CHAPTER 1 4. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

TABLE OF CONTENTS

14.1 INTRODUCTION ......................................................................................................... 14-1

14.2 MONETIZING CARBON DI OXIDE EMISSIONS ..................................................... 14-1

14.2.1 Social Cost of Carbon ........................................................................................ 14-1

14.2.2 Monetizing Carbon Dioxide Emissions ............................................................. 14-2

14.2.3 Current Approach and Key Assumptions .......................................................... 14-3

14.3 VALUATION OF OTHER EMISSIONS REDUCTIONS ........................................... 14-5

14.4 RESU LTS ...................................................................................................................... 14-5

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

LIST OF TABLES

Table 14.2.1 Annual SCC Values from 2010 Interagency Report, 2010–2050 (in 2007 dollars per metric ton of CO 2 ) ............................................................................ 14-4 Table 14.2.2 Annual SCC Values from 2013 Interagency Update, 2010–2050 (in 2007 dollars per metric ton of CO 2 ) ............................................................................ 14-4

Table 14.4.1 Estimates of Global Present Value of CO 2 Emissions Reduction for Sm all, Large, and Very Large Air -Cooled CUAC and CUHP Trial Standard

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

Table 14.4.2 Estimates of Domestic Present Value of CO 2 Emissions Reduction for Small, Large, and Very Large Air -Cooled CUAC and CUHP Trial

Standard Levels .................................................................................................. 14-7

Table 14.4.3 Estimates of Present Value of NO X Emissions Reduction for Small, Large, and Very Large Air -Cooled CUAC and CUHP T rial Standard Levels ............. 14-8

14 -iCHAPTER 14. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

14.1 INTRODUCTION

As part of its assessment of energy conservation standards, DOE estimated the monetary benefits likely to result from the reduced emissions of carbon dioxide (CO 2 ) and nitrogen oxides (NO X ) that are expected to result from each of the TSLs considered. This chapter summarizes the basis for the monetary values used for each of these emissions and presents the benefits estimates

considered.

As described in Chapter 13, the analysis of most power sec tor 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 decrease in the cumulative CO 2 emission reductions from the proposed standards can be expected if the projections of power plant utilization

assumed in AEO 2014 are realized . The estimated amount of cumulative emission reductions of

CO 2 are expected to decrease by 36% from DOE’s current estimate (from 1,085 Mt to 697Mt) based on the projections in AEO 2014 relative to AEO 2013. The monetized benefits from GHG reductions would likely decrease by a comparable amount. For the next phase of this rulemaking, DOE plans to monetize the emissions reductions developed based on the most recent AEO available, which may or may not be AEO 2014, depending on the timing of t he issuance of the next rulemaking document.

14.2 MONETIZING CARBON DI OXIDE 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) (6) of Executive Order 12866,”Regulatory Planning and Review,” 58 FR 51735 (Oct. 4, 1993), 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

diff icult 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 SCC estimates presented here 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

14 -1acknowledgement 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 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 grounded in the existing scientific and economic literatures. In th is 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 attempting to assess the incremental economic impacts of carbon diox ide emissions, the analyst faces a number of 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 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 w ith climate change will raise 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 carbon dioxide emissions. T he 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 value 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.

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 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 original 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 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 r ules.

14 -214.2.3 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, which were considered for this proposed rule. Specifically, the group considered public comments and further explored the technical literature in relevant fields. The interagency group relied on three integrated assessment models (IAMs) commonly used to estimate the SCC: the FUND, DICE, and PAGE models. a These models are frequently cited in the peer

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

Each model takes a slightly different approach to model ho w 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 i n the field. An extensive review of the literature was conducted to select three sets of input parameters for these models: (1) climate sensitivity; (2) socio -economic and emissions trajectories; and (3) discount rates. A probability distribution

for clim ate 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, relyi ng 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 distribut ion. 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 consideration of the global benefits of reducing

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

. c

Table 14.2.2 shows the updated sets of S CC 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 central 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

a The models are described in appendix 14

- A of the TSD.

b 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

.

c 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. http://www.whitehouse.gov/sites/default/files/omb/inforeg/social_cost_of_carbon_for_ria_2013_update.pdf

14 -3analysis, the interagency group emphasizes the importance of including all four sets of SCC

values. For the years after 2050, DOE applied the average annual growth rate of the SCC

estimates in 2040−2050 associated with each of the four sets of values.

Table 14.2.1 Annual SCC Values from 2010 Interagency Report, 2010–2050 (in 2007 dollars per metric ton of CO 2 )

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 of CO 2 )

Year Discount Rate %

5 3 2.5 3

Average Average Average 95 th Percentile

2010 11 33 52 90

2015 12 38 58 109

2020 12 43 65 129

2025 14 48 70 144

2030 16 52 76 159

2035 19 57 81 176

2040 21 62 87 192

2045 24 66 92 206

2050 27 71 98 221

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 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 carbo n and the limits of existing efforts to model

these effects. There are a number of analytic challenges that are be ing addressed by the research community, including research programs housed in many of the agencies participating in the

14 -4interagency process t o estimate the SCC. The interagency group intends to periodically review

and reconsider estimates of the SCC used for cost

- benefit analyses to reflect increasing 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, escalated to 2013$ using the GDP price deflator. For each of the four cases specified, the values used for emissions in 2015

are $12.0, $40.5, $62.4, and $119 per metric ton avoided.

DOE multiplied the CO 2 emissions reduction estimated for each 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, the interagency report notes that damages from future emissions should be discounted at

th e same rate as that used to calculate the SCC estimates themselves to ensure internal consistency. Thus, DOE discounted the values in each of the four cases using the specific

discount rate that had been used to obtain the SCC values in each case.

14.3 VALUATI ON OF OTHER EMISSION S 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 in those States that are no t 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. E stimates of monetary value for reducing NOx f rom stationary sources range from $476 to $4,893 per ton in

2013$. 4 DOE calculated monetary benefits using a medium value for NO X emissions of $2,684 per short 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 -5Table 14.4.1 Estimates of Global Present Value of CO 2 Emissions Reduction for Small, Large, and Very Large Air -Cooled CUAC and CUHP 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$

Power Sector Energy Emissions

1 1,511 7,547 12,167 23,410

2 4,205 21,212 34,252 65,798

3 5,922 29,876 48,244 92,674

4 8,501 42,993 69,453 133,362

Upstream Emissions

1 53 261 420 809

2 145 729 1,175 2,259

3 205 1,026 1,655 3,182

4 293 1,474 2,379 4,571

Total Emissions

1 1,564 7,808 12,587 24,219

2 4,350 21,940 35,427 68,057

3 6,127 30,902 49,899 95,856

4 8,794 44,467 71,831 137,933

* 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 $).

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 Pres ent Value of CO 2 Emissions Reduction for Small, Large, a nd Very Large Air -Cooled CUAC and CUHP 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$

Power Sector Energy Emissions

1 105.8 to 347.5 528.3 to 1735.7 851.7 to 2798.4 1638.7 to 5384.3

2 294.4 to 967.2 1484.8 to 4878.7 2397.7 to 7878.0 4605.9 to 15133.6

3 414.5 to 1362.0 2091.3 to 6871.4 3377.1 to 11096.0 6487.2 to 21315.0

4 595.1 to 1955.2 3009.5 to 9888.3 4861.7 to 15974.1 9335.3 to 30673.2

Upstream Emissions

1 3.7 to 12.1 18.3 to 60.0 29.4 to 96.6 56.6 to 186.1

2 10.2 to 33.5 51.0 to 167.6 82.3 to 270.3 158.1 to 519.6

3 14.3 to 47.1 71.8 to 236.0 115.8 to 380.6 222.7 to 731.8

4 20.5 to 67.5 103.2 to 339.1 166.5 to 547.1 320.0 to 1051.3

Total Emissions

1 109.4 to 359.6 546.5 to 1795.8 881.1 to 2895.0 1695.3 to 5570.4

2 304.5 to 1000.6 1535.8 to 5046.3 2479.9 to 8148.3 4764.0 to 15653.2

3 428.9 to 1409.2 2163.1 to 7107.5 3492.9 to 11476.7 6709.9 to 22046.8

4 615.6 to 2022.7 3112.7 to 10227.4 5028.2 to 16521.2 9655.3 to 31724.6

* 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 $).

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 ru lemaking, 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 and seven

- percent a nd three- percent
discount rates.

14 -7Table 14.4.3 Estimates of Present Value of NO X Emissions Reduction for Small, Large, a nd Very Large Air -Cooled CUAC and CUHP Trial Standard Levels

TSL 3% discount rate 7% discount rate

Million 2013$

Power Sector Emissions

1 128 37

2 369 106

3 520 148

4 753 215

Upstream Emissions

1 139 52

2 384 138

3 540 194

4 773 275

Total Emissions

1 267 89

2 753 243

3 1060 343

4 1527 490

14 -8REFERENCES

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

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

3. I nteragency 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_carb on_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 >

5. U.S. Office of Management and Budget (OMB), Circular A-4: Regulatory Analysis,

2003. (Posted September 17, 2003) (Last accessed April, 2013.)

< http://www.whitehouse.gov/sites/default/files/omb/assets/regula tory_matters_pdf/a4.pdf >

14 -9