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

14.3 DEVELOPMENT OF SOCIAL COST OF CARBON VALUES

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

- 2

14.3.1 Current Approach and Key Assumptions

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

- 2

14.3.2 Limitations of Current Estimates

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

- 4

14.4 VALUATION OF OTHER EMISSIONS REDUCTIONS

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

- 5

14.5 RESULTS

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

- 5

LIST OF TABLES

Table 14.2.1 Annual SCC Values for 2010

- 2050 from 2010 Interagency Report (in 2007$ per M etric Ton)

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

- 3

Table 14.2.2 Annual SCC Values for 2010

– 2050 from 2013 Interagency Update (in 2007$ per Metric Ton of CO 2 )

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

- 4

Table 14.4.1 Estimates of Global Present Value of CO 2 Emissions Reduction under

TSLs for Commercial Clothes Washers

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

- 6

Table 14.4.2 Estimates of Domestic Present Value of CO 2 Emissions Reduction under

TSLs for Commercial Clothes Washers

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

- 7

Table 14.4.3 Estimates of Present Value of NO X Emissions Reduction under TSLs for

Commercial Clothes Washers

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

- 8

14

- iCHAPTER 14. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

14.1 INTRODUCTION

As part of its assessment of the effe cts of potential energy conservation standards for

commercial clothes washers , the U.S. Department of Energy ( DOE ) estimated the monetary

benefits of the reduced emissions of carbon dioxide (CO 2 ) and nitrog en oxides (NO X ) that would

be expected to result from each trial standard level ( TSL ) considered for commercial clothes

washers . This chapter summarizes the basis for the monetary values assigned to emissions and presents the modeled benefits of e stimated reductions

.

14.2 MONETIZING CARBON DIOXIDE EMISSIONS

One challenge for anyone attempting to calculate the monetary benefits of reduced

emissions of CO 2 is what value to assign to each unit eliminated. The value must encompass a broad range of p h ysical, economic, social, and political effects. Analysts developed the concept of the social cost of carbon (SCC) to represent the broad cost or value associated with producing

— or reducing

— a quantifiable amount of CO 2 emissions

.

14.2.1 Social Cost of Carbon

Th e SCC is an estimate of the monetized damages associated with an incremental increase in carbon emissions in a given year. The SCC 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. SCC estimates are provided in dollars per metric

ton of carbon dioxide

. A value for the domestic SCC is meant to re present the damages in the United States resulting from a unit change in carbon di oxide emissions, whereas a global SCC is meant to reflect the value of damages worldwide.

Under section 1(b) (6) of Executive Order 12866

, 1 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, propose or adopt a regulation only upon a

reasoned determination tha t the benefits of the intended regulation justify its costs.” The purpose

of the SCC estimates required by the Executive Order is to enable agencies to incorporate the monetized social benefits of reducing CO 2 emissions into cost

- benefit analyses of regula tory actions. The estimates are presented with an acknowledgement of the many uncertainties involved and with a clear understanding that they will need updating in response to increasing knowledge of the science and economics of climate impacts.

As part of the interagency process that developed the SCC estimates, technical experts from numerous agencies met regular ly to explore the technical literature in relevant fields, discuss key model inputs and assumptions, and consider public comments. The primary objective

of the process was to develop a range of SCC values using a defensible set of assumptions

14

- 1regarding model inputs that was grounded in the scientific and economic literature. In this way, key uncertainties and model differences transparently and c onsistently inform the range of SCC

estimates developed for use in the rulemaking process.

14.2.2 Monetizing Carbon Dioxide Emissions

When attempting to assess the incremental economic impacts of carbon dioxide emissions, the analyst faces several serious chall enges. A report from the National Research

Council 2 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 climat e system, (3) the effects of changes in climate on the physical and biological environment, and (4) the translation of those environmental impacts into economic damages. As a result, any effort to quantify and monetize the harms associated with climate

cha nge raise s 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. An a gency 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 n the net present value of

the benefits can be calculate d by multiplying each of the 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 emissions

pat h, an approximation that is reasonable for policies that have effects on emissions that are small relative to cumulative global carbon dioxide emissions.

14.3 DEVELOPMENT OF SOCIAL COST OF CARBON VALUES

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

how benefits are evaluated across Federal agencies, the Administration sought to develop a transparent and defensible method, sp ecifically 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 literature to use as

interim v alues until a more comprehensive analysis could be conducted. The outcome of the preliminary assessment was a set of five interim values: global SCC estimates for 2007 (in

2006 $ ) of $55, $33, $19, $10, and $5 per ton of CO 2

. 3 Those interim values represent ed the first sustained interagency effort within the U.S. government to develop an SCC for use in regulatory analysis. The results of th at preliminary effort were presented in several proposed and final rules.

14.3.1 Current Approach and Key Assumptions

After th e release of the interim values, the interagency group reconvened regular ly to improve the SCC estimates. Speci fic ally, the group considered public comments and further

14

- 2explored the technical literature in relevant fields. The interagency group relied on t hree integrated assessment models commonly used to estimate the SCC . The models are known by their acronyms of FUND, DICE, and PAGE. Those three models frequently are cited in the peer

reviewed literature and were used in the most recent assessment of the Intergovernmental Panel on Climate Change. Each model was given equal weight in developing SCC values.

Each model takes a slightly different approach to calculating how increases in emissions produce economic damages. A key objective o f the interagency process was to enable a consistent exploration of the three models while respecting the different approaches taken by the key modelers in the field. An extensive review of the literature identified three sets of input parameters for the m odels: climate sensitivity; socioeconomic and emissions trajectories; and

d iscount rates

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

. Three values are based on the average SCC from the three integrated assessment models, at discount

rates of 2.5 percent , 3 percent , and 5 percent. The fourth value, which represents the 95 th
percentile of the SCC estimate across all three models at a 3

- percent discount rate, is included to

represent larger

- than

- expected effects from temperature change s f a rther out in the tails of the

SCC distribution. The values increase in real terms over time

. Additionally, the interagency group determined that a ran ge 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 consideration of the global benefits of reducing CO 2 emissions. Table 14.2.1 presents the values in the 2010

in teragency group report

. 4

Table 14.2

. 1 Annual SCC Values for 2010

- 2050 from 2010 Interagency Report (in 2007 $

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

The SCC values used for the analysis of the effects of potential standards for commercial

clothes washers were generated using the most recent versions of the three integrated assessment

14

- 3models that have been published in the peer

- reviewed literature, as d escribed in the 2013 update from the interagency working group (revised November 2013). 4 Table 14.2.2 shows the updated

sets of SCC estimates in 5

- year increments from 2010 to 2050. The full set of annual SCC

estimates for 2010

– 2050 is presented in appendix 14

- B of this TSD. The central value that emerges is the average SCC across models at a 3

- percent discount rate. To capture the uncertainties involved in regulatory impact analysis, however, the interagency group emphasizes the importance of including all four sets of SCC values.

Table 14.2

. 2 Annual SCC Values for 2010

– 2050 from 2013 Interagency Update (in 2007 $

per Metric Ton of 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

14.3.2 Limitations of Current Estimates

The interagency group recognizes that current models are imperfect and incomplete.

Because k e y uncertainties remain

, current SCC estimates should be treated as provisional and

revisable . Estimates doubtless will evolve in response to improved scientific and economic understanding. The 2009 National Research Council report 2 points out the tension between producing quantified est imates of the economic damages from an incremental ton of carbon and

the limits of current modeling efforts. Several analytic challenges are being addressed by the research community, some by research programs housed in many of the Federal agencies partici pating in the interagency process. The interagency group intends to review and reconsider

SCC estimates periodically to incorporate expanding knowledge of the science and economics of climate impacts, as well as improvements in modeling.

In summary, in considering the potential global benefits resulting from reduced CO 2 emissions, DOE used the values from the 2013 interagency report , applying the GDP price

deflator to adjust the values to 2013 $. For the four SCC values, the values of emissions in 2015

we re $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 2040

– 2050 in the interagency update.

14

- 4DOE multiplied the CO 2 emissions reduction estimated for each year by the SCC value for that year under each discount rate . To calculate a present value of the stream of monetary values, DOE discounted the values in each of the four cases using the same discount rate that had

b een used to obtain the SCC values in each case.

14.4 VALUATION OF OTHER EMISSIONS REDUCTIONS

DOE considered the potential monetary benefit s of reduced NO X emissions attributable to

the TSLs considered for commercial clothes washers . As noted in chapter 13, new or amended energy conservation standards would reduce NO X emissions in those States that are not affected by emissions caps. DOE estimated the monetized value of NO X emissions reductions resulting

from each TSL based on estimates of environmental damage fo und in the scientific literature.

E stimates suggest a wide range of monetary values, from $4 7 6 to $4,89 3 per ton ( in 2013 $). 5
DOE calculated monetary benefits using a medi an value for NO X emissions of $2,684 per short ton (in 2013$), at real discount rates of 3 percent and 7 percent.

DOE continues to evaluate appropriate values for monetizing avoided SO 2 and Hg

emissions. DOE did not monetize those emissions for this analysis

.

14.5 RESULTS

Table 14.4

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

TSL.

14

- 5Table 14.4

. 1 Estimates of Global Present Value of CO 2 Emissions Reduction under TSLs

for Commercial Clothes Washers

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 24.3 110.7 175.4 342.0

2 26.7 121.9 193.3 376.8

3 52.9 240.9 381.9 744.4

4 48.8 222.1 352.1 686.2

Upstream Emissions

1 2.1 9.5 15.0 29.3

2 2.3 10.8 17.1 33.3

3 4.2 19.5 31.0 60.4

4 3.7 17.1 27.1 52.8

Full

- Fuel

- Cycle Emissions

1 26.4 120.2 190.5 371.3

2 29.1 132.7 210.4 410.1

3 57.1 260.4 413.0 804.8

4 52.5 239.2 379.2 739.0

* 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 $).

After calculating global values of CO 2 emissions reductions for each considered TSL, DOE calculated domestic values as a range of from 7 percent to 23 percent of the global values. Results for domestic values are presented in

Table 14.4.2

.

14

- 6Table 14.4

. 2 Estimates of Domestic Present Value of CO 2 Emissions Reduction under

TSLs for Commercial Clothes Washers

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 1.7 to 5.6 7.7 to 25.5 12.3 to 40.4 23.9 to 78.7

2 1.9 to 6.1 8.5 to 28.0 13.5 to 44.5 26.4 to 86.7

3 3.7 to 12.2 16.9 to 55.4 26.7 to 87.8 52.1 to 171.2

4 3.4 to 11.2 15.5 to 51.1 24.6 to 81.0 48.0 to 157.8

Upstream Emissions

1 0.1 to 0.5 0.7 to 2.2 1.1 to 3.5 2.1 to 6.7

2 0.2 to 0.5 0.8 to 2.5 1.2 to 3.9 2.3 to 7.7

3 0.3 to 1.0 1.4 to 4.5 2.2 to 7.1 4.2 to 13.9

4 0.3 to 0.9 1.2 to 3.9 1.9 to 6.2 3.7 to 12.1

Full

- Fuel

- Cycle Emissions

1 1.8 to 6.1 8.4 to 27.6 13.3 to 43.8 26.0 to 85.4

2 2.0 to 6.7 9.3 to 30.5 14.7 to 48.4 28.7 to 94.3

3 4.0 to 13.1 18.2 to 59.9 28.9 to 95.0 56.3 to 185.1

4 3.7 to 12.1 16.7 to 55.0 26.5 to 87.2 51.7 to 170.0

* 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 $).

Table 14.4.3 presents the present value of cumulative NO X emissions reductions for each

TSL

. Monetary v alues are calculated using the average dollar

- per

- ton values assigned to NO X emissions at 7

- percent a nd 3

- percent discount rates.

14

- 7Table 14.4

. 3 Estimates of Present Value of NO X Emissions Reduction under TSLs for

Commercial Clothes Washers

TSL 3% discount rate 7% discount rate

Million 2013$

Primary Energy Emissions

1 5.0 2.5

2 5.6 2.7

3 10.5 5.1

4 9.4 4.6

Upstream Emissions

1 6.2 3.0

2 7.1 3.3

3 12.7 6.0

4 11.1 5.3

Full

- Fuel

- Cycle Emissions

1 11.2 5.4

2 12.7 6.1

3 23.2 11.2

4 20.4 9.9

14

- 8REFERENCES

1 Presidential Documents

– Executive Order 12866

– Regulatory Planning and Review. 58 FR, 51735 (October 4, 1993). (Last accessed June 28, 2014.)

< http://www.archives.gov/ federal

- register/executive

- orders/pdf/12866.pdf >

2 National Research Council. Hidden Costs of Energy: Unpriced Consequences of Energy

Production and Use . 2010. National Academies Press. Washington, D.C. (Last accessed June 28, 2014.) < http://www.nap.edu/catalog.php?record_id=12794 >

3 Interagency Working Group on Social Cost of Carbon. Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 1286 6. February 2010. United States Government. Washington, D.C. (Last accessed June 28, 2014.) < http://www.whitehouse.gov/sites/default/files/omb/inforeg/for

- agencies/Social

Cost

- of

- Carbon

- for

- RIA.pdf >

4 Interagency Working Group on Social Cost of Carbon. Technical Support Document: Technical Update of the Social Cost of Carbon for Regulatory Impa ct Analysis under

Executive Order 12866

. May 2013. United States Government. Washington, D.C. (Last accessed June 28, 2014.)

< http://www .whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_r ia_2013_update.pdf > [This, too, links to a TSD

-- add?

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

Entities . 2006. Washington, D.C. (Last accessed June 28, 2014.)

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

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