Abt Associates Inc., March 31, 2011 Social Cost of Carbon from 316(b) Regulatory Options 1 

# Environment and Resources 55 Wheeler Street, Cambridge, MA  Tel: 617 492-7100  www.abtassociates.com



### Date March 31, 2011

To Erik Helm

From Tatiana Melnikova and Michael Fisher Subject Estimating Social Cost of Carbon from Changes in CO2 

### Emissions due to 316(b)

Regulatory Options

The 316(b) electric generators are expected to incur one-time and annual generation losses due to compliance technology installation downtime and energy penalty (for details see Chapter 3: Development of Costs for Regulatory Options of the EA document). To meet electricity demand, other electric generators – in the case of downtime – and either the specifically affected 316(b) generator or other electric generators – in the case of energy penalty – will have to make up these generation losses by generating more electricity. Additional electricity generation will require increased energy input, which may lead to increased carbon emissions, depending on the energy input and generation profile of the generating units used to make up the generation losses. The purpose of this memorandum is to outline the methodology for estimating the potential cost to society from the increased carbon emissions that could result from the 316(b) regulation.

Estimating Change in CO 2 Emissions



### To estimate an increase in CO2 

### emissions, we calculated the difference in CO2 

### emissions reported in prepolicy and policy scenario run results of the Integrated Planning Model (IPM) for each of the three regulatory options (for information on IPM see Chapter 6: Electricity Market Model Analysis). We then allocated this change in CO2 

### emissions over the analysis period of 2013 through 2056, i.e. the entire analysis period (for details of the analysis period determination see Chapter 11: Assessment of Total Social Cost). As described in Chapter 6: Electricity Market Model Analysis, there are four IPM run years: 2015, which represents a 5-year period of 2013 through 2017; 2020 represents a 5-year period of 2018 through 2022; 2025 represents a 5-year period of 2023 through 2027, and 2028 represents only 2028. EPA assumed that the difference in CO2 

### emissions reported for 2015 is the same as the difference in other four years represented by 2015, i.e., 2013, 2014, 2016, and 2017 and applied the same methodology to the remaining three run years, i.e., 2020, 2025, and 2028, thereby generating the change in CO2 emissions for 2013 through 2028. In reviewing the estimates of change in CO2 

### emissions from the IPM runs, we observed that for some regulatory options and some analysis years, CO2 

### emissions decline even though electricity generation needs to be “made up” as described above. On closer inspection, in these cases, the composition of generation changes between the baseline and the regulatory option case in such way that CO 2 

### emissions would plausibly decrease – e.g., increased generation from nuclear facilities (which are non CO 2 

### emitting) and reduced generation from coal or other fossil fuel facilities. 

# memorandumAbt Associates Inc., March 31, 2011 Social Cost of Carbon from 316(b) Regulatory Options 2



### For the year 2028, EPA observed different patterns of emissions change across the three regulatory options: for Option 1, CO2 

### emissions decline from the baseline to the post-policy case, while for Options 2 and 3, emissions increase from the baseline to the post-policy case. For this analysis, for Options 2 and 3, EPA applied the estimated increase in CO2 

### emissions in 2028 over the full analysis period, 2029 through 2056. However, for Option 1, which reported a decline in CO 2 

### emissions for the policy case, EPA applied this decrease only for 2028 and assumed that for 2029 through 2056 the difference in CO 2 

### emissions is zero. This treatment avoids understating the potential effect of the regulation on CO 2 

### emissions,

Estimating the Social Cost of the Increased CO2 Emissions



### To estimate the social cost of the increased CO2 

### emissions from 316(b) compliance, we used Social Cost of Carbon (SCC) values calculated at specific discount rates from the 2010 Technical Supporting Document (2010 TSD) titled Social Cost of Carbon for Regulatory Impact Analysis-Under Executive Order 12866 developed by the U.S. Government Interagency Work Group on Social Cost of Carbon. The workgroup estimated four sets of annual SCC values for 2010 through 2050 ( Table 1 ). Three of these four sets of SCC values are based on the average SCC values across models and socio-economic and emissions scenarios, for each of three discount rates: 5.0, 3.0, and 2.5 percent. The Work Group developed a fourth set of SCC values as the 95 th 

### percentile value of the 3 percent discount rate-based SCC values – these values represent the potential for higher-than-expected impacts from temperature change farther out the distribution of SCC. 1 Table 1: Social Cost of Carbon, 2010-2050 ($2009) SCC Calculation Discount Rates 2.5% 3.0% 5.0% Year Average Average High Average 2010 $4.86 $22.12 $67.07 $36.28 2015 $5.89 $24.60 $75.24 $39.69 2020 $7.03 $27.18 $83.40 $43.10 2025 $8.47 $30.59 $93.43 $47.44 2030 $10.02 $33.90 $103.35 $51.67 2035 $11.57 $37.21 $113.37 $56.01 2040 $13.13 $40.51 $123.29 $60.36 2045 $14.68 $43.51 $132.08 $63.77 2050 $16.23 $46.40 $140.76 $67.18 a. SCC values are calculated for 2010 through 2050 and vary by year; this table reports SCC values only for every 5 th year for convenience. Source: EPA analysis, 2010



### These SCC values represent the present value of the future stream of costs to society2 

### from a change in GHG emissions in a given year, recognizing that the impact of changes in CO 2 

### presence in the

1 For more information on the assumptions and methodology used to develop these SCC values see the 2010 Technical Supporting Document (TSD) titled Social Cost of Carbon for Regulatory Impact Analysis-Under Executive Order 12866 available online at: http://www.epa.gov/oms/climate/regulations/scc-tsd.pdf

.

2 The SCC values reported in the 2010 TWD are described as global values and the document provides guidance that could be used to adjust the values to reflect a domestic impact/cost basis (p. 11). However, throughout the document, and in particular in the conclusion (p. 33), the document points to use of the global-basis values in regulatory analyses: “The interagency group selected four SCC estimates for use in regulatory analyses. For 2010, these estimates are $5, $21, $35, and $65 (in 2007 dollars).” These values, as summarized in the conclusion, are in fact global-basis values from elsewhere in the document; accordingly, for this analysis, we used the global-basis values for calculating SCC for the 316(b) regulatory options analysis.Abt Associates Inc., March 31, 2011 Social Cost of Carbon from 316(b) Regulatory Options 3



### atmosphere does not occur only in the year in which the emissions occur, but extends over a substantial period into the future. In the 2010 TSD, these values are in 2007 dollars. To state them in 2009 dollars for the 316(b) social cost analysis, we used the GDP deflator series published by the Bureau of Economic Analysis of the U.S. Department of Commerce. The SCC values published by the Work Group increase in real economic terms from year to year, reflecting the increasing marginal cost to society of additional GHG emissions and increasing cumulative burden of climate change over time. Because the Work Group published SCC values only through 2050, it was necessary to extend the SCC values to from 2050 to 2056, the last year of the 316(b) social cost analysis. For the period 2050-2056, we assumed that the annual real rate of change in SCC values remained the same as in the year 2049 to 2050. We then multiplied the year-by-year SCC values times the estimated year-by-year increases in CO2 

### emissions to yield the social cost of the year-to-year changes in CO2 

### emissions. As was done for the analysis of social costs (see Chapter 11: Assessment of Total Social Cost), we then discounted the resulting year-by-year social cost values to the 316(b) regulation promulgation year of 2012, and annualized these over the 316(b) benefit-cost analysis period of 50 years, using discount rates of 3 percent and 7 percent, i.e., the same discount rates as the ones used for the social cost analysis of the 316(b) regulation (see Chapter 11: Assessment of Total Social Cost). We acknowledge that this discounting approach appears to diverge from the discount rate concepts used to develop the SCC values (which use rates of 2.5 percent, 3 percent and 5 percent). However, we assess use of the 3 and 7 percent discount rates, as used elsewhere in the 316(b) social cost and benefit analyses, as being appropriate given that the alternative year-by-year SCC values reflect a range of factors including not only discount rates, but also different impact/socio-economic evolution scenarios, modeling approach/framework, and damage functions.

Table 2 summarizes the total change in CO2 

### emissions and associated annualized social cost of carbon values as of 2012 by option, while Table 3

, Table 4, and Table 5 provide undiscounted SCC values by emission year for Options 1, 2, and 3, respectively. Table 2: Annualized Total Global Social Cost of Carbon Due to Changes in CO2 Emissions (as of 2012) Total Global Social Cost of Carbon (Millions; $2009) Calculated at a Discount Rate of 2.5% 3.0% 5.0% Option Emissions Change (Millions; tCO2eq) Average Average High Average Discounted and Annualized Over 50 Years Using Discount Rate of 3% 1: IM Everywhere -7 ($9) ($6) ($18) ($2) 2: IM Everywhere and EM for Facilities with DIF>125MGD 1,645 $1,750 $1,160 $3,537 $358 3: I&E Mortality Everywhere 1,685 $1,793 $1,189 $3,624 $367 Discounted and Annualized Over 50 Years Using Discount Rate of 7% 1: IM Everywhere ($10) ($7) ($20) ($2) 2: IM Everywhere and EM for Facilities with DIF>125MGD $1,465 $960 $2,930 $285 3: I&E Mortality Everywhere $1,503 $985 $3,006 $292 Source: EPA analysis, 2010Abt Associates Inc., March 31, 2011 Social Cost of Carbon from 316(b) Regulatory Options 4

Table 3: Social Cost of Carbon by Year – Option 1: IM Everywhere (Millions; $2009) Using SCC Values Calculated at a Discount Rate of 2.5% 3.0% 5.0% Year Emissions

(Millions; tCO2eq) Average Average High Average 2012 0.0 $0.0 $0.0 $0.0 $0.0 2013 -0.2 -$7.2 -$4.4 -$13.5 -$1.0 2014 -0.2 -$7.3 -$4.5 -$13.8 -$1.1 2015 -0.2 -$7.4 -$4.6 -$14.1 -$1.1 2016 -0.2 -$7.5 -$4.7 -$14.4 -$1.1 2017 -0.2 -$7.7 -$4.8 -$14.7 -$1.2 2018 0.4 $16.0 $10.0 $30.7 $2.5 2019 0.4 $16.2 $10.2 $31.3 $2.6 2020 0.4 $16.5 $10.4 $31.9 $2.7 2021 0.4 $16.8 $10.7 $32.7 $2.8 2022 0.4 $17.2 $10.9 $33.5 $2.9 2023 -1.4 -$61.9 -$39.7 -$121.2 -$10.8 2024 -1.4 -$63.1 -$40.5 -$123.9 -$11.1 2025 -1.4 -$64.3 -$41.5 -$126.7 -$11.5 2026 -1.4 -$65.4 -$42.3 -$129.3 -$11.9 2027 -1.4 -$66.6 -$43.3 -$132.0 -$12.3 2028 -1.4 -$70.7 -$46.0 -$140.5 -$13.3 2029 0.0 $0.0 $0.0 $0.0 $0.0 2030 0.0 $0.0 $0.0 $0.0 $0.0 2031 0.0 $0.0 $0.0 $0.0 $0.0 2032 0.0 $0.0 $0.0 $0.0 $0.0 2033 0.0 $0.0 $0.0 $0.0 $0.0 2034 0.0 $0.0 $0.0 $0.0 $0.0 2035 0.0 $0.0 $0.0 $0.0 $0.0 2036 0.0 $0.0 $0.0 $0.0 $0.0 2037 0.0 $0.0 $0.0 $0.0 $0.0 2038 0.0 $0.0 $0.0 $0.0 $0.0 2039 0.0 $0.0 $0.0 $0.0 $0.0 2040 0.0 $0.0 $0.0 $0.0 $0.0 2041 0.0 $0.0 $0.0 $0.0 $0.0 2042 0.0 $0.0 $0.0 $0.0 $0.0 2043 0.0 $0.0 $0.0 $0.0 $0.0 2044 0.0 $0.0 $0.0 $0.0 $0.0 2045 0.0 $0.0 $0.0 $0.0 $0.0 2046 0.0 $0.0 $0.0 $0.0 $0.0 2047 0.0 $0.0 $0.0 $0.0 $0.0 2048 0.0 $0.0 $0.0 $0.0 $0.0 2049 0.0 $0.0 $0.0 $0.0 $0.0 2050 0.0 $0.0 $0.0 $0.0 $0.0 2051 0.0 $0.0 $0.0 $0.0 $0.0 2052 0.0 $0.0 $0.0 $0.0 $0.0 2053 0.0 $0.0 $0.0 $0.0 $0.0 2054 0.0 $0.0 $0.0 $0.0 $0.0 2055 0.0 $0.0 $0.0 $0.0 $0.0 2056 0.0 $0.0 $0.0 $0.0 $0.0 NPV 3% -$231.5 -$149.6 -$456.6 -$41.9 Annualized, 3% -$9.0 -$5.8 -$17.7 -$1.6 NPV 7% -$139.7 -$90.1 -$275.0 -$25.1 Annualized 7% -$10.1 -$6.5 -$19.9 -$1.8Abt Associates Inc., March 31, 2011 Social Cost of Carbon from 316(b) Regulatory Options 5

Table 4: Social Cost of Carbon by Year – Option 2: IM Everywhere and EM for Facilities with DIF>125MGD (Millions; $2009) Using SCC Values Calculated at a Discount Rate of 2.5% 3.0% 5.0% Year Emissions

(Millions; tCO2eq) Average Average High Average 2012 0.0 $0.0 $0.0 $0.0 $0.0 2013 -2.0 -$77.8 -$48.0 -$146.4 -$11.1 2014 -2.0 -$79.3 -$49.0 -$149.8 -$11.6 2015 -2.0 -$80.8 -$50.1 -$153.1 -$12.0 2016 -2.0 -$82.0 -$51.1 -$156.5 -$12.4 2017 -2.0 -$83.5 -$52.2 -$159.9 -$12.8 2018 34.5 $1,440.6 $902.2 $2,763.5 $224.6 2019 34.5 $1,462.0 $920.0 $2,820.6 $231.8 2020 34.5 $1,486.9 $937.8 $2,877.6 $242.5 2021 34.5 $1,515.5 $962.8 $2,945.4 $253.2 2022 34.5 $1,547.6 $984.2 $3,016.7 $263.9 2023 56.3 $2,572.4 $1,647.0 $5,034.1 $448.1 2024 56.3 $2,618.9 $1,681.9 $5,144.7 $459.8 2025 56.3 $2,671.3 $1,722.7 $5,261.1 $477.2 2026 56.3 $2,717.8 $1,757.6 $5,371.7 $494.7 2027 56.3 $2,764.4 $1,798.3 $5,482.3 $512.1 2028 41.4 $2,071.5 $1,348.2 $4,117.3 $389.5 2029 41.4 $2,105.7 $1,373.9 $4,198.6 $402.3 2030 41.4 $2,140.0 $1,403.8 $4,280.0 $415.2 2031 41.4 $2,178.5 $1,429.5 $4,365.6 $428.0 2032 41.4 $2,212.7 $1,459.5 $4,446.9 $440.8 2033 41.4 $2,247.0 $1,485.1 $4,528.2 $453.7 2034 41.4 $2,285.5 $1,515.1 $4,613.8 $466.5 2035 41.4 $2,319.7 $1,540.8 $4,695.1 $479.4 2036 41.4 $2,354.0 $1,570.7 $4,776.4 $492.2 2037 41.4 $2,392.5 $1,596.4 $4,862.0 $505.0 2038 41.4 $2,426.7 $1,622.1 $4,943.4 $517.9 2039 41.4 $2,461.0 $1,652.1 $5,024.7 $530.7 2040 41.4 $2,499.5 $1,677.7 $5,106.0 $543.6 2041 41.4 $2,525.2 $1,703.4 $5,178.8 $556.4 2042 41.4 $2,555.1 $1,729.1 $5,251.5 $569.2 2043 41.4 $2,585.1 $1,750.5 $5,324.3 $582.1 2044 41.4 $2,610.8 $1,776.2 $5,397.0 $594.9 2045 41.4 $2,640.7 $1,801.9 $5,469.8 $607.8 2046 41.4 $2,670.7 $1,823.3 $5,538.3 $620.6 2047 41.4 $2,696.4 $1,848.9 $5,611.0 $633.4 2048 41.4 $2,726.3 $1,874.6 $5,683.8 $646.3 2049 41.4 $2,756.3 $1,900.3 $5,756.6 $659.1 2050 41.4 $2,782.0 $1,921.7 $5,829.3 $672.0 2051 41.4 $2,807.9 $1,943.3 $5,903.0 $685.0 2052 41.4 $2,834.1 $1,965.2 $5,977.6 $698.4 2053 41.4 $2,860.5 $1,987.4 $6,053.2 $712.0 2054 41.4 $2,887.1 $2,009.7 $6,129.7 $725.9 2055 41.4 $2,914.0 $2,032.4 $6,207.1 $740.0 2056 41.4 $2,941.2 $2,055.3 $6,285.6 $754.4 NPV 3% $45,022.0 $29,852.9 $91,007.7 $9,222.2 Annualized, 3% $1,749.8 $1,160.2 $3,537.1 $358.4 NPV 7% $20,217.7 $13,250.9 $40,435.9 $3,929.8 Annualized 7% $1,465.0 $960.2 $2,930.0 $284.8Abt Associates Inc., March 31, 2011 Social Cost of Carbon from 316(b) Regulatory Options 6

Table 5: Social Cost of Carbon by Year – Option 3: I&E Mortality Everywhere (Millions; $2009) Using SCC Values Calculated at a Discount Rate of 2.5% 3.0% 5.0% Year Emissions

(Millions; tCO2eq) Average Average High Average 2012 0.0 $0.0 $0.0 $0.0 $0.0 2013 -2.0 -$78.0 -$48.1 -$146.8 -$11.2 2014 -2.0 -$79.5 -$49.1 -$150.2 -$11.6 2015 -2.0 -$81.0 -$50.2 -$153.5 -$12.0 2016 -2.0 -$82.3 -$51.2 -$156.9 -$12.4 2017 -2.0 -$83.7 -$52.3 -$160.3 -$12.9 2018 35.8 $1,496.2 $937.0 $2,870.2 $233.3 2019 35.8 $1,518.4 $955.5 $2,929.5 $240.7 2020 35.8 $1,544.4 $974.0 $2,988.7 $251.8 2021 35.8 $1,574.0 $999.9 $3,059.1 $262.9 2022 35.8 $1,607.3 $1,022.2 $3,133.1 $274.1 2023 57.5 $2,626.6 $1,681.7 $5,140.3 $457.6 2024 57.5 $2,674.1 $1,717.4 $5,253.2 $469.5 2025 57.5 $2,727.6 $1,759.0 $5,372.0 $487.3 2026 57.5 $2,775.2 $1,794.6 $5,484.9 $505.1 2027 57.5 $2,822.7 $1,836.2 $5,597.8 $522.9 2028 42.4 $2,119.0 $1,379.1 $4,211.8 $398.4 2029 42.4 $2,154.1 $1,405.4 $4,295.0 $411.5 2030 42.4 $2,189.1 $1,436.0 $4,378.2 $424.7 2031 42.4 $2,228.5 $1,462.3 $4,465.8 $437.8 2032 42.4 $2,263.5 $1,493.0 $4,548.9 $451.0 2033 42.4 $2,298.6 $1,519.2 $4,632.1 $464.1 2034 42.4 $2,338.0 $1,549.9 $4,719.7 $477.2 2035 42.4 $2,373.0 $1,576.1 $4,802.9 $490.4 2036 42.4 $2,408.0 $1,606.8 $4,886.1 $503.5 2037 42.4 $2,447.4 $1,633.1 $4,973.6 $516.6 2038 42.4 $2,482.4 $1,659.3 $5,056.8 $529.8 2039 42.4 $2,517.5 $1,690.0 $5,140.0 $542.9 2040 42.4 $2,556.9 $1,716.3 $5,223.2 $556.0 2041 42.4 $2,583.1 $1,742.5 $5,297.6 $569.2 2042 42.4 $2,613.8 $1,768.8 $5,372.0 $582.3 2043 42.4 $2,644.4 $1,790.7 $5,446.5 $595.4 2044 42.4 $2,670.7 $1,816.9 $5,520.9 $608.6 2045 42.4 $2,701.3 $1,843.2 $5,595.3 $621.7 2046 42.4 $2,732.0 $1,865.1 $5,665.4 $634.8 2047 42.4 $2,758.3 $1,891.4 $5,739.8 $648.0 2048 42.4 $2,788.9 $1,917.6 $5,814.2 $661.1 2049 42.4 $2,819.6 $1,943.9 $5,888.7 $674.2 2050 42.4 $2,845.8 $1,965.8 $5,963.1 $687.4 2051 42.4 $2,872.3 $1,987.9 $6,038.5 $700.8 2052 42.4 $2,899.1 $2,010.3 $6,114.8 $714.4 2053 42.4 $2,926.1 $2,033.0 $6,192.1 $728.3 2054 42.4 $2,953.4 $2,055.9 $6,270.3 $742.5 2055 42.4 $2,980.9 $2,079.0 $6,349.6 $757.0 2056 42.4 $3,008.7 $2,102.4 $6,429.8 $771.7 NPV 3% $46,137.9 $30,589.9 $93,255.4 $9,447.0 Annualized, 3% $1,793.2 $1,188.9 $3,624.4 $367.2 NPV 7% $20,746.1 $13,595.4 $41,487.9 $4,030.2 Annualized 7% $1,503.3 $985.1 $3,006.2 $292.0