would induce every individual country to decide not to control carbon pollution even though all countries would gain by worldwide carbon control.

The US Chamber of Commerce is, alas, a shortsighted and often venal institution that lacks in basic ethical standards and in practical knowledge of international public policy. Instead of attacking the EPA, the US Chamber of Commerce should be working with other chambers of commerce around the world, and with the umbrella institution, the International Chamber of Commerce (ICC), to make sure that EPA-like rules are indeed adopted worldwide. My best guess is that many members of the US Chamber of Commerce do not agree with the Chamber's stance on the social cost of carbon. They should speak out to insist on approaches that are moral, evidence based, and in both the US and global interest.