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IS OMB putting its thumb on the scale against the environment?

By Climate Guest Contributor  

"IS OMB putting its thumb on the scale against the environment?"

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The Office of Management and Budget is proposing to skew the formula used to weigh pending government regulations, reducing the value assigned to potential benefits

The result would be to give industry a strengthened weapon to fight standards with huge claims of anticipated costs, while the anticipated benefits are greatly discounted.  This puts the wide sweep of President Obama’s energy and environment policies in jeopardy, guest bloggers Dan Becker and James Gerstenzang explain.  Becker is director of the Safe Climate Campaign, which advocates for strong policies to fight global warming.  Gerstenzang is editorial director of the Campaign.

Working quietly out of the spotlight, OMB is preparing a section of the nearly-complete automobile fuel economy and global warming pollution rule that would deeply undervalue its benefits. If issued by the Obama administration, it would impose tall barriers to implementing a broad spectrum of future regulations intended to protect the environment and implement sound energy policies.

Think of it as OMB putting a heavy hand on one side of the scales that weigh the costs and benefits of government regulations before they are put into effect””adding to the burden of those arguing that the benefits outweigh the costs.

The Safe Climate Campaign and six other environmental organizations blasted the OMB language at the end of last week.  We warned in a letter to OMB Director Peter Orszag, Transportation Secretary Ray LaHood and Lisa Jackson, director of the Environmental Protection Agency, that the addition to the otherwise popular rule would undermine the final standards governing greenhouse gas emissions and fuel economy. The rules are expected to be unveiled within days.

We warned that the new language would establish an inaccurate cost-benefit analysis in the rule being applied to cars and light trucks from 2012 to 2016.

We also raised concern about the long-term impacts, warning: “More broadly, this flawed approach to valuing consumer energy savings could bias the cost-benefit test which OMB applies to a broad range of critical energy efficiency laws and proposals.”

The letter continues:

Last May, President Obama was joined by Cabinet officials, State regulators, and representatives from the auto industry as he announced groundbreaking clean vehicle standards. In response, the Environmental Protection Agency and the Department of Transportation worked closely together to propose standards that deliver on the President’s promise to save consumers money, cut America’s oil dependence, and curb global warming emissions.

The substantial consumer benefits that come from saving money at the gas pump due to improved fuel economy are a cornerstone of these standards. These savings far outweigh the cost of applying fuel-saving technology to new vehicles sold between model years 2012 and 2016. Unfortunately, OMB has injected a deeply flawed approach that severely discounts these important consumer benefits.

The OMB effort runs counter to the administration’s strong and positive agenda on energy efficiency, renewable energy and the environment in general. Most significantly, it could derail much of what the administration is setting out to accomplish on the environment.

Administrations have historically discounted by three to seven percent the benefits of future actions intended to save energy, on the assumption that the money saved by reducing energy use could earn that much in interest during normal economic times. Similarly, it reflects the standard cost of borrowing money.

OMB is proposing that the “discount rate” be increased to 25 percent, 35 percent and in some instances as much as 50 percent””a radical departure based on its argument that Americans don’t value saving energy.

The effort to dramatically increase the degree to which benefits are discounted is a departure even from the path taken by the George W. Bush administration, which adhered to the standard three-to-seven percent discount rate. Hidden in a thick new document, it would be a Trojan horse, introducing a new test that regulators could then apply to future rules, citing it as precedent.

The letter was signed by representatives of the American Council for an Energy Efficient Economy, the Consumer Federation of America, the National Wildlife Federation, Public Citizen, the Safe Climate Campaign, the Sierra Club, and the Union of Concerned Scientists.

It said:

OMB’s recommendation is based on how economic theory indicates consumers would respond if there was a perfect free market for fuel economy. But in reality, consumers face a highly imperfect market with limited and even misleading information, little foresight on gasoline prices, and few options when it comes to fuel economy. Applying such high discount rates will simply reinforce the very market failures the clean vehicle standards are intended to address. Therefore, this is a flawed approach to assessing a critical energy savings standard and should not be included in the final rule.

OMB’s move contravenes the President’s promise of transparency. Much like efforts in Congress to quietly attach unpopular legislation to broad measures certain to be enacted, the effort to apply the radically steep discounts to the benefit measures takes advantage of the broad support for the changes in the Corporate Average Fuel Economy (CAFE) program among consumers, environmentalists, and the auto industry.

OMB should cease and desist.

UPDATE:  It has been reported that this is a misunderstanding. I’ve talked to the authors and they stand by their story.  I have received no information from OMB or anyone else that any aspect of this story is incorrect.  If I do, I’ll be happy to correct it.

‹ The proof is in the pudding

Energy and Global Warming News for March 23: Wind energy investments to hit $65 billion this year; World Bank helps Indonesia increase geothermal energy ›

22 Responses to IS OMB putting its thumb on the scale against the environment?

  1. Mark says:

    It would be hard to justify undertaking any project of any type if you first had to clear a 25% discount rate hurdle.

  2. Jonah says:

    Man, I don’t know about the OMB, but in my house, a penny saved is a penny earned.

    I think it’s pretty telling that when people can SEE their current energy usage, they reduce it by 15%: http://www.eci.ox.ac.uk/research/energy/downloads/smart-metering-report.pdf

    Giving people the power of information about their consumption is a great way to make them enthusiastic about saving energy. The new OMB discount rates (50%?!) make no sense in light of research like this!

  3. OMB is singlehandedly trying to stop all environmental regulation by exaggerating the costs and minimizing the benefits. Peter Orszag is manipulating the accounting to make his personal ideology trump policy set by the rest of the executive branch and by Congress. This is an absolutely egregious abuse of his power as director of OMB.

    There is absolutely no rational basis for discounting future benefits by 50%. He’s trying to use accounting to force policy. That’s both bad accounting and bad policy.

    Orszag should be fired. He’s been undermining the administration on jobs too. He’s a huge political liability and a huge liability to a healthy future.

  4. mike roddy says:

    Thanks for digging into this, Sean. I know a very good resource on this issue: Lee Schipper of Berkeley and Stanford, astrophysicist, IPCC delegate, and auto/transportation expert. Send me an email and I’ll give you his contact info.

  5. Leif says:

    Good Grief! What does humanity have to do to make capitalism and corporations embrace long term survivability/sustainability with enthusiasm. It is becoming increasing clear to me that if this most powerful segment does not embrace the epiphany of their actions and pull together with humanity then this world is toast. That INCLUDES capitalism and corporations.
    It has been said that revolution is societies method of dealing with compound interest. Unfortunately even revolution will not work in this case because humanity needs a functioning economy and infrastructure to have a chance in hell of success in this World War of survivability.

    To take stock:
    The Press has abandoned humanity.
    Capitalism and corporations never gave a *hit.
    The Law and Courts appear incapable of addressing a problem of this magnitude, and are corrupted.
    A large segment of society too ignorant or brain washed by above to be aware.
    Huge amount of inertia in status quo.
    Political system dysfunctional.
    TIME IS SHORT!

    Options:
    Civil disobedience.
    Military intervention on humanities behalf. (Never thought I would say something like that with a straight face.)
    Natural disaster.
    Second coming of “Christ.”
    Help me here. Looking for a winner…

  6. Preston Wright says:

    Leif…I’m with ya.
    Unless and until someone at the controls wakes up, we are in deep. Its like having bleacher seats as the Titanic crossed the Atlantic and being able to scream at the captain. Sadly the ‘captains’ have all become deaf, dumb, and blind to the coming disaster.

    What does a lifeboat even look like if nothing is done…Cormac McCarthy’s ‘The Road’?

  7. BT Turner says:

    There is a hint of a suggestion of a whiff of something really fascinating and possibly as sinister as the authors fear here – but we have no evidence or actual substance to evaluate. All we have is _one sentence_ in this whole post that actually tells us what is at issue. “OMB is proposing that the “discount rate” be increased to 25 percent, 35 percent and in some instances as much as 50 percent—a radical departure based on its argument that Americans don’t value saving energy.”
    I can guess at what is at issue – I think Cass Sunstein is floating a proposal to use behavioral economic approach to backing-out a real-world discount rate. But I have to assume that it’s more of an academic discussion, and not the actual regulatory discount rate that is suggested here.
    For one thing, I can’t believe this would be the official discount rate they’d use – for that they’d need to officially revise OMB Circular A-94 wouldn’t they? And I think that would probably require notice-and-comment and other Administrative Procedure Act process requirements. But they could “discuss” an alternative interpretation in the rule that might establish a precedent for a future proposal to revise Circular A-94. Is that what it is? That is something to be concerned about, but not the sky-is-falling kind of concern of this post.
    Also, on the economics of it, I can’t believe Sunstein is ignoring the multiple market failures that get in the way of consumers’ ability to accurately value fuel economy, or the behavioral econ questions about whether our psychology or intellectual capacity allows us to accurately calculate what we value, or that they are confusing social time value of money for the personal or financial time value. Again, they may just be discussing this among dozens of different considerations.
    Now, it may be true that such academic discussions are better suited for Resources for the Future seminars until the science is more settled. But I don’t have any way of judging whether the discussion in the rule is something to be worried about or not.
    So could the bloggers actually link to any more substantive information for folks that are interested, please?

  8. Lucy says:

    Is there a link to the proposed rule, or is it not published? When rules are proposed, the public has the right to comment, and in this case, they should make their thoughts known. I agree with BT Turner — we need more specific information.

  9. Chuck says:

    Are these real or nominal discount rates? Maybe they are just getting ready for the Great Inflation that is coming…

  10. Marlowe Johnson says:

    Very odd. On their own website the OMB suggests using much more conventional discount rates:

    http://www.whitehouse.gov/omb/circulars_a094_a94_appx-c/

  11. Anon says:

    Are they really proposing 25% discount rates? that is completely insane, I can’t think of an environmental economist who would agree with that. We had this argument over the stern report and the high end was 7%, which is really too high. There needs to be an effort to organize prominent environmental economists on this.

  12. Eban Goodstein says:

    I am excerpting here from a report I just co-authored that discusses the EPA’s “social cost of carbon” analyses for the tailpipe ruling. Discount rates of 5% or > tend to show, incredibly, positive net benefits from global warming in IAM Models. Complete report (Cost of a Warming Arctic) at http://www.e3network.org:

    For short-time horizon cost assessments, discount rates of 3 to 5 percent are reasonable;
    they often reflect the foregone opportunity costs of investing dollars in one area and not
    another. When discounting at 5 percent, however, a logic that tells us not to spend $1.20
    today to prevent, in 90 years, $100 in economic costs to our descendants is troubling to
    most people, including many economists. Discount rates that rise above 3 percent result
    in analyses that dramatically reduce the present value of any costs to people or the planet
    beyond a 30 to 40 year time horizon, largely excluding climate impacts on future
    generations from the cost-benefit calculus.

    Lack of intergenerational equity may be the best-known and most intuitive criticism of
    the use of high discount rates for long-time horizon analyses. This concern has been
    reinforced by numerous economic studies focusing on a number of other technical issues
    described here. (1) Climate investments are, in significant part, a kind of insurance
    motivated by risk aversion to avoid catastrophic outcomes. Investment in insurance (e.g.,
    purchase of a fire insurance policy) typically has a negative rate of return. It is undertaken
    to minimize worst-case losses, not to maximize average gains (Weitzman, 2009;
    Ackerman et al., 2009a). (2) It is likely that in general climate stabilization investments
    will have a higher pay-off in the future during periods when economic growth rates are
    small. Under these conditions, economic theory requires a correspondingly small
    discount rate (Howarth, 2003). (3) Regardless of risk correlation, empirical evidence
    suggests that revealed discount rate choices are heavily influenced by the variance of the
    potential financial gain facing investors. For investments with little investment risk of
    this type (e.g., many climate stabilization investments), the appropriate discount rate is
    also low (Howarth, 2009). (4) Since future economic growth rates are inevitably
    uncertain, the appropriate discount rate for long-term analyses is one that is gradually
    declining over time. If all else remains constant, significant risks of future low economic
    growth or catastrophic outcomes will cause the rate to decline faster (Weitzman, 1998).
    (5) Growth in material consumption in developed countries does not correlate highly with
    increases in subjective well-being. As a result, the opportunity cost of climate
    investments should be calibrated against increases in per capita net national welfare, not
    to increases in per capita consumption, as the latter grows more slowly than the former
    (Goodstein, 2007). All of these issues cast considerable doubt on the validity of using
    discount rates greater than 3 percent for evaluating long-run benefits and costs of climate
    change mitigation.7

    Given these issues, the US EPA (2008) concludes:

    “OMB’s [Office of Management and Budget’s] Circular A-4 general analytical
    guidance requests use of constant 3% and 7% discount rates for both intra- and
    inter-generational discounting and allows for low but positive consumption
    discount rates if there are important intergenerational benefits or costs (e.g., 1–3%
    noted by OMB, 0.5–3% by EPA)…. A review of the literature indicates that rates
    of three percent or lower are more consistent with conditions associated with
    long-run uncertainty in economic growth and interest rates, inter-generational
    considerations, and the risk of high impact climate damages (which could reduce
    or reverse economic growth).”

    In spite of the many persuasive arguments against the use of high discount rates, and in
    direct contradiction to the 2008 US EPA guidance just quoted, a recent regulatory
    proposal by the US EPA and the National Highway Traffic Safety Administration
    (NHTSA) relies on a social cost of carbon that was estimated from integrated assessment
    model runs employing 3 percent and 5 percent discount rates (US EPA/NHTSA, 2009).
    The decision to rely exclusively on rates of 3 percent or greater is not well supported.8 In
    fact, of the 12 model runs employed by the agency using the 5 percent discount rate,
    more than half conclude that there will be either zero economic costs or positive net
    benefits to human society from business-as-usual global warming, i.e., around 3°C over
    current temperatures by 2100.

    Read more at http://www.e3network.org

  13. Dan says:

    I believe it was Amory Lovins who once said, “At a high enough discount rate, it doesn’t make sense to have children.”

  14. homunq says:

    I diaried this at Daily Kos, including public contact info for Orszag/OMB, Lahood/USDOT, and Jackson/EPA.

    http://www.dailykos.com/story/2010/3/23/849730/-OMB:-Future-energy-savings-Worthless.-Stealth-25-discount-rate-means-$1M-in-2058-worth-$1-today

  15. Ken Johnson says:

    Note that this has nothing to do with environmental “benefits”. They’re only concerned with direct economic benefits of fuel savings.

    So if they are planning to raise the discount rate to 25-50%, what rate will they assume for fuel price inflation? Or for renewable energy price deflation?

  16. Leif says:

    homunq, #14: I would point out that there is a poll on the sight that you posted. Currently 30 votes. A good chance to vote for the environment. Get to it gang!

  17. another alum says:

    I cannot find a link to a proposed rule.

  18. Jonathan Gilligan says:

    Why is it so hard to link to the proposed rule, or else to quote the OMB’s actual words fully in the commentary instead of paraphrasing and summarizing? I want to see exactly what they’re saying about discount rates.

    Frankly, the description in this commentary is so far from accepted practice that it makes little sense and suggests that someone is confusing a description of actual consumer behavior (e.g., hyperbolic discounting) with a prescription for agency cost-benefit assessments.

    If OMB is actually proposing using a 25% to 50% discount rate as a prescription for evaluating policy measures, this is very big news and can serve as the basis for huge public outrage, but very few people will take action on the basis of a second-hand description of what the OMB is purported to say.

  19. gearhead says:

    Can anyone point to anything written that says OMB is looking at higher discount rates? OMB tried in the interagency comments to get EPA to show what higher discount rates would mean for the NPV of fuel savings, but those calcs never made into the proposed rule. Does everyone here realize that consumer benefits are 89% of the value of this proposed rule, and environmental benefits are less than 10%? Yes we need a higher SCC, which OMB agrees should be discounted at 3% or 7%, but if we double or tripple the SCC for more realism, consumer savings would still drive this rule, not enviro benefits.

  20. another alum says:

    turns out the story is wrong, see The New Republic’s Vine blog

  21. BT Turner says:

    “UPDATE: OMB says it’s all a misunderstanding. I’ve talked to the authors and they stand by their story.”

    Uh, Joe – I think you often like to point out that there is such a thing as truth. [snip]

    [JR: My update was poorly phrased. As of now, I have received no information from OMB (or anyone) else that suggests the contents of this story are wrong. If I do, I'd be happy to make changes.]