Jack Thorlin*

COLORADO NATURAL RESOURCES, ENERGY & ENVIRONMENTAL LAW REVIEW No Credit Unless You Show Your Work: How Judges Can Stop the Gaming of Climate Change Discount Rates in Federal Rulemaking Jack Thorlin* Table of Contents INTRODUCTION ....................................................................................... 87 I. THE DISCOUNT RATE DEBATE ............................................................ 90 A. The Basics: How Discount Rates Work ................................. 90 B. The First Rumblings of Complexity ....................................... 91 C. Things Get Complicated: The Problem of Future People ...... 92 1. Guessing the Preferences of Future People ..................... 92 2. Incorporating the Preferences of Future People............... 94 3. What Discount Rates Can We Safely Rule Out? ............. 95 D. The Discount Rate Debate in Climate Change Economics .... 96 1. Why Discount Rates Dominate Climate Change Economics ....................................................................... 97 2. The Two Major Schools of Thought: Descriptivists and Prescriptivists .................................................................. 98 E. Discount Rates Around the World ........................................ 101 1. National Discount Rates ................................................ 101 2. Corporate Discount Rates .............................................. 102 * Jack Thorlin has worked on regulatory oversight for the past eight years for several committees in the U.S. Senate and House of Representatives. He is currently chief counsel of the Senate Republican Policy Committee. He was previously a senior counsel on the House Oversight and Reform Committee and the Senate Permanent Subcommittee on Investigations. He also serves as an adjunct professor of law at Georgetown University. COLORADO NATURAL RESOURCES, ENERGY & ENVIRONMENTAL LAW REVIEW 86 Colo. Nat. Resources, Energy & Envtl. L. Rev. [Vol. 31:1 II. HOW THE ACADEMIC DEBATE HAS PLAYED OUT IN U.S. POLICY.. 105 A. The Bush Administration’s Perambulations on Climate Change Economics ............................................................. 105 1. Bush the Candidate vs. Bush the President .................... 105 2. OMB Circular A-4: Stumbling into the Role of Gold Standard ........................................................................ 106 3. Massachusetts v. EPA and Bush’s Discount Rates ........ 107 B. The Obama Administration Embraced a Dash of Prescriptivism ..................................................................... 109 1. The Social Cost of Carbon: Enter Prescriptivism .......... 109 2. The Effect of the Prescriptivist Discount Rate .............. 111 C. The Trump Administration Uses Convenient Descriptivism to Replace the Clean Power Plan ............................................ 112 1. Trump’s Candidacy: Descriptivist in Fact, Prescriptivist in Effect ............................................................................. 112 2. Raising Discount Rates to Solve the Cost-Benefit Analysis Problem ......................................................................... 113 3. The Affordable Clean Energy Rule Repeals the Clean Power Plan .................................................................... 113 D. The Ghost of Discount Rates Yet to Come .......................... 116 1. Polls Suggest No Change in Public Opinion as Temperatures Increase .................................................. 117 2. Incentives to Game Discount Rates Will Increase for Both Parties ............................................................................ 118 III. JUDICIAL REVIEW OF DISCOUNT RATES ........................................ 119 A. Existing Case Law Relating to Discount Rates .................... 119 1. A Lenient Standard of Review....................................... 120 2. Methodological Flaws: Not Enough Reason to Overturn? ...................................................................................... 121 3. Challenges to Transparency: A Nuanced Alternative .... 123 4. Precedent for Challenging Discount Rates .................... 124 B. Theoretical Issues with Judicial Review of Discount Rates . 126 1. Arbitrary and Capricious Review: Actual Basis vs. Theoretical Basis for Agency Action ............................ 126 2. The Difficulty of “Reasonableness” Review ................. 127 IV. HOW COURTS AND CONGRESS CAN CREATE MEANINGFUL LIMITS ON DISCOUNT RATES ................................................................. 129 A. Discount Rates Step Zero: Why Should We Worry About Gaming Discount Rates? .................................................... 129 COLORADO NATURAL RESOURCES, ENERGY & ENVIRONMENTAL LAW REVIEW 2020] No Credit Unless You Show Your Work 87 1. Do the Parties Truly Endorse Different Discount Rates? ...................................................................................... 130 2. Does Discount Rate Ping-Ponging Lead to Ideal Policy? ...................................................................................... 130 3. Damage to the Credibility of Cost-Benefit Analysis Carries Long-Term Costs of its own ............................. 132 4. Should We Second-Guess Agencies on Difficult Moral Questions? ..................................................................... 132 B. Potential Legislative Solutions ............................................. 133 1. Congress’s Actions to Date on Climate Change ............ 133 2. Why Congress is Unlikely to Take Action .................... 134 3. What Congress Could Pass (Other Than Comprehensive Climate Change Legislation) ........................................ 136 C. How Courts Might Review Discount Rates ......................... 137 1. Require a Full Explanation, Not Just a Citation to Irrelevant Precedent ...................................................... 138 2. Require a Detailed Explanation for Rejecting Previous Discount Rates .............................................................. 139 3. Require an Explicit Endorsement of a Discount Rate ... 140 4. Require Consistency Within the Same Administration for Different Rules .............................................................. 142 D. Potential Criticism of Increased Judicial Review of Discount Rates ................................................................................... 143 1. Usurping the Role of Experts? ....................................... 143 2. Usurping the Role of the People? .................................. 144 3. Would a More Extreme Solution Work Better? ............ 145 CONCLUSION ......................................................................................... 146 INTRODUCTION How should the federal government balance costs today against benefits a century from now? The question sounds highly abstract and philosophical, but federal agencies must distill the answer into one number: a discount rate. The number selected by federal agencies and subject to review by federal judges may determine the future habitability of Earth. Federal agencies making the rules relating to climate change face that daunting reality. The most important variable in modeling damages from climate change is the discount rate, the rate by which future costs or benefits are COLORADO NATURAL RESOURCES, ENERGY & ENVIRONMENTAL LAW REVIEW 88 Colo. Nat. Resources, Energy & Envtl. L. Rev. [Vol. 31:1 adjusted for comparison with present costs or benefits. The higher the discount rate, the relatively less important future costs and benefits. With heavy discounting applied over several decades, the future becomes less relevant. The Obama administration used discount rates ranging from 2.5 to five percent to justify its major plan to curtail carbon emissions.1 The Trump administration used three to seven percent to justify repeal of that plan.2 While there are other important differences in the two administrations’ cost-benefit analyses, a change of three percent to the discount rate implies a roughly 1,000 percent increase in the social cost of carbon according to leading climate models.3 The simple mathematics of compounding explains why long-term discount rates dominate climate change economics. A discrepancy of a few percentage points does not make a significant difference over a few years, but the difference builds on itself over decades to yield vastly different outcomes. Nobel prize-winning climate change economist William Nordhaus noted that Manhattan was purchased for $24 in 1626, a price often seen as ludicrously low until one considers that $24 invested at four percent interest in 1624 would now be worth roughly as much as the current value of Manhattan.4 Similarly, the compounding effect makes the difference between a seven percent and 2.5 percent discount rate significant enough to swing decisions relating to climate change. It should be no surprise that a fierce debate rages among economists and philosophers over how to determine the “correct” discount rate. Thousands of pages have been written on the subject, with no true consensus in sight. As a result, there is at least a superficially reasonable case for such a wide range of potential discount rates that virtually any climate action (or inaction) can claim some level of justification. 1 U.S. ENVTL. PROT. AGENCY, EPA-452/R-15-003, REGULATORY IMPACT ANALYSIS FOR THE CLEAN POWER PLAN FINAL RULE ES-15-ES-16 (2015), available at https://www3.epa.gov/ttnecas1/docs/ria/utilities_ria_final-clean-power-plan-existing- units_2015-08.pdf [hereinafter “CPP RIA”]. 2 U.S. ENVTL.

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