### 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

- 2

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 Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard Levels

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

- 6

Table 14 .4.2 Estimates of Domestic Present Value of CO 2 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard Levels

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

- 7

Table 14.4.3 Estimates of Present Value of NO X 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard Levels

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

- 8

Table 14.4.4 Estimates of Global Present Value of CO 2 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard Levels Compared to the Alternative Base Case

.... 14

- 9

Table 14.4.5 Estimates of Domestic Present Value of CO 2 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard Levels Compared to the Alternative Base Case

.. 14

- 10

Table 14.4.6 Estimates of Present Value of NO X 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pump s Trial Standard Levels Compared to the Alternative Base Case

.. 14

- 11

14

- i

### CHAPTER 14. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

14.1 INTRODUCTION

As part of its assessment of energy conservation standards for packaged terminal air conditioners (PTACs) and packaged terminal heat pumps (PTHPs) , the U.S. Department of

En ergy ( 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.

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 ar e 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 d amages 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, recognizing that some costs and benefits are difficult to quantify, prop ose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” The purpose of the SCC estimates presented in the Executive Order is to allow agencies to incorporate the

monetized social benefit s 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 basis to explore the technical literature in relevant fields, discuss key model inp uts 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 grounded in the existing scientific and economic literatures. In this way, key

uncertaint ies and model differences transparently and consistently inform the range of SCC estimates used in the rulemaking process.

14

- 1

### 14.2.2 Monetizing Carbon Dioxide Emissions

When attempting to assess the incremental economic impacts of carbon dioxide emissions, the ana lyst 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 emissions of greenhouse gases, (2) the effects of past and future

emissions on the clim ate 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

ch ange 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 values appropriate for that year. The net present value of the

benefits can then be cal culated by multiplying each of these future benefits by an appropriate discount factor and summing across all affected years. This approach assumes that the marginal damages from increased emissions are constant for small departures from the baseline emiss ions 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 Development 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 Federal agencies, the Administration sought to develop a transparent and defensible meth od, specifically designed for the rulemaking process, to quantify

avoided climate change damages from reduced CO 2 

### emissions. The interagency group did not undertake any original analysis. Instead, it combined SCC estimates from the existing literature

to u se as interim values until a more comprehensive analysis could be conducted. The outcome of the preliminary assessment by the interagency group was a set of five interim values: 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, t he group considered public comments and further explored the technical literature in relevant fields. The interagency group relied on three integrated assessment models commonly used to estimate the SCC: the FUND, DICE, and

PAGE models. These models are fr equently 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 weight in the SCC values that were developed.

14

- 2

### Each model takes a slightly different ap proach 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 three 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

- economic and emissions trajectories; and d iscount rates

. A probability distribution fo r 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

- than

- expected impacts from temperature change further out in the tails of the SCC dist ribution. 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 adjust the global SCC to calculate domestic effects, although preference is given to con sideration 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 A ppendix 14

- A of the TSD.

The SCC values used for this analysis were generated using the most recen t 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 working group (revised November 2013)

. b



### Table 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 betwee n 2010 and 2050 is reported in A ppendix 14

- B

of the TSD. The ce ntral 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 set s of SCC

values.

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

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

- update

- social

- cost

- o f

- carbon

- for

regulator

- impact

- analysis.pdf

.

14

- 3

### 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 improved 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.

14

- 4

### 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 T SLs

it considered. As noted in C hapter 13, new or amended energy conservation standards would

reduce NO X 

### emissions in 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. Availabl e 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 $2,68 4 per sho rt ton (in 2013$), and real discount rates of 3 percent and 7 percent.

DOE is still evaluating appropriate 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

- 5

### Table 14.4

. 1 Estimates of Global Present Value of CO 2 

### Emis sions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps 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 6.90 32.60 52.04 101.01

2 26.86 127.30 203.32 394.56

3 53.64 253.57 404.84 786.02

4 70.70 329.56 524.84 1021.08

5 73.17 339.99 541.12 1053.04

Upstream Emissions

1 0.31 1.45 2.31 4.49

2 1.20 5.66 9.03 17.53

3 2.39 11.27 17.98 34.93

4 3.16 14.70 23.40 45.54

5 3.28 15.18 24.15 47.01

Full

- Fuel

- Cycle Emissions

1 7.21 34.05 54.35 105.50

2 28.06 132.95 212.35 412.08

3 56.03 264.84 422.82 820.95

4 73.86 344.26 548.24 1066.62

5 76.45 355.18 565.28 1100.06

* 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 ( 201 3 $).

14

- 6

### Table 14.4

. 2 Estimates of Domestic Present Value of CO 2 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps 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 0.5 to 1.6 2.3 to 7.5 3.6 to 12.0 7.1 to 23.2

2 1.9 to 6.2 8.9 to 29.3 14.2 to 46.8 27.6 to 90.7

3 3.8 to 12.3 17.7 to 58.3 28.3 to 93.1 55.0 to 180.8

4 4.9 to 16.3 23.1 to 75.8 36.7 to 120.7 71.5 to 234.8

5 5.1 to 16.8 23.8 to 78.2 37.9 to 124.5 73.7 to 242.2

Upstream Emissions

1 0.0 to 0.1 0.1 to 0.3 0.2 to 0.5 0.3 to 1.0

2 0.1 to 0.3 0.4 to 1.3 0.6 to 2.1 1.2 to 4.0

3 0.2 to 0.5 0.8 to 2.6 1.3 to 4.1 2.4 to 8.0

4 0.2 to 0.7 1.0 to 3.4 1.6 to 5.4 3.2 to 10.5

5 0.2 to 0.8 1.1 to 3.5 1.7 to 5.6 3.3 to 10.8

Full

- Fuel

- Cycle Emissions

1 0.5 to 1.7 2.4 to 7.8 3.8 to 12.5 7.4 to 24.3

2 2.0 to 6.5 9.3 to 30.6 14.9 to 48.8 28.8 to 94.8

3 3.9 to 12.9 18.5 to 60.9 29.6 to 97.2 57.5 to 188.8

4 5.2 to 17.0 24.1 to 79.2 38.4 to 126.1 74.7 to 245.3

5 5.4 to 17.6 24.9 to 81.7 39.6 to 130.0 77.0 to 253.0

* 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 ( 201 3 $).



### 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 p ercent a nd 3 percent discount rates.

14

- 7

### Table 14.4

. 3 Estimates of Present Value of NO X 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard Levels

TSL 3% discount rate 7% discount rate

Million 201 3 $

Primary Energy Emissions

1 0.56 0.21

2 2.20 0.81

3 4.39 1.62

4 5.57 2.13

5 5.67 2.18

Upstream Emissions

1 0.83 0.36

2 3.23 1.39

3 6.46 2.80

4 8.59 3.89

5 8.92 4.09

Full

- Fuel

- Cycle Emissions

1 1.39 0.57

2 5.43 2.20

3 10.85 4.42

4 14.16 6.02

5 14.59 6.27

14

- 8

### As described in Chapter 8, the alternative base case analysis was based off a scenario where the mandatory efficiency level is the Federal minimum, against which DOE determined the impacts on the monetization of emissions reduction

. Estimates of the presen t values of global

and domestic CO 2 

### emissions reduction and of cumulative NO X 

### emissions reductions are shown

in Table 14.4

. 4 to Table 14.4

. 6 , for informational purposes.

Table 14.4

. 4 Estimates of Global Present Value of CO 2 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard

Levels Compared to the Alternative Base Case

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 6.66 31.48 50.24 97.52

2 27.02 128.04 204.51 396.87

3 53.80 254.32 406.03 788.34

4 70.86 330.31 526.03 1023.40

5 73.33 340.74 542.31 1055.36

Upstream Emissions

1 0.30 1.40 2.23 4.34

2 1.20 5.69 9.08 17.63

3 2.40 11.30 18.04 35.03

4 3.17 14.74 23.45 45.64

5 3.28 15.22 24.21 47.12

Full

- Fuel

- Cycle Emissions

1 6.96 32.88 52.48 101.86

2 28.23 133.73 213.59 414.50

3 56.19 265.62 424.07 823.36

4 74.02 345.04 549.49 1069.04

5 76.61 355.96 566.52 1102.48

* 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 (201 3 $).

14

- 9

### Table 14.4

. 5 Estimates of Domestic Present Value of CO 2 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard

Levels Compared to the Alternative Base Case

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 0.5 to 1.5 2.2 to 7.2 3.5 to 11.6 6.8 to 22.4

2 1.9 to 6.2 9.0 to 29.4 14.3 to 47.0 27.8 to 91.3

3 3.8 to 12.4 17.8 to 58.5 28.4 to 93.4 55.2 to 181.3

4 5.0 to 16.3 23.1 to 76.0 36.8 to 121.0 71.6 to 235.4

5 5.1 to 16.9 23.9 to 78.4 38.0 to 124.7 73.9 to 242.7

Upstream Emissions

1 0.0 to 0.1 0.1 to 0.3 0.2 to 0.5 0.3 to 1.0

2 0.1 to 0.3 0.4 to 1.3 0.6 to 2.1 1.2 to 4.1

3 0.2 to 0.6 0.8 to 2.6 1.3 to 4.1 2.5 to 8.1

4 0.2 to 0.7 1.0 to 3.4 1.6 to 5.4 3.2 to 10.5

5 0.2 to 0.8 1.1 to 3.5 1.7 to 5.6 3.3 to 10.8

Full

- Fuel

- Cycle Emissions

1 0.5 to 1.6 2.3 to 7.6 3.7 to 12.1 7.1 to 23.4

2 2.0 to 6.5 9.4 to 30.8 15.0 to 49.1 29.0 to 95.3

3 3.9 to 12.9 18.6 to 61.1 29.7 to 97.5 57.6 to 189.4

4 5.2 to 17.0 24.2 to 79.4 38.5 to 126.4 74.8 to 245.9

5 5.4 to 17.6 24.9 to 81.9 39.7 to 130.3 77.2 to 253.6

* 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 (201 3 $).

14

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### Table 14.4

. 6 Estimates of Present Value of NO X 

### Emissions Reduction under Packaged Terminal Air Conditioners and Packaged Terminal Heat Pumps Trial Standard Levels Compared to the Alternative Base Case

TSL 3% discount rate 7% discount rate

Million 201 3 $

Primary Energy Emissions

1 0.54 0.20

2 2.22 0.81

3 4.40 1.63

4 5.58 2.14

5 5.68 2.19

Upstream Emissions

1 0.80 0.35

2 3.25 1.40

3 6.47 2.81

4 8.61 3.90

5 8.94 4.10

Full

- Fuel

- Cycle Emissions

1 1.34 0.55

2 5.46 2.22

3 10.88 4.43

4 14.19 6.03

5 14.62 6.28

14

- 11

### REFERENCES

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/catalog.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

a gencies/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/sites/default/files/omb/assets/omb/inforeg/2006_cb/2006_c b_final_report.pdf >

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