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5.XX Sensitivity Analysis of the Social Costs of New Generating Sources.

Section 5.X explains why EPA believes that, given expected energy demand along with 

fuel and capital prices, new conventional coal capacity is unlikely to be constructed over the 

time horizon of interest in this analysis. As part of this explanation we provide an illustrative, 

but representative, comparison of the relative private costs of constructing and operating new 

conventional coal and natural gas combined cycle systems to provide the same generation 

services (see Figure 5.4).1 This comparison shows that, at forecast relative fuel prices, there is a 

significant difference in the levelized cost of these two generating technologies. However, in 

the context of a social welfare analysis, the appropriate comparison between multiple options 

is on the basis of benefits and costs to society as a whole, and not solely the private cost to an 

investor. From the perspective of society, the appropriate cost comparison should account for 

the pollution damages associated with the competing generation technologies in addition to 

private generating costs. This section further explores the social costs of this NSPS standard 

across a wide range of natural gas prices, a key factor in the cost of the policy. It begins by 

estimating illustrative environmental damages per MWh for coal relative to gas generation and 

then uses those estimate to conduct an illustrative breakeven analysis for the social costs of the 

policy. 

5.XX.1 Illustrative environmental damages per MWh 

As discussed in Section 5.10, the damages associated with emissions from new sources 

of electricity generation are greater for coal-fired units than for natural gas combined cycle 

units (even when accounting for compliance with EPA’s recent Mercury and Air Toxics 

Standard). To gauge the general effect of accounting for both the private and external costs of 

electricity generation for new generation options we continue with the illustrative example 

from Section 5.10. By external costs we mean the damages associated with pollution that are 

not accounted for in the private investor's decision making.2To illustrate the external costs 

associated with new generation options we combine the illustrative emission profiles for the 

new units, as provided in Table 5-4, and the illustrative damage estimates discussed in the 

 

1

By fixing generation in this comparison, we are assuming that both technologies generate the same benefits in 

the form of electricity generating services. For a discussion of the usefulness of a levelized cost analysis, and 

when it provides informative results and when it does not, see for example Joskow 2010 and 2011. 

2

See Baumol and Oates, 1988. 
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previous section.3 Specifically, for each generating technology we multiply the CO2 emissions 

by the estimates of the SCC and add that to the SO2 emissions multiplied by the PM2.5-related 

SO2 benefit per-ton estimates4, subsequently dividing by MWh5to estimate the external costs 

per unit of generation. Using this approach the damages associated with generation from the 

illustrative new coal unit are, depending on the discount rate and epidemiology study used, $18

to $99 per MWh, while damages associated with the illustrative new natural gas combined 

cycle unit are $3 to $29 per MWh (2007$).6 For any specific epidemiology study and SCC 

estimate the pollution damages associated with new coal generation in this illustrative, but 

representative, example are significantly higher than those associated with new natural gas 

combined cycle generation. For example, considering the SO2 per ton damages based on Pope 

et al. 2002 using a 7% discount rate and the SCC estimate based on the 3% discount rate, new 

generation based on conventional coal in this example would result in an additional $24 per 

MWh in pollution damages compared to a new NGCC plant. Alternately, damages that reflect 

the SO2 per ton damage estimate based on Laden et al. 2006 using a 3% discount rate and the 

SCC estimate based on a 2.5% discount rate suggest an additional $52 of pollution damages per 

MWh from a new conventional coal unit compared to a new NGCC plant. Table 5-XX reports the 

additional pollution damages from the illustrative new coal plant relative to the illustrative new 

natural gas plant given different mortality risk studies and assumptions about the discount rate. 

These pollution damages should be relatively invariant across natural gas prices and other 

economic factors.

 

3

Only the direct emissions of three pollutants (CO2, SO2, and Nox) are considered in this illustrative exercise. 

Other pollutants and lifecycle emissions are not considered.

4

See footnote 23 in section 5.11 for a description of the benefit-per-ton values. In this exercise they are 

interpreted as damage per-ton values.

5

See footnote 19 in section 5.10.

6

Different discount rates are applied to SCC than to the other damage estimates because CO2 emissions are longlived and subsequent damages occur over many years. Moreover, several rates are applied to SCC because the 

literature shows that it is sensitive to assumptions about discount rate and because no consensus exists on the 

appropriate rate to use in an intergenerational context. The SCC interagency group centered its attention on 

the 3 percent discount rate but emphasized the importance of considering all four SCC estimates. See the “SCC 

TSD,” Interagency Working Group on Social Cost of Carbon (IWGSC). 2010. Technical Support Document: Social 

Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866. Docket ID EPA-HQ-OAR-2009-

0472-114577. http://www.epa.gov/otaq/climate/regulations/scc-tsd.pdf, for details.
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Table 5-XX. Pollution Damages ($/MWh) from Illustrative New Coal Unit Relative to New 

Natural Gas Combined Cycle Unit 

Health Co-Benefits

SCC Discount Rate 3% Discount Rate 7% Discount Rate

5% $17 - $37 $16 - $33

3% $25 - $45 $24 - $42

2.5% $32 - $52 $31 - $49

3% (95th percentile) $50 - $70 $49 - $66

Notes: The range of costs within each SCC value and discount rate for conventional pollution damages pairing reflects the use of 

two PM2.5-related estimates of premature mortality, Pope et al. (2002) representing the low estimate and Laden et al. (2006) 

represent the high estimate. Assumed coal is high sulfur bituminous with scrubber and SCR, and also in compliance with MATS. 

The combinations of health studies and discount rates represent lower and higher valuations of impacts of NOx and SO2 

emissions in the Eastern U.S.

As with the relative investment costs of a new coal unit and a new natural gas combined 

cycle system, a comparison of the environmental damages associated with these two 

technologies depends on the location under consideration and the specific fuels that would be 

used. An ideal social cost comparison of these technologies would account for these local 

circumstances (and consider alternative sources of generation).7 That said, the damages 

associated with CO2 emissions, which is the focus of this rule, do not depend on the location of 

generation. Furthermore, the damages associated with sulfur dioxide emissions from a new 

very well-controlled coal-fired unit firing low-sulfur coal would still be greater than the damages 

from a new natural gas combined cycle unit independent of the location. Other studies of the 

social costs of coal and natural gas fired generation provide similar findings (Muller et. al, 2011; 

NRC, 2009).8 Overall, these environmental damages suggest that, even if it were the case that 

the private cost of natural gas generation began to rise relative to the private cost of coal 

generation, there would still remain a substantial difference in the overall cost to society 

between these two technologies. In other words, the damages from air pollution suggest that, 

even in cases where new coal may be marginally more economic to operate, these new units 

are still likely to impose a net cost to society relative to a new natural gas plant. This idea is 

discussed in more detail in the next section. 

 

7

EPA does not assert a specific location for the illustrative coal and natural gas combined cycle units and is 

therefore unable to specifically determine the population that would be affected by their SO2 and NOX

emissions. Therefore, the benefits for any specific unit can be very different than the estimates shown here. 

8 Muller et al. 2011 conclude that, “ ...coal-fired power plants have air pollution damages larger than their value 

added”, while the same is not true for natural gas plants (see Table 5). However, these comparisons are based 

on typical existing coal and natural gas units, including natural gas boilers, and are not sensitive to location. The 

NRC 2009 study shows that only the most polluting natural gas units may cause greater damages than even the 

least polluting existing coal plants (compare Tables 2-9 and 2-15). However, the NAS comparison does not 

compare new units located in the same place, and so some of the natural gas units with the greatest damages 

may be attributable to their location, and includes natural gas steam boilers, which have a higher emission 

rates per unit of generation than natural gas combined cycle units. 
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5.XX.2 Social Costs Across A Range of Gas Prices - Breakpoint Analysis

Section 5.XX.1 details illustrative environmental damages associated with a model coal 

plant compared to a natural gas plant. The social cost of a policy should account for not only 

the difference in private cost between the two technologies, but also the difference in the 

external costs (environmental damages) associated with the two technologies. At today’s gas 

prices the difference in the private levelized cost for these illustrative facilities is roughly $27 

per MWh in favor of natural gas combined cycle at today’s gas prices(see Figure 5-XX). 

Because the underlying economics at current gas prices favor the construction of NGCC, the 

proposed NSPS standard does not impose any social costs (or generate monetized net benefits). 

However, the net benefits from a policy interact with the relative generating costs, which in 

turn vary based on the prices of fuels like natural gas and coal. Because the cost of this 

standard is zero under EPA’s baseline scenario, and because the social costs are expected to be 

especially sensitive to the relatively uncertain parameter of natural gas prices, EPA conducted 

an illustrative analysis of the breakpoints where natural gas prices change the sign of the social 

costs of the policy (holding all other parameters constant).9 This analysis describes the pattern 

in social costs as natural gas prices rise across three ranges: projected gas prices, unexpectedly 

high natural gas prices, and unprecedented natural gas prices.

Likely Projected Natural Gas Prices. As described in Section 5.5.1., the base case 

modeling that EPA performed for this rule (as well as base case modeling that EPA has 

performed for other recent air rules) indicates that new fossil fuel-fired generating capacity 

projected to be built through 2020 will be either natural gas-fired combined cycle generation or 

coal-fired generation with CCS (the latter is assumed to be built with support from federal 

grants). As shown in section 5.XX, in our illustrative analysis it is only when gas prices reach 

approximately $9.60/mmBtu, that coal-fired generation without CCS becomes competitive in 

terms of dollars per megawatt hour wholesale cost of electricity generation. For context, even 

EIA’s most pessimistic gas sensitivity case (“low shale gas recovery per well”) only projects an 

electricity sector gas price of $5.93 in 2020 (the “low shale gas recovery per play” scenario 

projects a price of $6.79/mmBtu in 2020). In other words, even under pessimistic natural gas 

sensitivity cases, NGCC is likely to remain the economic choice for generation over the next two 

decades even in the absence of this standard. As a result, the social costs of the standard are 

expected to be zero.

 

9

In reality this is unlikely to be the case. For example, high economic growth would increase both natural gas and 

coal prices at the same time - making it harder to alter the underlying cost advantage of NGCC generation.
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Unexpectedly High Natural Gas Prices In this illustrative analysis, at gas prices above 

$9.60/mmBTU, coal generation without CCS becomes competitive with NGCC, which may mean 

that some new non-CCS coal units might be constructed in the absence of the standard

provided there is sufficient demand and new coal without CCS is competitive with other 

generating technologies. However, these coal units would also impose social costs in the form 

of global warming pollution and particulate matter (as a result of SOx and NOx emissions) and 

this proposed standard would avoid those social costs. For example, at gas prices of 

$10/MMBTU, the illustrative non-CCS coal unit would generate power for $[3]/MWh less than 

an NGCC unit10, but result in greater pollution damages of $16-70/MWh (see table 5-XX).11 

Under the proposed standard, if the investor built the NGCC unit instead the resulting net social 

benefit would be $[13] to [67]/MWh. For context, we note that these circumstances are less 

likely than the zero cost scenario outlined above. To put this gas price breakpoint into historical 

context, $9.60/MMBTU is higher than any annual gas price observed over the last 10 years, and 

it has only been reached temporarily in 9 of the last 120 months. 12 13 Looking forward, the 

continued development of unconventional natural gas resources in the U.S. suggests that gas 

prices would actually tend to be towards the lower end of the historical range. As discussed 

above, none of the EIA sensitivity cases (which represent future price trajectories for both gas 

and coal) show scenarios where non-compliant coal becomes more economic than NGCC 

before 2020.

Unprecedented Natural Gas Prices. At extremely high gas prices, the private generating 

costs of non-compliant coal are significantly lower than the cost of new natural gas and the net 

social cost of the standard could be positive (negative net benefits) under some assumptions 

for environmental damage costs. For example, at gas prices of $15/MMBTU, the illustrative 

non-CCS coal unit would generate power for roughly $[36]/MWh less than an NGCC unit but 

result in social costs of $16-70/MWh (see table 5-XX). Under the proposed standard, a 

generator would likely build the NGCC unit instead, resulting in a net social benefit of $[-19] to 

[34]/MWh. The point at which this standard would result in net social costs depends heavily 

 

10 Assuming an increase of $6.80/MWh in the cost of gas generation for every $1/MMBTU increase in natural gas 

prices. AWAITING CONFIRMATION

11 Again, assuming that coal prices do not increase along with natural gas prices as they historically have. See 

previous footnote.

12 See: http://www.eia.gov/dnav/ng/hist/n3045us3A.htm

13 It is important to note that relatively high gases prices in a single month or year will not drive the 

investment decision in the technology employed for new generating units. Instead that decision will be 

motivated by expectations of relative fuel prices over the lifetime of the unit. Therefore given the 

historical path of natural gas prices and the forecasts for the future, it is highly unlikely that 

expectations of sustained high natural gas prices, to the degree necessary to drive technology 

choices, will be realized.
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upon the value for damages from GHGs and SO2; assuming an SCC using a 3% discount rate in 

this illustrative example would generate net social costs at average gas prices of $[13] to 

$[18]/MMBTU. Annual natural gas prices delivered to the electricity sector have not exceeded

$ 9.26 /MMBTU over the last 15 years.

We emphasize that differences in generating costs, plant design, local factors, and the relative 

differences between fuels costs can all have major impacts on the precise circumstances where 

this standard would be projected to have no costs, net benefits or net costs. However, based 

annual gas prices over the last 15 years, we project that this standard is most likely to have no 

notable costs, that there is some small probability that it produces net benefits, and an 

exceedingly low probability that it results in net costs. 

The analysis above focuses on two well developed control technologies, conventional 

supercricitcal coal and natural gas combined cycle. Because these technologies are well 

developed, there is significantly more certainty about operating costs than for new, emerging 

technologies like coal with CCS. As a result, any analysis which examines the relative social 

costs of coal vs. coal with CCS is considerably more uncertain and should primarily be used as a 

guide to the key sensitivities in the relative social costs. EPA compared the costs and damages 

for a model pulverized coal (PC) EGU using supercritical steam conditions (like the one used in 

the comparisons above) to and IGCC plant with a CCS system (e.g. Selexol) [SEE TECHNICAL

MEMO FOR DETAILS]

EPA analyzed the cost and emission impacts for two scenarios. In the first scenario, 

partial capture achieves the proposed emissions rate of 1,000 lb CO2/MWh gross output. This 

requires that approximately 31% of the CO2 is captured and stored. EPA has not previously

developed costs for such a unit, therefore, this analysis may not fully realize all of the cost 

savings possible from building a unit with significantly less than 90% capture (for instance, an 

IGCC could be built with a conventional gas turbine, rather than one designed for higher 

temperature characteristics of a higher hydrogen content fuel). A 90% capture system was also 

examined to analyze the cost of several proposed new coal-fired EGUs using CCS. In the near 

term, any new coal-fired EGU with CCS would mostly likely be located in areas amenable to 

using the captured CO2 in enhanced oil recovery (EOR) operations. This is because EOR 

provides a revenue stream that is not available for other forms of geologic storage. For example, 

the Texas Clean Energy project14 is planning to capture 90% of the CO2 and sell it for enhanced 

oil recovery. To evaluate the potential revenues from EOR we examined two options. We 

considered a case where CO2 could be sold for $45/ton based on recent DOE studies.15 We also 

 

14 http://www.texascleanenergyproject.com/

15 US DOE / NETL studies have assumed a delivered CO2 price ranging from $40 - $45/tonne. “Improving Domestic 

Energy Security and Lowering CO2 Emissions with “Next Generation” CO2-Enhanced Oil Recovery (CO2-EOR)”, 

DOE/NETL-2011/1504 (June 2011); and “Storing CO2 with Enhanced Oil Recovery, DOE/NETL-402/1312 

(February 2008).
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considered a lower revenue sensitivity where CO2 could be sold for $15/ton (equivalent to the 

cost assumed for the transport and storage of CO2 in the analysis). Costs for the IGCC unit with 

90% capture and the ultra-supercritical coal-fired unit without CCS were derived from IPM 

version 4.10.16 These cost estimates are generally consistent with the range of studies estimating 

the cost of CCS that are available, however there is uncertainty around any such projections of 

technology costs, particularly for early movers of this technology. Costs for the IGCC unit with 

30% capture were derived from the costs for the IGCC unit with 90% CCS using best 

engineering judgment. EPA estimated the benefits associated with avoided CO2 and SO2 

emissions in a similar fashion to the one described above [REFERENCE TECHNICAL MEMO 

IN THE DOCKET]

Table 5-XX: Illustrative Costs and Benefits for two CCS Scenarios Compared to 

Conventional Coal Plant (Millions 2007$) – NOTE – WILL BE REVISED TO $/MWh 

FOR CONSISTENCY

USPC to IGCC 

with 30% 

capture

USPS to IGCC 

with 90% 

capture

Additional Gross Annual Private Costs $80.0 $130.3 

Revenue from EOR

$17.4

(@$15/ton)

$143.7 

(@$45/ton)

Net Additional Annual Private Costs $62.6 ($13.4)

Value of Quantified Benefits

 SCC 3% with Pope 7% $58 $109

 SCC 3% with Laden 3% $101 $151

Net Benefits

 SCC 3% with Pope 7% ($4.6) $122.4

 SCC 3% with Laden 3% $38.4 $164.4

This analysis suggests that the relative social cost of CCS compared to conventional coal is 

sensitive to the achieved generating costs for CCS units, the revenue stream from EOR, and the 

monetary value of avoided climate and other air pollution damages. However, it also suggests 

that, at relatively low prices for EOR revenue ($15/MWh), CCS generation can generate net 

social benefits compared to conventional coal generation.

EPA recognizes that this illustrative analysis is somewhat novel, and requests comment on ways 

to incorporate uncertainty about future economic factors (and gas prices in particular) into the 

consideration of the social cost of this rule.

 

16http://www.epa.gov/airmarkets/progsregs/epa-ipm/BaseCasev410.html
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References for Social Cost Section

W. J. Baumol and W. E. Oates, The Theory of Environmental Policy. 2nd Edition. Cambridge 

University Press New York (1988).

P.L Joskow. 2010. Comparing the Cost of Intermittent and Dispatchable Electricity Generating 

Technologies. MIT Center for Energy and Environmental Policy Research Working Paper 10-013.

P.L. Joskow, 2011. "Comparing the Costs of Intermittent and Dispatchable Electricity Generating 

Technologies," American Economic Review, vol. 101:238-41.

N.Z. Muller, R. Mendelsohn, and W. Nordhaus. Environmental Accounting for Pollution in the 

United States Economy. American Economic Review. 101:1649-1675.

National Research of Council (NRC). 2009. Hidden Costs of Energy: Unpriced Consequences of 

Energy Production and Use. National Academies Press: Washington, D.C.