CHAPTER 1 4

. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

TABLE OF CONTENTS

14.1 INTRODUCTION

................................ ................................ .............................................. 14 -1

14.2 MONETIZING CARBON DIOXIDE EMISSIONS

....................................................... 14 -1

14.2.1 Social Cost of Carbon

................................ ............................................................ 14 -1

14.2.2 Monetizing Carbon Dioxide Emissions

............................................................... 14 -2

14.2.3 Development of Social Cost of Carbon Values

................................................... 14 -2

14.2.4 Current Approach and Key Assumptions

............................................................. 14 -3

14.3 VALUATION OF OTHER EMISSIONS REDUCTIONS

............................................. 14 -5

14.4 RESULTS

................................ ................................ ........................................................... 14 -5

LIST OF TABLES

Table 14.2.1 Annual SCC Values from 2010 Interagency Report, 2010

- 2050 (in 2007 dollars per metric ton)

................................ ........................................................... 14 -4 Table 14.2.2 Annual SCC Values from 2013 Interagency Update, 2010

- 2050 (in 2007 dollars per metric ton CO 2 )

................................ ................................................... 14 -4

Table 14.4.1 Estimates of Global Present Value of CO 2 Emissions Reduction under Single Package Vertical Units Trial Standard Lev els

......................................... 14 -6

Table 14.4.2 Estimates of Domestic Present Value of CO 2 Emissions Reduction under Single Package Vertical Units Trial St andard Levels

......................................... 14 -7

Table 14.4.3 Estimates of Present Value of NO X Emissions Reduction under Single Package Vertical Units Trial Standard Levels

..................................................... 14 -8

Table 14.4.4 Estimates of Global Present Value of CO 2 Emissions Reduction under Single Package Vertical Units Trial Standard Levels (EPCA Baseline)

........... 14 -9

Table 14.4.5 Estimates of Domestic Present Value of CO 2 Emissions Reduction under Single Package Vertical Units Trial Standard Levels (EPCA Baseline)

......... 14

- 10

Table 14.4.6 Estimates of Present Value of NO X Emissions Reduction under Single Package Vertical Units Trial Standard Levels (EPCA Baseline)

..................... 14

- 11

14-iCHAPTER 14. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

14.1 INTRODUCTION

As part of its assessment of energy conservation standards for s ingle package vertical air conditioners (SPVACs) and single package vertical heat pumps (SPVHPs)

– or collectively single package vertical units (SPVUs)

– DOE estimated the monetary benefits from the potential reduced emissions of carbon dioxide (CO 2 ) and nitrogen oxides (NO X ) that are expected to result

from each of the trial standard levels ( TSL ) considered. This chapter summarizes the basis for the monetary values used for each of these emissions and presents the estimated benefits.

As described in Cha pter 13, t he analysis of most power sector emissions uses marginal emissions intensity factors derived from runs of DOE’s NEMS

- BT model . DOE used the version

of NEMS based on the Annual Energy Outlook 2013 (AEO 201 3). Emissions factors based on

the Annual Energy Outlook 2014 (AEO 2014) , which became available too late for incorporation into this analysis, indicate that a significant change in the cumulative CO 2 and NO

x emission reductions from the proposed standards can be expected if the projections of pow er plant

utilization assumed in AEO 2014 are realized . T he estimated amount of cumulative emission

reductions of CO 2 are expected to decrease by 33% from DOE’s current estimate based on the projections in AEO 2014 relative to AEO 2013 , while the estimated amount of cumulative

emission reductions of NO

x are expected to increase by 13% . The monetized benefits from GHG reductions would likely change by a comparable amount. For the next phase of this rulemaking, DOE plans to monetize the emissions reductions de veloped based on the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

14.2 MONETIZING CARBON DIOXIDE EMISSIONS

14.2.1 Social Cost of Carbon

The social cost of carbon (SCC) is an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year. It is intended to include (but is not limited to) changes in net agricultural productivity, human health, property damages from increased flood risk, and the value of ecosystem services. Estimates of the SCC are provided in dollars per metric ton of carbon dioxide

. A domestic SCC value is meant to reflect the value of damages in the United States resulting from a unit change in carbon dioxide emissions, while a global SCC value is meant to reflect the value of damages worldwide.

Under section 1(b) of Executive Order 12866, agencies must, to the extent permitted by law, “assess both the costs and the benefits of the intended regulation and, recogni zing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” The purpose of the

14-1SCC estimates presented in the Executive Order is to allow agencies to incorporate the monetized social benefits of reducing CO 2 emissions into cost

- benefit analyses of regulatory actions. The estimates are presented with an acknowledgement of the many uncertainties involved and with a clear understanding that they should be updated over time to reflect increasing knowledge of the science and economics of climate impacts.

As part of the interagency process that developed these SCC estimates, technical experts from numerous agencies met on a regular b asis to explore the technical literature in relevant fields, discuss key model inputs and assumptions, and consider public comments. The main objective of this process was to develop a range of SCC values using a defensible set of input assumptions grounde d in the existing scientific and economic literatures. In this way, key uncertainties and model differences transparently and consistently inform the range of SCC estimates used in the rulemaking process.

14.2.2 Monetizing Carbon Dioxide Emissions

When attempti ng to assess the incremental economic impacts of carbon dioxide emissions, the analyst faces a number of serious challenges. A report from the National Research

Council 1 points out that any assessment will suffer from uncertainty, speculation, and lack of information about (1) future emiss ions of greenhouse gases, (2) the effects of past and future emissions on the climate system, (3) the impact of changes in climate on the physical and biological environment, and (4) the translation of these environmental impacts into economic damages. As a result, any effort to quantify and monetize the harms associated with climate change will raise serious questions of science, economics, and ethics and should be viewed as provisional.

Despite the limits of both quantification and monetization, SCC estimates can be useful in estimating the social benefits of reducing CO 2 emissions. The agency can estimate the benefits from reduced (or costs from increased) emissions in any future year by multiplying the change in emissions in that year by the SCC val ues appropriate for that year. The net present value of the benefits can then be calculated by multiplying each of these future benefits by an appropriate discount factor and summing across all affected years. This approach assumes that the marginal damage s from increased emissions are constant for small departures from the baseline emissions path, an approximation that is reasonable for policies that have effects on emissions that are small relative to cumulative global carbon dioxide emissions.

14.2.3 Developme nt of Social Cost of Carbon Values

In 2009, an interagency process was initiated to offer a preliminary assessment of how best to quantify the benefits from reducing carbon dioxide emissions. To ensure consistency in

how benefits are evaluated across Fede ral agencies, the Administration sought to develop a transparent and defensible method, specifically designed for the rulemaking process, to quantify

avoided climate change damages from reduced CO 2 emissions. The interagency group did not undertake any ori ginal analysis. Instead, it combined SCC estimates from the existing literature to use as interim values until a more comprehensive analysis could be conducted. The outcome

14-2of the preliminary assessment by the interagency group was a set of five interim va lues: global SCC estimates for 2007 (in 2006 dollars) of $55, $33, $19, $10, and $5 per ton of CO 2

. 2 These interim values represented the first sustained interagency effort within the U.S. government to develop an SCC for use in regulatory analysis. The results of this preliminary effort were presented in several proposed and final rules.

14.2.4 Current Approach and Key Assumptions

After the release of the interim values, the interagency group reconvened on a regular basis to generate improved SCC estimates. Specially, the group considered public comments and further explored the technical literature in relevant fields. The interagency group relied on three integrated assessment models com monly used to estimate the SCC: the FUND, DICE, and PAGE models. These models are frequently cited in the peer

- reviewed literature and were used in the last assessment of the Intergovernmental Panel on Climate Change (IPCC). Each model was given equal weig ht in the SCC values that were developed.

Each model takes a slightly different approach to model how changes in emissions result in changes in economic damages. A key objective of the interagency process was to enable a consistent exploration of the thr ee models while respecting the different approaches to quantifying damages taken by the key modelers in the field. An extensive review of the literature was conducted to select three sets of input parameters for these models: climate sensitivity;

socio

- ec onomic and emissions trajectories; and d iscount rates

. A probability distribution for climate sensitivity was specified as an input into all three models. In addition, the interagency group used a range of scenarios for the socio

- economic parameters and a range of values for the discount rate. All other model features were left unchanged, relying on the model developers’ best estimates and judgments.

The interagency group selected four SCC values for use in regulatory analyses

. Three

values are based on the average SCC from three integrated assessment models, at discount rates of 2.5, 3, and 5 percent. The fourth value, which represents the 95th percentile SCC estimate across all three models at a 3 percent discount rate, is included to represent higher -t han

- expected impacts from temperature change further out in the tails of the SCC distribution. The values grow in real terms over time

. Additionally, the interagency group determined that a range of values from 7 percent to 23 percent should be used to adj ust the global SCC to calculate domestic effects, although preference is given to consideration of the global benefits of reducing

CO 2 emissions. Table 14.2.1 presents the values in the 2010 interagency group report, a which is reproduced in appendix 14

- A o f the TSD.

The SCC values used for this analysis were generated using the most recent versions of the three integrated assessment models that have been published in the peer

- reviewed literature

, as described in the 2013 update 3 from the interagency workin g group (revised November 2013)

. b

a Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 . Interagency Working Group on Social Cost of Carbon, United States Government , February 2010. http://www.whitehouse.gov/sites/default/files/omb/inforeg/for

- agencies/Social -Cost-of-Carbon- for -RIA.pdf

. b Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. Interagency Working Group on Social Cost of Carbon, United States Government . May 2013; revised November

14-3Table 14.2 .2 shows the updated sets of SCC estimates in five year increments from 2010 to

2050

. The full set of annual SCC estimates between 2010 and 2050 is reported in appendix 14

- B

of the TSD. The cent ral value that emerges is the average SCC across models at the 3 percent

discount rate. However , for purposes of capturing the uncertainties involved in regulatory impact analysis, the interagency group emphasizes the importance of including all four sets of SCC

values.

Table 14.2 .1 Annual SCC Values from 2010 Interagency Report, 2010

- 2050 (in 2007 dollars per metric ton)

Year Discount Rate %

5 3 2.5 3

Average Average Average 95 th Percentile

2010 4.7 21.4 35.1 64.9

2015 5.7 23.8 38.4 72.8

2020 6.8 26.3 41.7 80.7

2025 8.2 29.6 45.9 90.4

2030 9.7 32.8 50.0 100.0

2035 11.2 36.0 54.2 109.7

2040 12.7 39.2 58.4 119.3

2045 14.2 42.1 61.7 127.8

2050 15.7 44.9 65.0 136.2

Table 14.2 .2 Annual SCC Values from 2013 Interagency Update, 2010

- 2050 (in 2007 dollars per metric ton CO 2 )

Year Discount Rate %

5 3 2.5 3

Average Average Average 95 th Percentile

2010 11 32 51 89

2015 11 37 57 109

2020 12 43 64 128

2025 14 47 69 143

2030 16 52 75 159

2035 19 56 80 175

2040 21 61 86 191

2045 24 66 92 206

2050 26 71 97 220

It is important to recognize that a number of key uncertainties remain, and that current SCC estimates should be treated as provisional and revisable since they will evolve with

2013. http://www.whitehouse.gov/sites/default/files/omb/assets/inforeg/technical -update- social

- cost -of-carbon- for

regulator

- impact -analysis.pdf

.

14-4improved scientific and economic understanding. The interagency group also rec ognizes that the existing models are imperfect and incomplete. The 2009 National Research Council report mentioned above points out that there is tension between the goal of producing quantified estimates of the economic damages from an incremental ton of carbon and the limits of existing efforts to model these effects. There are a number of analytic challenges that are being addressed by the research community, including research programs housed in many of the Federal agencies participating in the interage ncy process to estimate the SCC. The interagency group intends to periodically review and reconsider those estimates to reflect increasing knowledge of the science and economics of climate impacts, as well as improvements in modeling.

In summary, in cons idering the potential global benefits resulting from reduced CO 2 emissions, DOE used the values from the 2013 interagency report adjusted to 2013 $ using the GDP price deflator. For each of the four sets of SCC values, the values for emissions in 2015

were $1 2.0 , $ 40.5 , $6 2.4 , and $11 9 per metric ton avoided (values expressed in 2013 $). DOE derived values after 2050 using the relevant growth rates for the 2040

- 2050 period in the interagency update.

DOE multiplied the CO 2 emissions reduction estimated for e ach year by the SCC value for that year in each of the four cases. To calculate a present value of the stream of monetary values, DOE discounted the values in each of the four cases using the specific discount rate that

had been used to obtain the SCC valu es in each case.

14.3 VALUATION OF OTHER EMISSIONS REDUCTIONS

DOE considered the potential monetary benefit of reduced NO X emissions from the TSLs it considered. As noted in chapter 13, new or amended energy conservation standards would

reduce NO X emissions i n those States that are not affected by caps. DOE estimated the

monetized value of NO X emissions reductions resulting from each of the TSLs considered based on environmental damage estimates found in the relevant scientific literature. Available estimates suggest a very wide range of monetary values, ranging from $4 7 6 to $4,89 3 per ton ( in

201 3$). 4 DOE calculated monetary benefits using a medium value for NO X emissions of $2,68 4 per short ton (in 2013$), and real discount rates of 3 percent and 7 percent.

DOE is still evaluating a ppropriate values to use to monetize avoided SO 2 and Hg

emissions. It did not monetize these emissions for this analysis

.

14.4 RESULTS

Table 14.4 .1 p resent s the global values of CO 2 emissions reductions for each considered

TSL. DOE calculated domestic values as a range from 7 percent to 23 percent of the global values, and these results are presented in Table 14.4 .2

.

14-5Table 14.4 .1 Estimates of Global Present Value of CO 2 Emissions Reduction under Single Package Vertical Units Trial Standard Levels

TSL SCC Case*

5%

discount

rate, average* 3% discount
rate, average* 2.5%

discount

rate, average* 3% discount rate, 95 th

percentile*

Million 201 3 $

Primary Energy Emissions

1 50 241 386 747

2 120 584 937 1812

3 202 969 1552 3006

4 216 1035 1656 3209

Upstream Emissions

1 1.8 8.5 14 26

2 4.3 21 33 64

3 7.2 34 55 107

4 7.8 37 59 114

Full

- Fuel

- Cycle Emissions

1 52 249 400 773

2 124 605 970 1875

3 209 1003 1607 3112

4 224 1072 1715 3324
* For each of the four cases, the corresponding global SCC value for emissions

in 2015 is $ 12.0 , $ 40.5 , $ 62.4 , and $ 119 per metric ton ( 2013 $).

Note: These results are based on emissions factors in AEO 2013 , the most recent version available at the time of this analysis. Use of emissions factors in AEO 2014 would likely decrease the monetized benefits of CO2 emissions. In the next phase of this rulemaking, DOE plans to use emissions factors based on the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

14-6Table 14.4 .2 Estimates of Domestic Present Value of CO 2 Emissions Reduction un der Single Package Vertical Units Trial Standard Levels

TSL SCC Case*

5% discount

rate, average* 3% discount rate, average* 2.5% discount rate, average* 3% discount rate, 95 th

percentile*

Million 2013 $

Primary Energy Emissions

1 3.5 to 11.4 16.9 to 55.4 27.0 to 88.8 52.3 to 171.7

2 8.4 to 27.6 40.9 to 134.3 65.6 to 215.5 126.8 to 416.7

3 14.1 to 46.4 67.8 to 222.8 108.6 to 356.9 210.4 to 691.3

4 15.2 to 49.8 72.4 to 238.0 115.9 to 380.8 224.6 to 738.1

Upstream Emissions

1 0.1 to 0.4 0.6 to 2.0 1.0 to 3.1 1.8 to 6.1

2 0.3 to 1.0 1.4 to 4.7 2.3 to 7.6 4.5 to 14.7

3 0.5 to 1.7 2.4 to 7.9 3.9 to 12.7 7.5 to 24.5

4 0.5 to 1.8 2.6 to 8.5 4.1 to 13.6 8.0 to 26.3

Full

- Fuel

- Cycle Emissions

1 3.6 to 11.8 17.5 to 57.3 28.0 to 91.9 54.1 to 177.8

2 8.7 to 28.6 42.3 to 139.0 67.9 to 223.1 131.3 to 431.3

3 14.6 to 48.0 70.2 to 230.8 112.5 to 369.6 217.9 to 715.8

4 15.7 to 51.6 75.0 to 246.5 120.0 to 394.4 232.7 to 764.5
* For each of the four cases, the corresponding SCC value for emissions in 2015

is $ 12.0 , $ 40.5 , $ 62.4 , and $ 119 per metric ton ( 2013 $).

Note: These results are based on emissions factors in AEO 2013 , the most recent version available at the time of this analysis. Use of emissions factors in AEO 2014 would likely decrease the monetized benefits of CO2 emissions. In the next phase of this rulemaking, DOE plans to use emissions factors based on the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

Table 14.4 .3 presents the present value of cumulative NO X emissions reductions for each TSL, calculated using the average dollar

- per

- ton values at 7 percent a nd 3 percent discount rates.

14-7Table 14.4 .3 Estimates of Present Value of NO X Emissions Reduction under Single Package

Vertical Units Trial Standard Levels

TSL 3% discount rate 7% discount rate

Million 201 3$

Primary Energy Emissions

1 3.6 1.0

2 9.1 2.6

3 1 5 4.2

4 15 4.3

Upstream Emissions

1 4.8 2.0

2 11 4.7

3 19 8.2

4 21 9.0

Full

- Fuel

- Cycle Emissions

1 8.4 3.0

2 21 7.3

3 34 12

4 36 13

Note: These results are based on emissions factors in AEO 2013 , the most recent version available at the time of this analysis. Use of

emissions factors in AEO 2014 would likely in crease the monetized

benefits of NO

x emissions. In the next phase of this rulemaking, DOE plans to use emissions factors based on the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

Although DOE is statutorily required to evaluate impacts of this rulemaking relative to the ASHRAE baseline, for informationa l purposes, Table 14.4 .4 through Table 14.4 .6 show the

results compared to a base case including the current federal standards (i.e., EPCA baseline)

.

14-8Table 14.4 .4 Estimates of Global Present Value of CO 2 Emissions Reduction under Single Package Vertical Units Trial Standard Levels (EPCA Baseline )

TSL SCC Case*

5% discount
rate, average* 3% discount
rate, average* 2.5%

discount

rate, average* 3% discount rate, 95 th
percentile*

Million 201 3$

Primary Energy Emissions

1 17 6 85 1 136 3 26 39

2 247 119 4 191 4 370 4

3 328 1579 2529 4898

4 343 1645 2633 5101

Upstream Emissions

1 6.3 30 48 93

2 8.8 42 67 131

3 12 56 89 173

4 12 59 93 181

Full

- Fuel

- Cycle Emissions

1 183 88 1 141 1 27 32

2 256 123 6 198 2 383 4

3 340 1635 2618 5071

4 355 1703 2726 5283

* For each of the four cases, the corresponding global SCC value for emissions in 2015 is $12.0, $40.5, $62.4, and $119 per metric ton (2013 $).

Note: These results are based on emissions factors in AEO 2013 , the most recent version

available at the time of this analysis. Use of emissions factors in AEO 2014 would likely decrease the monetized benefits of CO2 emissions. In the next phase of this rulemaking, DOE plans to use emissions factors based on the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

14-9Table 14.4 .5 Estimates of Domestic Present Value of CO 2 Emissions Reduction under Single Package Vertical Units Trial Standard Levels ( EPCA Baseline )

TSL SCC Case*

5% discount rate, average* 3% discount rate, average* 2.5% discount rate, average* 3% discount rate, 95 th
percentile*

Million 201 3$

Primary Energy Emissions

1 12.3 to 40.6 59.6 to 195.7 95.4 to 313.5 184.7 to 606.9

2 17.3 to 56.8 83.6 to 274.6 134.0 to 440.3 259.3 to 851.9

3 23.0 to 75.5 110.5 to 363.1 177.0 to 581.7 342.8 to 1126.5

4 24.0 to 78.9 115.1 to 378.3 184.3 to 605.5 357.1 to 1173.3

Upstream Emissions

1 0.4 to 1.4 2.1 to 6.9 3.4 to 11.1 6.5 to 21.4

2 0.6 to 2.0 2.9 to 9.7 4.7 to 15.5 9.1 to 30.0

3 0.8 to 2.7 3.9 to 12.9 6.3 to 20.6 12.1 to 39.9

4 0.9 to 2.8 4.1 to 13.5 6.5 to 21.5 12.7 to 41.7

Full

- Fuel

- Cycle Emissions

1 12.8 to 42.0 61.7 to 202.6 98.8 to 324.6 191.2 to 628.4

2 17.9 to 58.8 86.5 to 284.3 138.7 to 455.8 268.4 to 881.9

3 23.8 to 78.2 114.4 to 376.0 183.3 to 602.2 355.0 to 1166.4

4 24.9 to 81.7 119.2 to 391.7 190.8 to 627.0 369.8 to 1215.0

* For each of the four cases, the corresponding SCC value for emissions in 2015 is $12.0, $40.5, $62.4, and $119 per metric ton (2013 $).

Note: These results are based on emissions factors in AEO 2013 , the most recent version available at

the time of this a nalysis. Use of emissions factors in AEO 2014 would likely decrease the monetized benefits of CO2 emissions. In the next phase of this rulemaking, DOE plans to use emissions factors based on the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

14-10Table 14.4 .6 Estimates of Present Value of NO X Emissions Reduction under Single Package

Vertical Units Trial Standard Levels ( EPCA Baseline )

TSL 3% discount rate 7% discount rate

Million 201 3$

Primary Energy Emissions

1 13 3.7

2 18 5.3

3 2 4 6.9

4 24 7.0

Upstream Emissions

1 17 7. 0

2 24 9.7

3 3 2 13

4 33 14

Full

- Fuel

- Cycle Emissions

1 30 1 1

2 4 2 15

3 55 20

4 57 21

Note: These results are based on emissions factors in AEO 2013 , the most recent version available at the time of this analysis. Use of

emissions factors in AEO 2014 would likely in crease the monetized

benefits of NO

x emissions. In the next phase of this rulemaking, DOE plans to use emissions factors based on the most recent AEO available, which may or may not be AEO 2014 , depending on the timing of the issuance of the next rulemaking document.

14-11REFERENCES

1. National Research Council, Hidden Costs of Energy: Unpriced Consequences of Energy

Production and Use , 2009. National Academies Press. Washington, DC.

< http://www.nap.edu/catalo g.php?record_id=12794 >

2. Interagency Working Group on Social Cost of Carbon, Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866, February, 2010. United States

Government. < http://www.whitehouse.gov/sites/default/files/omb/inforeg/for

agencies/Social -Cost- of -Carbon- for

- RIA.pdf >

3. Interagency Working Group on Social Cost of Carbon, Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 12866, May 2013

. United States Government. http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria _2013_update.pdf

4. U.S. Office of Management and Budget (OMB), 2006 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on State, Local, and Tribal

Entities , 2006. Washington, DC.

< http://www.whitehouse.gov/s ites/default/files/omb/assets/omb/inforeg/2006_cb/2006_c b_final_report.pdf >

14-12