From: Robin Moran/AA/USEPA/US
To: "Achanta, Chandana L." <Ch andana_L._Achanta@ omb.eop.gov> Cc: William Charmley/AA/USEPA/US@EPA, Ed Nam/AA/USEPA/US@EPA, Maureen Delaney/DC/USEPA/US@EPA, rebecca.yoon@dot.gov, james.tamm@dot.gov, Kate Cardamone/DC/USEPA/US@EPA, Dina Kruger/DC/USEPA/US@EPA, Paul Balserak/DC/USEPA/US@EPA, Eliz abeth Kopits/DC/USEPA/US@EPA
Date: 03/30/2010 04:18 PM Subjec

t: SCC Response to Comments

Chandana, per your request, for y our information, here is EPA's re sponse to comments for Social
Cost of Carbon.

[attachment "SCC Response to Comments - to OMB 3-30-10.doc" deleted by Tad Wysor/AA/USEPA/US]

Robin Moran Senior Policy Advisor
Assessment and Standards Division U.S. EPA, Office of Transportation and Air Quality
2000 Traverwood Dr. Ann Arbor, MI 48105 (734) 214-4781 (734) 214-4821 (fax)4.5.4. Benefits of Reducing GHG Emissions (Social Cost of Carbon)

EPA RESPONSE A

Organizations: See table below.

Commenter Affiliation Document ID Number

California Air Resources Board EPA-HQ-OAR-2009-0472-7189.1 Center for Biological Di versity EPA-HQ-OAR-2009-0472-7265.1

Connecticut DEP EPA-HQ-OAR-2009-0472-7301.1

Environmental Defense Fund EPA-HQ-OAR-2009-0472-7246.1 Ford Motor Company EPA-HQ-OAR-2009-0472-7082.1 Institute for Energy Research EPA-HQ-OAR-2009-0472-7225.1 Institute for Policy Integrity at New York University School of

Law EPA-HQ-OAR-2009-0472-7246.1

National Association of Clean Air Agencies EPA-HQ-OAR-2009-0472-7071.1

Natural Resources Defense
Council EPA-HQ-OAR-2009-0472-7274.1

National Rural Electric Cooperative Association EPA-HQ-OAR-2009-0472-7252.1

New Jersey DEP EPA-HQ-OAR-2009-0472-7093.1

Northeast States for
Coordinated Air Use Management EPA-HQ-OAR-2009-0472-7235.1

Pew Center EPA-HQ-OAR-2009-0472-7239.1 Physicians for Social Responsibility, Los Angeles EPA-HQ-OAR-2009-0472-7283, pg 81

Private Citizen (Adcock, James) EPA-HQ-OAR-2009-0472-5385 Private Citizen (Chew, Yuli) EPA-HQ-OAR-2009-0472-7042.1 Private Citizen (Magavern, Bill) EPA-HQ-OAR-2009-0472-7283, pg 179-186 Private Citizen (Rose, Stephen) EPA-HQ-OAR-2009-0472-7276.1 Private Citizen (Steiner , John) EPA-HQ-OAR-2009-0472-8705

Sierra Club EPA-HQ-OAR-2009-0472-6185, p. 31

Stockholm Environment
Institute-US Center EPA-HQ-OAR-2009-0472-7432.1

Union of Concerned Scie ntists EPA-HQ-OAR-2009-0472-7181.1 University of California Santa Barbara Bren Working Group EPA-HQ-OAR-2009-0472-7188.1

Comments:Commenters presented extensive methodologi cal input and discussed various issues, including discount rate, uncertain ty and risk, and magnitude and uses of the social cost of
carbon.

Comments on Discount Rate

These comments identified concerns about th e discount rates applied to SCC estimates and provided different recommendations about issues such as the appr oach used to select discount rates, the magnitude of the disc ount rate, and ways to account for uncertainty in discount rates. Many commenters emphasized th e ethical issues embedded in the selection (e.g., 7246.1, 7239.1, and 7274.1).

In general, commenters recommended different approaches and lower rates to give more weight to climate damages experienced by future generations. Some co mmenters recommended that EPA develop a social discount rate on the ba sis of detailed considerat ion of the scientific, ethical, and economic implications of di scounting (e.g., 7246.1 and 7274.1); several commented on using the Ramsey framework in particul ar to derive the discount rate (e.g., 7432.1, 7246.1, 7274.1). Some commenters di d not think it was appropriate to infer rates from observed market behavior when considering the long time horizons for climate damages (e.g., 7265.1, 7246.1, 7274.1). For example, the Environmental Defense Fund and the NYU Institute for Policy Integrity stated in a joint letter that a “simple application of a market rate of return is not justified” because of the “special relationship of GHGs to the market rate of return and to a large range of goods and services (both market and non-market)” (7246.1, pg 15). They noted, however, that if EPA opted to use market rates of return, it should also analyze and consider the underlying complexities in greater detail, such as the relationship be tween GHG reductions and economic growth, and present a r obust discussion about GHG reductions “fit into an optimal portfolio of investments” (7246.1, pg 15).

In addition, two commenters suggested that EPA should not di scount the SCC (7265.1, 7274.1). That is, they stated that EPA should us e a discount rate of ze ro, thereby making the present value of damages in the future equivalent to their value in the future, effectively making the net present value of damages infinite.

Many of the commenters stated that the discountrates applied to the interim SCC estimates were too high and therefore resulted in underestim ates of SCC that fail to adequately capture the value of damages experienced by future generations (e.g., 7265.1, 7246.1, 7274.1, 7239.1). In particular, some commenters disagreed with the rationale given for use of a 5 percent discount
rate. Dr. Rose stated that “a 5 percent discount rate is inconsistent with risk-free consumption trade-offs within the current generation,” furthe r noting that the interg enerational timeline for GHG emissions “implies even greater uncertainty than that reflected in intragenerational interest rates” (7276.1, pg 4). That is, GHG mitigation repr esents a different kind of investment than intragenerational investments analyzed with higher discoun t rates like 5 percent. The
Environmental Defense Fund and the NYU Institute for Policy Integrity concluded that there are “strong reasons for concluding that a substantia l fraction of the benefits from abatement are uncorrelated or even negatively correlated wi th the returns to the economy as a whole” (7246.1,pg 15). Other commenters agreed with this view and concluded that it would be appropriate to view investment in GHG mitigation from a risk-averse perspective—i.e., investment in mitigation as a form of insurance against uncerta in future climate damages—rather than a risky investment in mitigation technology (7274.1, 7432.1).

Furthermore, some commenters disagreed with the proposed rule’s statement that 5 percent is consistent with the Ramsey framework, based on standard estimates of the Ramsey parameters (e.g., 7239.1, 7276.1, 7246.1, 7432.1). First, the Stockhol m Environment Inst itute noted that controversy about appropriate estimates of Ramsey paramete rs has thus far prevented
standardization of the framework values. Similarly, Environmental Defense Fund and NYU Institute for Policy Integrity stated that “[t]he cl aim that 5% is ‘near the middle of the range of
values that are able to be derived from the Ramsey equation’ is in fact meaningless—there is no theoretical lower or upper bound to values that could possibly be derived from the Ramsey equation” (7276.1, pg 8). Second, several commente rs pointed out that the Ramsey framework normally assumes perfect certainty about the future and needs to be adjusted to account for the significant uncertainty inherent in GHG emissions; this would result in a lower estimate of the discount rate (e.g., 7432.1, 7239.1). Third, the Stockhol m Environment Institute concluded that the derivation of the 5 percent discount rate from Ramsey “does not appear to be based on a careful reading of the sources cite d in supporting footnotes” (7432.1, pg 11). 1

In addition, many commenters no ted that the range of discount rates used in the proposed rule did not include low enough ra tes and recommended using lower rates in the final rule (e.g., 7239.1, 7432.1, 7188.1). Several specifically sugges ted using 2 percent and lower and one recommended setting an upper bound that did not exceed 4 percent (7246.1, 7274.1).

The commenters presented multiple sources to support their recommendation for lower rates. For example, several commenters stated that consideration of rates below 3 percent would fulfill OMB Circular A-4 guidance to conduct sensitivity analysis at such rates for intergenerational problems (e.g., 7432.1, 7274.1, and 7239.1). The Environmental Defense Fund and NYU Institute for Policy Integrity presented evidence of lower rates that the interagency group should consider, including a 2009 National Academy of Science study that reporting discount rates of 1.5, 3, and 4.5 percent for SCC estimates (7246.1).

Finally, some commenters recommended thatEPA account for discount rate uncertainty and adjust the rates in the final rule (e.g., 7246.1, 7274.1, 7432.1). The Stockholm Environment Institute disagreed with the proposed rule’s statement that the literature on techniques to account for discount rate uncertainty, in pa rticular time-varying discount rate s, is relatively recent. This commenter cited several papers, including a l iterature review published in 2002 in AEA’s Journal of Economic Literature; the review discussed numerous arguments for time-varying discount rates dating back to a 1937 paper. 2 Likewise, the Environmental Defense Fund and the NYU Institute for Policy Integrity pointed out the qualitative conclusions of the work by Newell

1 The Stockholm Environment Institute determined that four of the five sources cited in the proposal as the basis for the Ramsey parameter estimates are inconsistent with the numerical estimates presented in proposed rulemaking. See OAR-2009-0472-7432.1, pg 11.

2 Shane Frederick, George Loewenstein, and Ted O’Don oghue, “Time discounting and time preference: A critical review,” Journal of Economic Literature (2002) 40:351-401.and Pizer are “reinforced in a general theo retical setting by Gollie r and Weitzman” (7246.1, pg 21). 3

Likewise, the Environmental Defense F und and NYU Institute for Policy Integrity supported the adjustment of discount rates for uncertainty and recommended that EPA do so to determine the principal SCC estimates, rather than limit it to sensitivity analysis. These
commenters described the choice between the Weitzman and Newell-Pizer approaches, which define discount rate uncertainty in different wa ys, as a false one because each approach supports the same conclusion: “in the presence of uncerta inty over the appropriate discount rate, future
costs and benefits should be discounted at a rate that declines over time” (7246.1, pg 21). However, they noted that if forced to choose one or the other, they would advise Newell and
Pizer because of “its careful us e of historical data, its demons tration that time-varying discount rates are rigorously justified on strictly descriptive grounds, a nd its development of a rigorous analytical methodology that can be readily applied to the comput ation of SCC values in the current context” (7246.1, pg 20-21).

Another commenter identified the potential time inconsistency as an issue to consider when applying Newell and Pizer (2003) to SCC estim ates. Specifically, Dr. Rose stated that the Newell and Pizer discounting fram ework may present values that are inconsistent with various alternative futures; he further noted that such inconsistencies would likely be greater if climate impacts affect future economic growth (7276.1).

The Environmental Defense Fund and NYU Ins titute for Policy Integrity addressed the critique that rank ordering of present value and future value of benefits may produce different results when using time-differen tial discount rates. They main tained that the timing of the investment decision is not arbitrary—it is made by individuals inthe present under known certainties. Rather, concerns a bout time inconsistency center on “a certain pattern of discount rates (“high today, low tomorrow” ) that the planner nonetheless systematically fails to anticipate, ” but that time-declining rates (e.g., Newe ll-Pizer) involve a “d iscrete investment decision [that] must be made today, in the abse nce of full information about the future discount rate, that will continue to yi eld returns far into the future” (7246.1, pg 21-22). In sum, they concluded that no time inconsistency arises in th e latter case because “by the time we reach the future the decision will have already been made. Declining discount rates merely provide an aid to current decision-making in th e face of risk” (7246.1, pg 21-22).

Comments on Uncertainty and Risk

Many commenters discussed the limitations of the SCC estimates, in particular the treatment of uncertainty, catastrophic impacts, a nd omitted impacts, and the implications for the benefits assessment. For example, several commenters noted that the reliance on modelweighted averages in the proposed rule failed to capture the uncertainty in climate impacts. The
Environmental Defense Fund and NYU Institute fo r Policy Integrity recommended the final rule

3 See, for example, Martin L. Weitzman, Why the Far Dist ant Future Should Be Disco unted at Its Lowest Possible Rate, 36 Journal of Environmental Economics and Management, 201 (1998); Christian Gollier & Martin L. Weitzman, How Should the Distant Future Be Discounted When Discount Rates Are Uncertain? (Working Paper, Nov. 2009), http://www.economics.ha rvard.edu/faculty/weitzman/files/discountinglongterm(2).pdf.better account for the upward skew of uncertainty by, for example, applying an upward adjustment to the SCC estimates.

Commenters from various environmental orga nizations and state and regional government agencies observed that the models do not capture numerous and si gnificant climate impacts, in particular potentially catastr ophic events, which contributes to the underestimation of GHG mitigation benefits. The Union of Concerned Scientists’ conclusion that the interim SCC estimates fell “far short of capturing the poten tially immense impacts of climate change” was echoed by many other commenters (e.g., 7265.1, 7235.1, and 7274.1).

The Natural Resources Defense Council (NRD C) elaborated on the treatment of catastrophic impacts, stating that the “SCC estimates [used in the proposed rule] are systematically biased downward, in large part be cause they do not adequately reflect the most critical issue in climate change: non-zero pr obabilities of extremel y high and potentially catastrophic damages” (7274.1, p. 3). NRDC obser ved that the set of interim SCC estimates misrepresented the probability distribution of cl imate damage estimates, which includes “a ‘fat’ right tail (low to medium probabilities of relatively high damages), extending toward infinity (very low probabilities of profound catastrophe s)” (7274.1, pg 12). Specifically, NRDC noted that while the lower bound of the interim SCC estimates was representative of the left tail of the distribution of damage estimates, the upper bound was not. NRDC recommended that SCC estimates instead go to the right of the central es timates to better represent the right-skew of the distribution. NRDC further supports this r ecommendation by referring to Weitzman’s (2009) observation that “climate change presents a long chain of tenuous inferences with huge uncertainties in every link that undermine the capability of [integrated assessment models] to estimate damages” (7274.1, pg 14).

Comments on Magnitude and Uses of Social Cost of Carbon

Many commenters stated that the interim SCC estimates were too low (e.g., 7301.1, 7181.1, 7093.1, 7239.1), although one commenter said SCC ove rstates the benefits of GHG mitigation (7225.1). Some commenters expressed concern th at EPA is using an underestimate of the SCC to determine the stringency of the vehi cle rule’s GHG standards (e.g., 7239.1, 7265.1, 7093.1). Commenters recommended that EPA consider higher values in the analysis to better represent the possibility of catastrophic climate damages; some recommended specific numbers to use as the upper bound (e.g., 7189.1) or other analyses to set a minimum lower bound (7181.1).

Commenters discussed additional uses of SCC in rulemaking analyses as well as presentation. For example, the Environmental Defense F und and NYU Institute fo r Policy Integrity recommended that the interagency group specify how agencies should use SCC in traditional regulatory impact analysis and agency rulemaki ng. The Stockholm Environment Institute also commented on the use and purpose of SCC, and noted that policies designed from an insurance perspective “would not be framed in terms of cost-benefit calculati ons,” but that economic analysis would inform selection of a least-co st strategy for meeting a risk-based standard (7432.1, pg 13).

Other recommendations regarding the us e and presentation of SCC included:• Present an even number of SCC estimates (7276.1)

• Expand the presentation of information about the basis for the estimates, including discussion about omitted impacts, a broader se t of descriptive statistics, and probability density functions (e.g., 7274.1, 7246.1)

• Considering using CO 2 mitigation cost in lieu of SCC estimates (7082.1)

• Incorporate a broader range of SCC estimates into the benefits analysis rather than rely on central estimates (e.g., 7246.1).

EPA Response A:

As discussed in preamble III.H.6, EPA and NHTSA used new SCC estimates in this final rule that were recently developed by an interagency pr ocess, in which both agencies participated. EPA and NHTSA critically evaluated the decisi ons of the interagency group and the new SCC
estimates and endorsed them as reasonable for th is final rule for the reasons presented in preamble III.H.6. The remainder of this response discusses EPA’s consideration of and response to the comments on discount rate, un certainty and risk, and magnitude and uses of the social cost of carbon, and, as relevant, how the interagency modeling exercise addr essed the methodological

comments.

EPA has responded to the commenters’ other SCC co mments elsewhere. Specifically, refer to Response [B] for EPA’s respons e to comments regarding the interim SCC estimates and methodology, the use of integrated assessment m odels, and equity-weighting, and to Response [C] for EPA’s response to comments regardi ng global and domestic valuations of SCC.

Discount rate

.

Many of the comments on SCC identified concerns about the discount ra tes applied to the interim SCC estimates and provided different re commendations about: (i) approach used to select discount rates; (ii) th e magnitude of the discount rate, and; (iii) ways to account for uncertainty in discount rates.

EPA’s continued assessment of the SCC literature and review of the extensive public comments about discount rate selection reaffirms the comp lexity and sensitivity of this task. Recognizing the lack of consensus about an appropriate disco unt rate to use in this context and uncertainty regarding how interest rates mightchange over time, EPA selected three rates to span a plausible range of certainty-equivalent constant discount rates: 2.5, 3, and 5 per cent per year. Although
EPA selected discount rates for this exercise that differed fr om some of those recommended by commenters, the agency regards its approach as defensible and transparent given its consistency with current benefit-cost analysis principles as well as OMB’s guidelines for such analysis as
embodied in OMB Circular A-4. The Technical Support Document, Social Cost of Carbon forRegulatory Impact Analysis Under Executive Order 12866 (hereafter, "SCC TSD"), discusses in
detail the basis for the discount rate selection. 4

(i) Response to Comments on the Approac h Used to Select Discount Rates.

EPA considered the comments and recommendations regarding both prescr iptive approaches for
discount rate selection and descri ptive approaches that infer disc ount rates from observed market
behavior. As stated in the S CC TSD, the selection of discount rates drew on both approaches but relied primarily on the descriptive approach.

In sum, average returns on longer- term investments were used to inform selection of certaintyequivalent discount rate s. This approach was consistent with the comments on consumptionbased rates as well as the literatur e. EPA recognizes its limitations but finds this approach to be the most defensible and transparent given it s consistency with the standard contemporary
theoretical foundations of benef it-cost analysis and with the approach outlined in OMB’s existing guidance. See the SCC TSD for a detailed explanation.

Prescriptive Approaches. EPA considered all recommendati ons for prescriptive approaches, including selection of rates at 2 percent and lower within the Ramsey framework and use of a zero discount rate (i.e., not discounting). As not ed in the SCC TSD, Ramsey (1928) argued that it is “ethically indefensible” to apply a positive pu re rate of time preference to discount values across generations. After considering the co mments and relevant literature, however, EPA ultimately decided that within the time constrai nts of this rulemaking, use of observed market behavior was a more transparent and defensib le approach consistent with the federal government’s current guidelines on intergenera tional discounting. See the SCC TSD for the
detailed rationale and discussion.

NRDC presented an interesting observation regard ing the relationship betw een damage functions and growth rates, and maintained that declining economic growth requi res a negative discount rate. However, negative growth does not auto matically imply negative discount rates because
the discount rate is a function of both rho and the product of et a and growth. Therefore, one could have low, but positive discounti ng depending on the value of rho.

Regardless of the relationship between econom ic growth and discount rate, the modeling exercise supporting the final rule could not a llow for negative discount rates because it used constant discount rates. Moreover, negative discount rates cannot be justified using EPA’s current discounting approach—reliance on observed market behavior to infer discount rate. Application of a negative discount rate would involve explicit c onsideration of ethical aspects of intergenerational discounting and u ltimately the selection of an a ppropriate social discount rate.

4 Interagency Working Group on Social Cost of Carbon, U.S. Government, with participation by Council of Economic Advisers, Council on Environmental Quality, Department of Agriculture, Department of Commerce, Department of Energy, Department of Transportation, Environmental Protection Agency, National Economic Council, Office of Energy and Climate Change, Offi ce of Management and Budget, Office of Science and Technology Policy, and Department of Treasury, “ Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866 ,” February 2010. EPA-HQ-OAR-2009-0472EPA agrees with the NYU Institute for Policy Integrity and the Environmental Defense Fund (IPI, EDF) that use of prescriptive approaches would necessitate explicit consideration of philosophical and legal issues (7246.1, pg 4). While EPA has considered these comments and remains keenly aware of the normative dimensions of discount rate selection, the selection of
discount rates in the recent m odeling exercise focused primarily on economic considerations and the guidelines for intergenera tional discounting specified in OMB Circular A-4 and EPA’s guidance.

Using Market Rates to Inform Discount Rates. Several commenters expressed a preference for explicitly prescriptive approaches but also provid ed comments for the agency to consider if it
used market rates to inform discount rate selec tion (e.g., see IPI, EDF, NRDC). EPA agrees with
IPI and EDF’s clarification that regardless of the approach, the c hoice of a discount rate is not a “value-free ‘objective’ decision” and involves “deep ethical and mora l judgments” (7246.1, pg. 4). While using observed market behavior was the best approach feasible for this analysis, EPA recognizes its limitations and will continue to seek opportunities, such as convening workshops to explore economic and non-economic aspects of discounting, to aid ou r understanding of the relevant issues. The SCC TSD explains in greate r detail the rationale for using market rates to
inform discount rate selection.

EPA concurs with the comments re garding the need to carefully select an appropriate market rate, given the numerous rates available, as well as the comments on consumption-based
discount rates. EPA carefully reviewed the literature and considered various complexities involved in discounting over long ti me horizons. For example, IPI and EDF noted that it would be difficult to justify the selection of high rates on the basis that the returns from alternate
investments would be available as compensation for those impacted by climate change because this is unlikely to be feasible over long time hor izons. As discussed in the SCC TSD, EPA opted to use average returns on longer-term inve stments rather than short term rates.

In addition, IPI and EDF stated that if EPA uses ma rket rate of returns, it should also analyze and consider the underlying complexities in greate r detail, such as the relationship between GHG reductions and economic growth. In partic ular, IPI and EDF referred to Weitzman’s
observations about a limitation of integrated assessment models: the models’ assumption of perfect correlation between GHG damage and aggr egate economic activity is a function of the model design, not “the result of any reasone d argument” (Weitzman 2007) (as quoted in 7246.1, pg 15). Indeed, the modeling exercise has rais ed questions about the relationship between mitigation benefits and economic growth in the models. While more analysis is required before EPA can reach definitive conclusions, the agency recognizes this as a key issue that should be explored when refining SCC or applying it to benefit analyses.

(ii) Magnitude of Discount Rate.

EPA determined lower rates are appropriate and us ed rates of 2.5 and 3 percent. Consistent with the rationale presented by several commenters, risk-free rates of re turn informed the selection of discount rates. However, average returns on longe r-term investments rather than short-term rates
were used. The lower rates are also consistent with the comments suggesting that mitigationshould be viewed as a form of insurance against climate damages rather than a rate of return on risky assets (e.g., NRDC, Stockhol m Environment Institute).

Many commenters disagreed with the rationale for and use of a 5 percent discount rate in the proposed rule. In particular, several comme nters stated that GHG mitigation represents a
different kind of investment th an intragenerational investment s analyzed with higher discount rates like 5 percent. IPI and ED F concluded that there are “str ong reasons for concluding that a
substantial fraction of the benef its from abatement are uncorrelated or even negatively correlated with the returns to the economy as a whole.” Other commenters agreed with this view and concluded that it would be appr opriate to view investment in GHG mitigation from a risk-averse perspective—i.e., investment in mitigation as a form of insurance against uncertain future climate damages—rather than a risky investment in mitigation technology. Consideration of SCC estimates based on a 5 percent discount rate could not be ruled out, however, and was included to represent the view th at climate damages are highly co rrelated with market returns, under which the appropriate discount rate would be expected to exceed the risk-free rate.

In addition, IPI and EDF recommended 4 per cent as an appropriate upper bound. While EPA agrees with IPI and EDF that “the uncertainty (more properly the risk ) over the temperature changes resulting from a ton of GHG emissions doe s not justify a higher di scount rate,” it is not clear how this concern argues for setting 4 rather than 5 percent as the upper bound (7246.1, pg 24).

In sum, EPA applied three consta nt certainty-equivalent discount rates (2.5, 3, and 5 percent) to the SCC estimates to account for various perspe ctives about risk and uncertainty. The upper value of 5 percent accounts for the view that there may be a high correlation between climate damages and market returns while the rest of the SCC analysis centers on a discount rate
consistent with concerns about risk aversion. See SCC TSD for mo re details about the rationale for using 5 percent.

(iii) Uncertainty in discount rates.

The comments informed the ongoing consideration of how GHG benefits analysis could account for discount rate uncertainty th rough differential discounting. Th e SCC TSD presents the basis
for EPA’s decision to account for discount rate uncertainty by using certainty-equivalent constant discount rates, in par ticular inclusion of 2.5 percent to incorporate the concern that interest rates are highly uncertain over time.

The SCC TSD also summarizes the consideratio n of the approaches discussed by commenters (e.g., Newell and Pizer (2003), Weitzman (2001), and the UK’s “Green Book” for regulatory analysis) and concludes that the proper way to model discount rate uncertainty remains an active
area of research.

In particular, key questions about potential time inconsistencies arising with differential discounting remain unresolved. For example, in its 2008 critique of the EPA Economic Guidelines, the EPA Science Advisory Board (SAB ) found that in cases with uncertain discount rates, “rank ordering of policie s by present values and future value may differ.” The SABadvised EPA to use caution when interpreting th e results of time differential discounting and
noted that more research is warranted. Similarl y, Dr. Rose noted that there is an inconsistency between the Newell and Pizer (2003) discount ing and various alternative futures.

Several commenters considered the potential for and implications of time inconsistency issues. For example, the Stockholm Environment Institute stated that “there is minimal risk” of time inconsistency problems and that regardless, “no one...has the life span or resources to arbitrage against multi-century public policies” (7432.1, pg 12) . IPI and EDF noted that the timing of the investment decision is not arbitrary—it is made by individuals inthe present under known certainties. They maintain that concer ns about time inconsistency center on “a certain pattern of discount rates (‘high today, low tomo rrow’) that the planner nonetheless systematically fails to anticipate, ” but that time-declining rates (e.g., Newe ll-Pizer) involve a “d iscrete investment decision [that] must be made today, in the abse nce of full information about the future discount rate, that will continue to yield returns far into the futu re” (7246.1, pg 22). IPI and EDF conclude that no time inconsistency arises in the latter case because “by the time we reach the future the decision will have already been made. Declining discount rates merely provide an aid to current decision-making in the face of risk” (7246.1, pg 22). Although the commenters presented a valid point, in light of uncertainty about how interest rates may change over time, EPA uses a low certainty-equivalent discount rate to incorporate th e concern that interest rates are highly uncertain over time.

IPI and EDF also point out that the “choice of st arting point cannot be made independently of the underlying financial instrument used to estimate real returns over time. The simulated paths are extensions of a particular time series, and thus correspond to a particular financial instrument” (7246.1, pg 23). They state that the time-differen tial discounting literature, which has thus far
relied on lower discount rates as the starting point, provides su fficient empirical evidence for EPA to use a similar starting point. IPI and ED F suggest that the agency would first need to gather empirical evidence before using altern ative starting points, in light of the likely
differences that would result from instruments wi th different risk levels. However, given the lack of agreement about the starting point a nd proper adjustment to use in differential discounting, EPA could not justify re lying on this technique.

EPA agrees with a comment from Dr. Rose that clarifies the difference between dynamic
discount rates and uncertain rates. The SCC modeling exercise supporting the benefits analysis in this rulemaking used certai nty-equivalent consta nt discount rates and did not change over time. The SCC TSD discusses in greater detail how the discount rates accounted for uncertainty.

Uncertainty and Treatment of Impacts in the Models.

Many commenters discussed the limitations of the S CC estimates, in particular the treatment of uncertainty, catastrophic impacts, and omitted impacts, as well as the implications for the benefits assessment. EPA has responded to these concerns by providing a more robust discussion about these important issues that co mplements the SCC estimates and better informs policy makers.EPA considered these limitations and, as a par ticipant in the interagency group, used best available information and techniques to quantif y such impacts as feasible and supplement the SCC with qualitative assessments. Overall, presen tation of the revised SCC estimates in the final rule responds more fully the uncertainties and risk s associated with climate change (see the SCC TSD for discussion).

In particular, the revised estimates more fully capture uncertainty through Monte Carlo analysis and are accompanied by a fuller discussion of the un certainties and risks associated with climate change, as well as the limitations of SCC. In add ition to the uncertain parameters in each model, EPA assessed three parameters—climate sensitiv ity, socioeconomic and emissions trajectories, and discount rate—and sought to model them probabilistically for purposes of formal uncertainty analysis in the interagency modeling exercise . A probability distribution was specified for climate sensitivity and used as an input in the three models. A probability distribution was not specified for the other two parameters because of uncertainty about how to model them probabilistically for purposes of formal uncertain ty analysis. For example, while models can project potential emissions pathways, assigning pr obability weights to different states of the world in an analytically rigorous way proved challenging given th e dearth of information on the likelihood of a full range of future socio-economi c pathways. Therefore, the modeling exercise used multiple scenarios that span a range of so cio-economic parameters and multiple values for
the discount rate.

Consistent with the commenter’s recommendati ons, EPA has provided much more information about the SCC estimates and the underlying paramete rs in the final rule. For example, the SCC TSD shows how SCC values for 2010 vary across model, scenario, and discount rate; it also presents the distribution of SCC estimates, in cluding benefit estimates at the 95th and 99th percentiles. However, EPA believes that it is more appropriate to place the technical information in the rulemaking’s technical supporting documents, rather than in the preamble text, which is intended to provide a high-level di scussion of the policy issues rela ted to the economic analysis. Therefore, EPA has presented a summary of the SCC results in the preamble along with references to the other rulemaking documents that provide data and methodological details necessary to replicate the analysis.

EPA also considered the emerging literature about the treatment of risk of catastrophic impacts
and commenters’ recommendations on this issue. For example, EPA considered the findings from Weitzman (2009) suggesting that catastroph ic damages are so large that they would
dominate the effect of the disc ount rate in a present value calculation and result in an infinite willingness-to-pay for GHG mitigation today. Howe ver, EPA determined that this research requires further exploration before its generality is known and the optimal way to incorporate it into regulatory reviews is understood. EPA also c onsidered ways to account for risk aversion in the SCC estimates, such as inclusion of a risk premium, suggested by IPI, EDF, and the Pew Center on Global Climate Change. The review show ed that further research in this area is needed to develop a reasonable ap proach to account for catastrophic risks in regulatory analyses. In addition, an adder was not used given the l ack of a rigorous method to select the number; choosing an adder value would at this point amount to an arbitr ary decision. Finally, available information did not support rigor ous inclusion of an option valu e, as recommended by the IPI
and EDF. See the SCC TSD for more about the consideration of catastrophic risk.Instead, low probability, high impact events ar e incorporated into the SCC values through explicit consideration of their effects in two of the three models as well as the use of a probability density function for equilibrium clim ate sensitivity (see the SCC TSD). Treating climate sensitivity probabilistically results in more high temperature outcomes than analyzing climate sensitivities of specific values (e.g., 1.5 or 4.5), which in turn lead to higher projections of damages. EPA has also presented a detailed qualitative assessment of potential catastrophic damages and the implications for SCC estimates in the SCC TSD. EPA remains interested in research about practical and robust methods to address this important consideration.

The SCC TSD further emphasizes the need to e xplore the sensitivity of the results to other aspects of the models, in particular how the damage functions incorporate adaptation, technological change, and catastrophic damages. While it is not possible at this time to provide a precise list of each model’s treatment (i.e., in cluded, excluded) of climate impacts, EPA has presented a robust discussion of this key anal ytical issue and placed more detailed model
information in the docket.

In particular, the SCC TSD discusses in detail how each model estimates climate impacts, the known parameters and assumptions underlying those models, and the implications of incomplete treatment of impacts (catastroph ic and non-catastrophic) for the S CC estimates. This discussion underscores the difficulty in accurate ly distilling the models’ treatment of impacts in table-form. Most notably, the use of aggregate damage f unctions—which consolidate information about impacts from multiple studies—in two of the models poses a challenge in listing included impacts. For example, within the broad agricu ltural impacts category, some of the sub-grouped impacts are not explicitly modeled but are highl y correlated to other subcategories that are explicitly modeled. Therefore, it may be misleadi ng to identify these kinds of impacts as either “included” or “omitted” from the model. Along those lines, impacts may be included in models but not directly; the Dynamic Integrated C limate and Economy (DICE) model represents adaptation implicitly through the choice of studies used to ca librate the aggregate damage function, and the Climate Framework for Uncer tainty, Negotiation, a nd Distribution (FUND) model includes adaptation both implicitly and explicitly (see the SCC TSD for details).

Accordingly, EPA recognizes the need for a thor ough review of damage functions—in particular, how the models incorporate adaptation, technolog ical change, and catastrophic damages. EPA
has considered the Pew Center on Global Clim ate Change’s recommendation to conduct an expert elicitation on the value of omitted impacts, but determined that conducting a rigorous and complete expert elicitation was not possible wi thin the rulemaking timeline. However, the Federal government is committed to exploring these models—e.g., determining which impacts are included and omitted—and how they can be modi fied to produce more accurate estimates of the SCC. EPA regards the SCC TSD as a starting point in the inquiry into the models’ treatment of impacts and to motivate new research.

Regarding recommendations to modify model paramete rs that were not adjusted in this exercise, see Response B for EPA’s response.

Magnitude and Uses of the Social Cost of Carbon.EPA considered various comments about the magn itude of SCC estimates (e.g., interim SCC was too low). Many commenters recommended that EPA consider higher values in the analysis to better represent the possibility of catastrophic climate damages; some recommended specific numbers to use as the upper bound (e.g., CARB) or other analyses to set a minimum lower bound (e.g., Union of Concerned Scientists). In re sponse, EPA has focused on developing a rigorous methodology to improve its characterization of S CC rather than selecting estimates from the published literature. Accordingly, EPA continued to review the SCC literature, participated in the interagency review of SCC, and conducted the modeling exercise (see the SCC TSD for
detailed discussion about the basis for the m odeling exercise, the methodology, and results).
Consistent with recommendations to justify any weighting schemes used, the SCC TSD explains why each model and two of the parameters (soc ioeconomic emissions trajectories and discount rates) are weighted equally; italso presents the rationale fo r the probability distribution for climate sensitivity.

EPA disagrees with one commenter who said thatSCC overstates the benefits of mitigation and
attributed it to emissions leak age, i.e., shifting emissions fr om the region subject to the GHG mitigation requirements to a location without su ch requirements. Emissions leakage could reduce or negate the net reduction in global emissi ons. However, emissions leakage would affect
the estimate of total emissions and it is not relevant to the value of a one ton reduction in CO 2 emissions (i.e., SCC) in this case. As discussed in the SCC TSD, we have assumed that this rule would result in small (marginal) impacts on cumula tive global emissions. Even in the unlikely event that emissions leakage occurred under this rulemaking, it would not alter the cumulative global emissions trajectory underlying the SCC es timates. Regarding the potential for leakage under this rule, EPA finds the commenter’s sugges tion that people will mo ve to other countries to avoid purchasing cars with higher fuel economy standards highl y implausible. See Preamble
III.H.5 for further discussion about considerations of turnover rate for the vehicle fleet and the implications thereof. See also the prior sections of this respon se for detailed discussion about treatment of uncertainty in SCC estimates, in part icular the treatment of omitted impacts, and the implications for the benefits assessment.

On the other hand, the SCC TSD does not, as an other commenter recommended, explicitly direct agencies to view the SCC as a minimum value for GHG reduction benefits. Instead, the SCC TSD presents detailed methodological informa tion and a discussion of the SCC limitations, thereby enabling interpretation of the estimates as they are used in this analysis.

EPA also considered comments about the use and presentation of SCC in rulemaking analyses. For example, IPI and EDF recommended that th e interagency group specify how agencies should use SCC in traditional regulatory impact analysis and agency rulemaking. In response, the SCC TSD identifies the purpose of SCC and details how to use it to estimate the benefits of policies resulting in marginal reductions in CO 2 emissions. The SCC TSD further notes that there is a separate question of whether the SCC is an a ppropriate tool for calculating the benefits of reduced emissions from policies that have a large (non-marginal) imp act on global cumulative emissions. The analysis supporting this final ru le does not attempt to answer that question.Overall, EPA recognizes the importance of tradi tional regulatory impact analyses and the EPA Regulatory Impact Analysis (RIA) presents four ne w SCC estimates used to estimate benefits of the marginal reductions in CO 2 emissions under this fina l rule (see EPA RIA 7.5).

In response to Ford’s recomm endation to consider using CO 2 mitigation cost in lieu of SCC estimates, EPA has determined that doing so would eliminate useful information from the economic analysis about the CO 2 benefits of the standards. Indeed, Execu tive Order 12866 states that agencies are required, to the extent permitted by law, “to assess both the costs and the benefits of the intended regula tion and, recognizing that some cost s and benefits are difficult to quantify, propose or adopt a regulation only upon a r easoned determination th at the benefits of the intended regulation justify its costs.” Other sections of the economic analysis consider the
costs to achieve the standards in this final ru le (e.g., see Preamble Section III.H.3 for discussion about the annual cost per ton of GHG reduction).

In addition, SEI commented that policies designed from an insurance perspective “would not be
framed in terms of cost-benefit calculations,” but that economic analysis would inform selection of a least-cost strategy for meeting a risk-based standard. EPA continues to recognize that the estimates do not include all significant climate changes damages and are therefore underestimates. As a result, EPA has supplemen ted the quantified benefit estimates with a qualitative discussion about benefits.

It is also useful to recognize the somewhat limited role that the mone tary value placed on the SCC plays in the determination of what emissions standards should be adopted in this final rule. EPA used the benefit-cost analysis as one c onsideration among many to evaluate the overall
reasonableness of the emissions standards chose n. See preamble section III.D of the preamble for a complete discussion of the various factor s on which EPA determined the stringency of the final standard. In this case, the benefits of th e standards are significantly greater than the costs, and this would be the case whether EPA considered the domestic value for the SCC, the global value for the SCC, or a range of values incl uding higher SCC values. The specific range or values used in this analysis are therefore not outcome determinative as far as deciding what emissions standards to adopt, as the standards adopted by EPA w ould still be reasonable from a net benefits perspective unde r a wide range of SCC.

EPA considered Dr. Rose’s comments about the number of SCC estimates presented and basis for deciding on an appropriate SCC estimate. In response, EPA has presented four SCC
estimates and calculated benefits at each SCC value. The SCC TSD discusses in detail the methodological soundness of and treatment of uncertain ty and risk in the f our SCC estimates. In sum, the four SCC estimates are considered to capture many of the uncertainties involved in regulatory impact analysis.

Regarding the commenters’ concerns about om itted impacts and recommendations to expand the presentation of information about the estimates, see above section, Uncertainty and Treatment of Impacts in Models , for EPA’s response. In addition, the SCC TSD presents the distribution of SCC estimates, including be nefit estimates at the 95 th and 99 thpercentiles. Variation in climate sensitivity is reflected, along with other parameters that are treated as unce rtain in the models, indifferences between SCC estimates for a given so cio-economic trajectory and discount rate. EPA
has also made the full model results availabl e in the docket for this rule; see OAR-2009-0472.

In addition, EPA notes IPI and EDF’s recomm endation for the interagency group to “give explicit direction to agencies on how to account for ancillary benefits associated with GHG reductions” (7246.1, pg 42). As noted above, the S CC TSD reiterates the need to document more thoroughly omitted impacts and monitor the literature for emerging research. As the research evolves, the Federal government, including EPA, is committed to exploring how modeling can be improved so that these aspe cts are better reflected in the SCC.

EPA agrees with the Center for Biological Divers ity’s observation that om ission of impacts from the SCC estimates effectively assigns such im pacts a value of zero, but disagrees with the Center’s interpretation of the Ni nth Circuit’s Court’s decision that agencies must quantify nonzero benefits. First, EPA has provided a non-zero estimate of the benefits of this rulemaking’s
reduction in CO 2 emissions. As discussed at length a bove and in the SCC TSD, some of the benefits cannot currently be quantified in a ri gorous manner and were therefore presented in a qualitative manner. Both the qua litative and quantitative presenta tion of benefits incorporates the results of the Federal government’s extensiv e review of SCC and recent modeling exercise,
which was based on best available information. Second, the Center for Biological Diversity’s argument applies most directly to rulemakings in which the economic analysis determines the stringency of the standard. See 538 F. 3d at 1201-02 (court found arbitrary determination not to
monetize social cost of carbon when utilizing a marginal cost bene fit analysis where this decision influenced the stringency of the standard). Mo reover, that case involve d a situation where the agency assigned no monetary value to the social cost of carbon, clearly not the case here. The stringency of this rulemaking’s standard, in fact , is not determined by th e monetized benefits of GHG reductions. As discussed further below, the bene fit-cost analysis used for this rule played a part in EPA’s overall conclusion that the rule is reasonable, but did not determine the standard’s stringency. See, for example, preamble secti on III.D, which discusses the basis for EPA’s
determination and notes that issues of technol ogy availability, cost (t o both manufacturers and consumers), and available leadtime are the critical decision factors..

EPA RESPONSE B

Organization: See table below.

Commenter Affiliation Document ID Number

California Air Resources Board EPA-HQ-OAR-2009-0472-7189.1 Center for Biological Di versity EPA-HQ-OAR-2009-0472-7265.1

Environmental Defense Fund EPA-HQ-OAR-2009-0472-7246.1 Ford Motor Company EPA-HQ-OAR-2009-0472-7082.1 Institute for Policy Integrity at New York University School of

Law EPA-HQ-OAR-2009-0472-7246.1

Natural Resources Defense
Council EPA-HQ-OAR-2009-0472-7274.1New Jersey DEP EPA-HQ-OAR-2009-0472-7093.1

Pew Center EPA-HQ-OAR-2009-0472-7239.1 Private Citizen (Adcock, James) EPA-HQ-OAR-2009-0472-5385 Private Citizen (Rose, Stephen) EPA-HQ-OAR-2009-0472-7276.1

Stockholm Environment
Institute-US Center EPA-HQ-OAR-2009-0472-7432.1

Union of Concerned Scie ntists EPA-HQ-OAR-2009-0472-7181.1 University of California Santa Barbara Bren Working Group EPA-HQ-OAR-2009-0472-7188.1

Comments:

EPA received extensive comments about the me thodology used to derive the interim SCC
estimates as well as comments on the use of inte grated assessment mode ls, and equity-weighting.

Comments on the Methodology Used for Interim SCC Estimates

While the Ford Motor Company noted that the interim methodology was acceptable given available data, many commenters—representing academic and environmental organizations— expressed concerns that the filt ers were too narrow and stated that model-weighting averaging was inappropriate. In general, the latter group of commenters observe d that averaging and model-weighting the filtered estimates furthe r restricted the SCC da taset and obscured the variability among published SCC estimates.

For example, the Stockholm Environment In stitute (SEI) characterized the interim methodology as biased and reflective of an incomp lete reading of the eco nomic literature, and
stated that other studies and models should have been include d (7432). In particular, SEI identified the peer-review filter as problematic because it resulted in the exclusion of SCC estimates from the heavily scrutinized Stern Review, which “offered an innovative, rigorous analysis leading to a relatively high es timate of the SCC, $85 per ton of CO 2 ” (7432.1, pg 3). Although the Stern Review authors did not release th eir results in a peer-reviewed journal, their study received a level of scrutiny “far beyond th e normal peer review process for articles published in academic journals” (7432.1, pg 3).

Similarly, Dr. Rose identified reliance on th e most recent versions of each model as problematic. He stated that because there ha s been little change in SCC modeling since 2001, it
was incorrect to assume that the most recent es timates are superior. The commenter concluded that limiting consideration to “the most recent results reduces sample size and makes results highly contingent on most recent applica tions and assumptions used” (7276.1, pg 1-2).

Moreover, the Natural Resources Defense Council (NRDC) described the interagency group’s reliance on model-weighted averages, which further compounded this distortion and failed to capture estimates for extreme climate events, as “astonishing,” based on the current understanding of climate scien ce (7274.1, pg 14). Other commenters likewise concluded that thefilters and model-weighting procedures exacerbat ed what is widely understood to be a partial accounting of mitigation benefits (e.g., 7432.1, 7276.1).

Several commenters expressed concerns aboutaveraging SCC estimates from different discount rates; one commenter clar ified that this is incorrect b ecause the discount rates represent different judgments about “the value of te mporal trade-offs” (7276.1, pg 3; see also 7188.1, 7208.1). That is, estimates from each discount rate encompass inconsistent assumptions about the type of investments made and how their valu e changes over time. In addition, EPA received
extensive comments about the selection of discount rates, which is discussed separately in Response to Comments [A].

Finally, one commenter recommended an alternat ive approach to monetize the benefits of
reductions in CO 2 emissions (see 5385, pg 3). Specifi cally, this commenter recommended extrapolating the results of lo cal-scale ecosystem service valua tions, such as one for Puget Sound, to a global estimate of SCC.

Comments on Use of Integrated Assessment Models

Three commenters discussed the limitations of the integrated assessment models, concluding that the interagency group’s selection of models a nd reliance on the model authors’
datasets contributed to the downward bi as of the interim SCC estimates (7432.1, 7239.1, 7274.1). One commenter observed that the integr ated assessment models rely heavily on projections of GHG emissions a nd temperatures from the Inte rgovernmental Panel on Climate Change (IPCC) to estimate the value of economi c damages and cited evidence to support the view that these project ions are conservative. 5

Indeed, the Stockholm Environm ent Institute characterized all three models’ default datasets as “embody[ing] cont roversial judgments” (7432.1, pg 4) . The Stockholm Environment Institute presented numerous examples of such judgments, including th e “surprisingly low” estimate of climate damages in DICE. The Stock holm Environment Institut e clarified that DICE relies on estimates of agricultural impacts de veloped in the 1990s that were “excessively optimistic about potential benefits from warmi ng, and contained some basic analytical errors” (7432.1, pg 6). The Stockholm Environment Institute further noted that a UC-Berkeley economist has run DICE using the current data an d found that climate damages in the U.S. could be four times greater than those derived using the DICE default dataset (7432.1, pg 6).

Accordingly, these commenters recommended the agencies run the models with other datasets and also modify some of the models ’ assumptions. For example, they suggested modifying certain model parameters in the exercise—e.g., global valu e of a statistical life (VSL), an adaptation function, and damage functions allowing cross-sectoral impacts (7274.1, 7432.1).

5 Commenter stated that “following ev ery IPCC assessment report (four to date), many predictions have turned out worse than expected. Each IPCC assessmen t report is grimmer than the previo us. There are already signs that the last assessment report of 2007 (the Fourth Assessment Report, FAR) had overly op timistic ‘best guesses.’” Commenter cited findings published after release of the FAR, including evidence that summer sea ice could disappear by 2030, much sooner than the IPCC’s projection of disappearance by the end of the century. See Science Magazine 326(5955): 926-928. (OAR-2009-0472-7274.1, pg 10).Comments on Equity Weighting

EDF and IPI discussed an inconsistency betw een the discounting approach used in the proposed rule, which applies differential equity we ights on a timescale, and “the decision not to apply differential equity weights to the impact s on different income groups within a single generation” (7276.1, pg 8). They clarified the point “is not necessarily to recommend that equity weights be applied for intratemporal transfers: although there would appear to be strong ethical grounds for such an approach, the determination of those equity weights would be an enormous challenge in itself” (7276.1, pg 8).

NRDC likewise noted an inconsistency and stated that “failing to weigh damages by
income levels is inconsistent with economic theory” (7274.1, page 5) . NRDC further noted it is “difficult to justify [not usi ng equity weights] on ethical gr ounds: most of the world’s poor
neither emitted the CO 2 emissions responsible for current at mospheric concentration levels, nor economically benefited from them—resulting in the poor having the leas t ability to absorb climate damages” (7274.1, page 6). NRDC reco mmended that EPA apply equity-weights to the SCC estimates by taking into account the relative reductions in wea lth in different regions of the
world and use a number for the VSL that is e qual between all countries and populations. See EPA-HQ-OAR-2009-0472-7274.1 for further discussion.

EPA Response B:

The commenters’ input informed the development of the new SCC estimates. This response addresses the following issues id entified by the commenters: the methodology used to derive the interim estimates, the use of integrated asse ssment models, and equity -weighting (see letters from California Air Resources Board, Center fo r Biological Diversity, Ford, NJ DEP, Natural Resources Defense Council, Pew Center on Climat e, Dr. Rose, Stockholm Environment Institute, University of California Santa Barbara Br en Working Group, and Union of Concerned Scientists). EPA has responded el sewhere to the commenters’ other comments related to SCC. Specifically, refer to Response [A] for EPA’s response to comme nts regarding discount rate, uncertainty and risk, and magnitude and uses of the social cost of carbon, and to Response [C] for EPA’s response to comments regarding global and domestic valuations of SCC.

Methodology Used to Derive Interim Estimates.

EPA received and considered extensive commen ts about the methodology used to derive the interim SCC estimates. EPA recognized the lim itations of the interim approach—a metaanalysis that relied on published SCC estimates —but judged it as the best option given the limited time available to coordinate among federa l agencies and develop SCC estimates for the proposed rule. However, EPA did not continue w ith its interim approach and instead developed new SCC estimates for this rule. Specifica lly, the interagency S CC group, in which EPA participated, reconvened on a regul ar basis to generate improved SCC estimates that respond to the concerns raised by commenters. As noted in Preamble III.H.6, EPA ha s critically evaluatedthe decisions of the group and the new SCC estimat es and endorses them as reasonable for this
final rule.

The revised SCC methodology responds to comments in several key ways. First, we agree with
the commenters’ concerns aboutthe use of model-weighted means (e.g., see NRDC, SEI, Dr. Rose). The new results are weighted equally by model because the exer cise produced an equal number of estimates for each model. Second, we agree that it is inappropriate to combine SCC
estimates across discount rates. None of the revised SCC esti mates has been averaged across discount rates. (See Response to Comment A for consideration of comments about the rationale for discount rates, approach used to select rates, the magnitude of rates, and treatment of uncertainty.) The Technical Support Document, Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866 (hereafter, "SCC TSD"), also responds to these comments by presenting the rationale for discount rate selection. 6 Third, as discussed further in Response to Comment A, the modeling exercise resulted in a fuller distribution of SCC estimates and better accounted for uncertainty through a Monte Carlo analysis. See the SCC TSD for detailed explanation about probabilistic treatment of climate sensitivity in the modeling exercise.

The commenters also had concerns about the fi lters used to narrow down the pool of existing SCC estimates for consideration in the proposed rule , noting that they were overly restrictive, or that the sample otherwise excluded key studies (e.g., Dr. Rose, SEI, UC-Santa Barbara Bren Working Group). In response, EPA notes that th e approach used in this final rule—conducting new model runs—has avoided this particular cha llenge. As noted in the SCC TSD, the modeling exercise produced a vast amount of data for consideration.

In addition, EPA considered comments about the se lection of a growth rate applied to climate damages for the interim SCC estimates (CARB, Ce nter for Biological Dive rsity). Rather than assuming a constant annual growth rate, we estima ted the growth rate of the SCC directly using the Dynamic Integrated Climate and Economy (DIC E), Policy Analysis of the Greenhouse Effect (PAGE), and Climate Framework for Uncerta inty, Negotiation, and Distribution (FUND) models. This approach helped to ensure that th e estimates are internallyconsistent with other modeling assumptions. See the SCC TSD for a tabl e that illustrates how the growth rate for these four SCC estimates varies over time; the S CC TSD also presents the full set of annual SCC
estimates between 2010 and 2050.

The California Air Resources Board presented a va lid critique about the non-trivial variation in climate scenarios underlying the in terim SCC estimates; Dr. Rose al so described the selection of
socioeconomic emissions scenarios for the in terim estimates as limited. For the new SCC estimates, we used socio-economic and emission trajectories that span a range of plausible scenarios. Five trajectories were selected from the recent Stanford Energy Modeling Forum exercise, EMF-22; each trajectory wa s used consistently in the three models. Four trajectories

6 Interagency Working Group on Social Cost of Carbon, U.S. Government, with participation by Council of Economic Advisers, Council on Environmental Quality, Department of Agriculture, Department of Commerce, Department of Energy, Department of Transportation, Environmental Protection Agency, National Economic Council, Office of Energy and Climate Change, Offi ce of Management and Budget, Office of Science and Technology Policy, and Department of Treasury, “ Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866 ,” February 2010. EPA-HQ-OAR-2009-0472represent potential busin ess-as-usual (BAU) growth in populat ion, wealth, and emissions and are
associated with CO 2 (only) concentrations ranging fr om 612 to 889 ppm in 2100. The fifth trajectory represents an emissions pathwa y that achieves stab ilization at 550 ppm CO 2 e (i.e.,

CO 2 -only concentrations of 425 – 484 pp m or a radiative forcing of 3.7 W/m 2 ) in 2100, a lowerthan-BAU trajectory.

We note Dr. Rose’s comment that “it would be ar bitrary to use SCC estimat es off of aspirational pathways for policies that generate small net changes in global emissions. Instead, estimates off of baseline projections are more consistent with current policy decisions with marginal global GHG emissions implications, as well as a risk ma nagement approach designed to internalize
risks that the USG wishes to a void or hedge against” (7276.1, pg 2) . However, as explained in the SCC TSD, the modeling exercised relied prim arily on BAU trajectories but also included a lower-than-BAU trajectory that would be consis tent with widespread action by countries to mitigate GHG emissions. The lower-than-BAU trajec tory was chosen because it represents the most stringent case analyzed by the EMF-22 wher e all the models converg e: a 550 ppm, not to exceed, full participation scenario. See the SCC TSD for complete discussion.

Regarding Dr. Rose’s question about why the Hope (2006) estimates were labeled as 5 percent: One common equation used to calculate the di scount rate is the Ramsey equation: r = ρ + g* η , where ρ is the pure rate of time prefer ence, g is the growth rate, and η is the elasticity of the marginal utility of consumption. The pure rate of time preference cited in the Hope (2006) article is 3% per year. While the actual di scount rate varies over time, it is relatively common to refer to the discount rate as the pure rate of time preference plus 2%, wher e the 2% is roughly the growth rate times the elasticity of the marginal utility of consumpti on. A more accurate categorization would be “approximately 5%” or “a pure rate of time preference of 3%.” As noted in Response A, EPA used a different approach to di scount SCC estimates in the final rule.

Dr. Rose also requested more information to understand the applicati on of Newell and Pizer discounting to the interim SCC estimates. The undi scounted stream of benefits was not available for each of the studies included in this analys is. The way that the Newell and Pizer (2003) findings were adapted for the interim values wa s to apply the adjustment factors implied by either their preferred random walk model or mean-reverting model. According to the random walk model, SCC estimates based on a 3% or 5% discount rate ar e increased by 70.733% and 89.8%, respectively. The mean-reverting mode l implies increases of 10.733% and 16.8% for
estimates based on a 3% or 5% discount rate.

Note Newell and Pizer based adjustment factors were not applied to estimates from Guo et al. (2006) that use a different approach to account for discount rate uncertainty.

EPA notes Dr. Rose’s recommendation to ensure consistency in presenti ng the SCC analysis in each agency’s section of the joint rule. Tables in the proposed rule, for example, used different dollar years to report the same SCC estimates (e.g, 2007$ in EPA’s preamble section and 2006$ in NHTSA’s preamble section). The agencies agree with the commenter’s recommendation and have ensured to the extent possible that the secti ons in this rule are consistent. Moreover, the same detailed analysis of SCC presented in the SCC TSD supports the entire rulemaking.In response to Dr. Rose’s request for inform ation about base years and Newell and Pizer discounting, please see the table below.

Model Study Base year (Best available info) Y ear Dollars (Best available info)

FUND Anthoff et al. 2009 2000 2000

FUND Link and Tol 2004 1995 1995

FUND Guo et al. 2006 1995 1995

PAGE Wahba & Hope 2006 2000 2000

PAGE Hope 2006 2000 2000

DICE Nordhaus 2008 2005 2005

Additionally, the commenter requested a complete list of references. The references are as
follows:

• Anthoff, D., C. Hepburn, and R. Tol. 2009. Equity weighting and the marginal damage costs of climate change. Ec ological Economics 68: 836:849.

• Guo, J., C.J. Hepburn, R. Tol, and D. Antoff. 2006. Discounting and the social cost of
carbon: a closer look at un certainty. Environmental Science and Policy 9: 205-216.

• Hope, Chris. 2008. Optimal carbon emissions and the social cost of carbon over time under uncertainty. The Integrated Assessment Journal 8(1): 107-122.

• Hope, Chris. 2006. The Marginal Impact of CO2 from PAGE2002: An Integrated Assessment Model Incorporati ng the IPCC’s Five Reasons for Concern. The Integrated Assessment Journal 6(1): 19-56.

• Link, P.M., and R. Tol. 2004. Possible economic impacts of a shutdown of the thermohaline circulation: an application of FUND. Portuguese Economic Journal 3: 99-

114.

• Newell, R., and W. Pizer. 2003. Discounting th e distant future: how much do uncertain
rates increase valuations? Journal of Environmental Econom ics and Management 46: 52-

71.

• Nordhaus, William. 2008. A Question of Ba lance: Weighing the Options on Global Warming Policies. New Haven, CT: Yale University Press.

• Tol, R. 2008. The Social Cost of Carbon: Trends, Outliers and Catastrophes. Economics: The Open-Access, Open-Assessment E-Journal 2(25): 1-24.• Wahba, Mohammed, and Chris Hope. 2006. The ma rginal impact of carbon emissions
under two scenarios of future emi ssions. Energy Policy 34: 3305-3316.

Other Methodology Comments. Consistent with Dr. Rose’s r ecommendation to “strive for an enduring and transparent methodology that can be readily and transparently updated,” the SCC TSD presents a detailed discussion of the develo pment of the interagency modeling exercise and the resulting SCC estimates. As noted in the SCC TSD, the main objective of this process was to develop a range of SCC values using a defens ible set of input assumptions grounded in the existing scientific and economic lit eratures. In this way, key uncer tainties and model differences transparently and consistently inform the range of SCC estimates used in this rulemaking

process.

Furthermore, the Federal government has committed to updating the new SCC estimates as the science and economic understanding of climate change and its impacts on society improves over time. The interagency group set a preliminary goal of revisiting the SCC values within two years or at such time as substantially updated models become available, and to continue to support
research in this area.

EPA notes with interest the valuation of P uget Sound ecosystem services identified by commenter 5385, but regards the commenter’s sugge stion to extrapolate these results to a national or global SCC as problematic. In particular, the commenter’s recommendation does not incorporate findings from the ex isting scientific and economic l iterature about climate change impacts on other sectors. Furthermore, while the estimated value of ecosystem services in Puget
Sound could inform assessments of the monetized value of climate change impacts in that region, it does not assign a dollar value to the impacts associat ed with a marginal unit of CO 2 emissions. In short, it lacks a defensible appr oach that accounts for the various complexities involved in projecting CO 2 emissions and associated climate impacts on global scale.

In contrast, the integrated assessment models us ed to estimate the new SCCs combine climate processes, economic growth, and feedbacks betw een the climate and the global economy into a single modeling framework. As discussed in th e SCC TSD, these models translate emissions into changes in atmospheric greenhouse concentra tions, atmospheric concentrations into changes in temperature, and changes in temperature into economic damages. The emissions projections
used in the models are base d on specified socio-economic (G DP and population) pathways.
These emissions are translated in to concentrations using the ca rbon cycle built into each model,
and concentrations are translated into warmi ng based on each model’s simplified representation of the climate and a key parameter, climate sensitivity.

Use of Integrated Assessment Models

Several commenters discussed the use of the inte grated assessment models , concluding that the interagency group’s selection of models and reliance on the model authors’ datasets contributed
to the downward bias of the interim SCC estimates.

Model choice . EPA agrees with SEI that DICE, FUND , and PAGE are not the only relevant
climate economics models and has clarified its ch aracterization of these models as well as itsrationale for continuing to use them in the fina l rule. Overall, we fi nd DICE, FUND, and PAGE useful because they combine climate processe s, economic growth, and feedbacks between the climate and the global economy into a single mo deling framework, but we recognize that this advantage comes at the expense of a more deta iled representation of the underlying climatic and economic systems. However, as noted by SEI, these models have “been widely used by other investigators, precisely because of their simp licity and transparency” (7432.1, pg 4). Moreover, other integrated assessment models have not li nked physical impacts to economic damages. The limited amount of research linking climate impacts to economic damages makes this exercise even more difficult (see the SCC TSD for more information).

Others commented on the version of the models used to derive the interim SCC estimates. Pew noted that few studies have been published usi ng the most recent versi on, but identified several expected to be released by the ti me of the final rule and encour aged EPA to account for those. As discussed in the SCC TSD, EPA used SC C estimates from new model runs rather than selecting from those in the literature; EPA has continued to review de velopments in the SCC
literature.

We note that Pew’s comments about the values resulting from the most recent version of FUND are incorrect. According to EPA’s March 2010 communication with Dr. Anthoff, all of the deterministic SCC estimates were positive for the discount rates investigated in a paper that he prepared for Pew using FUND 3.5; this does not mean that FUND 3.5 produces positive SCCs
for any discount rate. Also, FUND uses a Major.Mi nor numbering system rather than calendar year to label the versions. EP A used the latest version of this model, FUND 3.5, that was available at the time of the modeling exercise.

Datasets used in models . NRDC observed that the integrated assessment models rely heavily on projections of GHG emissions a nd temperatures from the Inte rgovernmental Panel on Climate Change (IPCC) to estimate the value of economi c damages and cited evidence to support the view that these projections are conservative. Also, SEI characte rized all three models’ default datasets as “embody[ing] cont roversial judgments” (7432.1, pg 5). SEI presented numerous examples of such judgments, including the “sur prisingly low” estimate of climate damages in DICE, and clarified that DICE re lies on estimates of agricultural impacts developed in the 1990s that were “excessively optimis tic about potential benefits from warming, and contained some basic analytical errors” (7432.1, pg 6). SEI furt her noted that a UC-Berkeley economist has run DICE using the current data and found that clim ate damages in the U.S. could be four times greater than those derived using th e DICE default dataset (7432.1, pg 6).

EPA regards with interest the commenters’ specific recommendations to modify model parameters that were not adjusted in the exercise —e.g., global value of a st atistical life (VSL), an adaptation function, and damage functions allo wing cross-sectoral impacts (e.g., NRDC and SEI). Research gaps and practical constraints required us to lim it modification of the models to socioeconomic and emissions scenarios, climate sensitivity, and discount rate. Therefore, the modeling exercise relied on the default values in the latest available version of each model for the remaining parameters. Moreover, continuing to use the models’ defa ult values for some parameters allowed the exercise to account for different approaches to quantifying damages. While EPA recognizes that the models’ translati ons of physical impacts to economic values areincomplete, approximate, and highly uncertain, it regards them as the best available representations.

As noted in Response A, the SCC TSD further em phasizes the need to e xplore the sensitivity of the results to other aspects of the models, in particular how the damage functions incorporate adaptation, technological change, and catastrophic damages. The Federal government is committed to supporting new research and explori ng how to value the benefits of reduced GHG emissions. As the research evolves, the Federa l government is also committed to exploring how modeling can be improved so that these aspects are better reflected in the SCC. The interagency group plans to revisit the SCC estimates within two years.

Equity weighting and value of statistical life.

NRDC recommended that EPA apply equity-wei ghts to the SCC estimates by taking into
account the relative reductions in wealth in different regions of the world and use a number for the VSL that is equal between all countries and populations. As noted in the SCC TSD, we recognize the inconsistency betw een accounting for wealth differences over time through the discount rate and declining to do so on a geogra phical scale. However, after considering the literature on equity-weighting, we decided not to use equity-w eights because putting it into practice and defending it for dome stic regulatory analysis woul d raise complex conceptual, empirical, and normative problems (see the SCC TSD).

As discussed in Response A, the modeling exercise relied on the default values for VSL because it was not one of the parameters chosen to be held constant across all three models.

EPA RESPONSE C

Organization: See Table below.

Commenter Affiliation Document ID Number

Environmental Defense Fund EPA-HQ-OAR-2009-0472-7246.1 Georgia-Pacific EPA-HQ-OAR-2009-0472-7122.1

National Automobile Dealers Association (NADA) EPA-HQ-OAR-2009-0472-7182.1

National Petrochemical &
Refiners Association EPA-HQ-OAR-2009-0472-7234.1

Natural Resources Defense
Council EPA-HQ-OAR-2009-0472-7274.1

NYU Institute for Policy Integrity EPA-HQ-OAR-2009-0472-7246.1

Pew Center EPA-HQ-OAR-2009-0472-7239.1 Private Citizen (Adcock, James) EPA-HQ-OAR-2009-0472-5385 Private Citizen (Rose, Stephen) EPA-HQ-OAR-2009-0472-7276.1

Texas Chemical Council EPA-HQ-OAR-2009-0472-7290 University of California Santa Barbara Bren Working Group EPA-HQ-OAR-2009-0472-7188.1Comment Summary:

Seven commenters, representing academia and environmental organizations, supported the proposed rule’s preference for global SCC estimat es while several industry groups stated that under the Clean Air Act, EPA is prohibited fr om using global estimates. The commenters supporting a global SCC described it as the most appropriate way to account for the public good aspects of GHG emissions and climate protection.

The Environmental Defense Fund and NYU In stitute for Policy Integrity described climate stability as a special public good case be cause it is a global one, meaning that no single actor can provide climate st ability. Maintaining or ach ieving the public good—climate stability—must involve coordinati on of many sovereign countries, a ll of which have an incentive to do nothing and enjoy global benefits when ot her countries incur the costs of GHG mitigation (7246.1, pg 37).

Moreover, the Environmental Defense F und and NYU Institute for Policy Integrity
maintained that consideration of domestic S CC does not solve the global public good problem.
These commenters stated that if all countries based GHG reductions on domestic SCC values, it would “result in sub-optimal protection of clim ate stability [because] the global SCC is not a population-weighted average of do mestic SCCs, but instead the a ggregate of all of the harms associated with climate change” (7246.1, pg 37). For more details regarding comments that support use of a global SCC, see EPA-HQ-OAR-2009-0472-7246.1, -7274.1, -7239.1, -7276.1, - 7188.1, and -5385.

One commenter who supported use of global S CC estimates stated that it was unclear how the agencies planned to use domestic es timates, thereby making it difficult to comment on domestic SCC estimates (7276.1). NRDC also noted a lack of clarity re garding the agencies’
intentions for domestic SCC estimates but conc luded that it would be inappropriate to use
domestic estimates in any situation (7274.1).

NRDC based its support for use of a global SCC on the global, public goods aspect of
GHG emissions as well as ethical co nsiderations. Specifically, NRDC stated that from an ethical standpoint, it cannot support a U.S. SCC estimate, which would effectively assign a value of zero to the damages imposed on other countries by U.S. emissions. NRDC fo und this particularly troubling because “many countries, especially poor ones, did not contribute to the current CO 2 levels in the atmosphere, yet will suffer the wo rst consequences. Perverse ly, developed countries obtained their income status by emitting greenhouse gases, and as a result have more resources to absorb climate damages, while the opposite is true of the poor countries” (7274.1, pg 24).

The commenters that disagreed with use of a global SCC argued that EPA cannot permissibly consider a global value because it lacks authority to consider th e international effects of domestic emissions in crafting emission sta ndards under section 202 (a). These commenters further argued that Congress was ex plicit when it wanted such eff ects to be considered, referring to section 115 of the Act, whic h authorizes regulation of domes tic pollutant emissions due to
their international effect under specified circumstances. The co mmenters also referred to thegeneral presumption that Federal statutes are pres umed not to have extra-territorial effect. For more details, see EPA-HQ-OAR -2009-0472-7234.1, -7290, -7182.1, and -7122.1.

EPA Response C:

This response presents EPA’s c onsideration of and response to comments from regarding the use of global and domestic valuations of SCC (s ee comments from Dr. Rose, National Automobile Dealers Association, NYU Institute for Policy Integrity and Environmental Defense Fund, University of California Santa Barbara Bren Working Group, Pew Center on Climate, Natural Resources Defense Council, and Texas Chemical Council).

In sum, the final rule continues to focus on gl obal SCC values because of the global, public good aspects of greenhouse gas emissions. EPA prefer s a global measure of GHG mitigation benefits because of the unusual aspects of the climate change problem—i.e., GHG emissions cause the same damage regardless of the location of thei r emission; climate change occurs over very long time horizons, and it represents a problem that the United States cannot solve independently (see the Technical Support Document, Social Cost of Carbon for Re gulatory Impact Analysis Under
Executive Order 12866 (hereafter, "SCC TSD")). 7

Several commenters argued that EPA cannot permi ssibly consider a global value because it lacks authority to consider the international effect s of domestic emissions in crafting emission standards under section 202 (a). These commenters further ar gued that Congress was explicit
when it wanted such effects to be consider ed, referring to section 115 of the Act, which authorizes regulation of domes tic pollutant emissions due to their international effect under specified circumstances. The co mmenters also referred to the ge neral presumption that Federal statutes are presumed not to ha ve extra-territorial effect.

The commenters have misapprehended the analysis of global and domestic SCC. First, EPA’s regulation does not exercise extraterritorial effect. The regula tion sets standards for new motor vehicles produced or imported into the United Stat es; hence, the activity it regulates is domestic activity. The issue here is not the extraterritorial exercise of regulator y authority over conduct occurring overseas, but how to place a monetary value on a reduction in domestic emissions, with the commenter arguing that EPA may not cons ider effects occurring outside the borders of the US when valuing the benefits of reductions achi eved under section 202(a) . In this case, the emissions reductions will marginally reduce the overall global contribution of GHG emissions to the atmosphere, affecting the global atmospheric con centrations of GHGs. This will then have a marginal effect on global climate change, with resulting impacts both inside the US and around the world. There is no issue that the impacts fromglobal climate change that occur in the US are appropriate to consider in valuing the benefits of these domestic GHG reductions.

7 Interagency Working Group on Social Cost of Carbon, U.S. Government, with participation by Council of Economic Advisers, Council on Environmental Quality, Department of Agriculture, Department of Commerce, Department of Energy, Department of Transportation, Environmental Protection Agency, National Economic Council, Office of Energy and Climate Change, Offi ce of Management and Budget, Office of Science and Technology Policy, and Department of Treasury, “ Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866 ,” February 2010. EPA-HQ-OAR-2009-0472However, there is also a value to the US from domestic emissions reductions that reduce the harm occurring globally. First, impacts from c limate change occurring overseas can create economic, trade, humanitarian and national security issues for the US. For example, climate change may exacerbate problems (e.g., food security or water supply) in relatively poor and politically volatile countries that raise humanitari an issues and national security issues for the
United States. 8 Second, the US will gain the greatest benefit from reducing domestic emissions of GHGs if there is a global response to the gl obal problem of climate change. Given the nature of the public good at issue, a global response would maximize the benefits the US receives from reducing GHGs. Using a global SCC in valuing th e domestic reductions from this final rule is
most consistent with this outcome , while using a domestic SCC is not. For both of these reasons, considering the global SCC is an appropriate way to value the bene fits to the US from domestic GHG reductions under section 202(a).

Second, this situation is not an alogous to section 115 of the Act, which calls for control of
domestic emissions if certain conditions are met concerning emissions in the U.S. causing or contributing to air pollution that is reasonably anticipate d to endanger public he alth or welfare in a foreign country. Mandating control of domes tic emissions in certain circumstances based on the impact of those emissions on a foreign c ountry does not indicate a ny intention by Congress on the very different issue involved here. Use of the global SCC in the benefits analysis for this rule is not an issue of the authority or the obligation to regulate dom estic emissions of GHGs from new motor vehicles. Our authority to a dopt standards stems from the endangerment and contribution findings that have b een made under section 202(a). The issue here is how to value those domestic emissions reductions in considering th e benefits of the reduc tions. That is not the issue Congress addressed in sec tion 115, when it authorized re gulatory controls if certain conditions were met. Congress’ decisions on that issue in sec tion 115 do not limit or take away any of EPA’s discretion on how to value the be nefits of GHG reductions from the emissions standards adopted under section 202(a). 9

Finally, it is useful to recognize the somewhat limited role that the monetary value placed on the SCC plays in the determination of what emission s standards should be adopted. As noted above,
the value of the SCC is not relevant to whether EPA has the authority or the obligation to adopt emissions standards, as that stems from the e ndangerment and contribution findings. In addition, the levels of the standards adopted by EPA have been determined based on the effectiveness of the technology that will be available, their cost, and the appropriate leadtim e for incorporation of that technology in the light-duty ve hicle fleet. See the detailed explanation in section III.F for
further discussion of this. The cost-benefits an alysis is used to help evaluate the overall

8 See US EPA, Technical Support Document, Endangerment and Cause or Contribute Findings for Greenhouse Gases under Section 202(a) of the Clean Air Act , December 8, 2009, for a comp lete discussion about the implications of international climate impacts for the US, in docket EPA-HQ-OAR-2009-0171.

9 The commenters are also incorrect in maintaining that because Congress addressed in section 115 the issue of an obligation to adopt emissions controls based on the effect domestic emissions have outside the US, it necessarily precluded consideration of those effects under s ection 202(a). See Catawba County v. EPA, 571 F. 3d 20, 34 (D.C. Cir. 2009) (a congressional mandate in one section and silence in another often “suggests not a prohibition but simply a decision not to mandate any solution in the second context, i.e., to leave the question to agency discretion.’ (internal citation omitted, emphasis original)). In any case, as explained above, section 115 addresses the different issue of authority to regulate, and does not address how to value a reduction of domestic emissions for purposes of evaluating the costs and benefits of an otherwise authorized regulation.reasonableness of the emissions standards chosen by EPA. In this case, the benefits of the standards are significantly greater than the co sts, and this would be the case whether EPA considered the domestic value for the SCC, the gl obal value for the SCC, or a range of values including higher SCC values. The specific range or values used in this an alysis are therefore not outcome determinative as far as deciding what emissions standards to adopt, as the standards adopted by EPA would still be reas onable from a net benefits pe rspective under a wide range of

SCC.

Nonetheless, EPA considered the available estim ates of domestic SCC values to determine how global SCC values could be adjusted to national or regional levels . As explained further in the SCC TSD, EPA regards this approach as highl y speculative and recognizes that there is no a priori reason why domestic benefits should be a constant fraction of net global benefit estimate. While there is compelling evidence suggesting that the US represents a non-constant fraction of global values, a rigorous manner to quantify that fraction in ha s not emerged. Indeed, current models do not quantify many of the spillover eff ects identified by commenters IPI, EDF, and NRDC, such as the U.S. military position in the world. Accordingly, the final rule presents only global SCC values; the SCC TSD presents a range of values that should be used to adjust the global SCC to calculate domestic effects.