16 -i CHAPTER 16. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

TABLE OF CONTENTS

16.1 INTRODUCTION ......................................................................................................... 16-1

16.2 MONETIZING CARBON DIOXIDE EMISSIONS ..................................................... 16-1

16.2.1 Social Cost of Carbon .................................................................................................... 16-1

16.2.2 Social Cost of Carbon Values Used in Past Regulatory Analyses ................................. 16-3

16.2.3 Current Approach and Key Assumptions ...................................................................... 16-4

16.3 VALUATION OF OTHER EMISSIONS REDUCTIONS ........................................... 16-5

16.4 RESULTS ...................................................................................................................... 16-5

LIST OF TABLES

Table 16.2.1 Social Cost of CO 2 , 2010 – 2050 (in 2007 dollars per metric ton) .................... 16-2

Table 16.4.1 Estimates of Global Present Value of CO 2 Emissions Reduction Under

Distribution Transformer Trial Standard Levels ................................................ 16-6

Table 16.4.2 Estimates of Domestic Present Value of CO 2 Emissions Reduction Under

Distribution Transformer Trial Standard Levels ................................................ 16-7

Table V.33 Estimates of Present Value of NO X Emissions Reduction under

Distribution Transformer Trial Standard Levels ................................................ 16-816 -1 CHAPTER 16. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

16.1 INTRODUCTION

As part of its assessment of energy conservation standards, DOE considered the estimated 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

summarize s the basis for the estimated monetary values used for each of these emissions and presents the benefits estimates considered.

16.2 MONETIZING CARBON DIOXIDE EMISSIONS

16.2.1 Social Cost of Carbon

Under Executive Order 12866, agencies must, to the extent permitted by law, “assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.”

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.

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 that have small, or “marginal,” impacts on cumulative global emissions. The estimates are presented with an acknowledgement 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 consider public comments, explore the technical literature in relevant fields, and discuss key model inputs and assumptions. 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 this way, key uncertainties and model differences transparently and consistent ly inform the range of SCC estimates used in the rulemaking process.

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 estimate16 -2 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 SC C distribution. For emissions (or emission reductions) that occur in later years, these values grow in real terms over time, as depicted in Table 16.2.1.

Table 16.2.1 Social Cost of CO 2 , 2010 – 2050 (in 2007 dollars per metric ton)

Discount Rate

5% 3% 2.5% 3%
Avg Avg Avg 95th

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

When attempting to assess the incremental economic impacts of carbon dioxide emissions, the analyst faces a number of serious challenges. A recent report from the National

Research Council a 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 with climate change will raise serious questions of science, economics, and ethics and should be viewed as provisional.

Despite the serious limits of both quantification and monetization, SCC estimates can be useful in estimating the social benefits of reducing carbon dioxide emissions. Consistent with the directive quoted above, the purpose of the SCC estimates presented here is to make it possiblefor agencies to incorporate the social benefits from reducing carbon dioxide emissions into costbenefit analyses of regulatory actions that have small, or “marginal,” impacts on cumulative global emissions. Most Federal regulatory actions can be expected to have marginal impacts on global emissions.

For such policies, the 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

a National Research Council. Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use

. National Academies Press : Washington, DC . 2009

.16 -3 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. This approach assumes that the marginal damages f rom increased emissions are constant for small departures from the baseline emissions path, an approximation that is reasonable for policies that have effects on emissions that are small relative to cumulative global carbon dioxide emissions. For policies that have a large (non

- marginal) impact on global cumulative emissions, there is a separate question of whether the SCC is an appropriate tool for calculating the benefits of reduced emissions. DOE does not attempt to answer that question here.

It is important to emphasize that the interagency process is committed to updating these estimates as the science and economic understanding of climate change and its impacts on society improves over time. Specifically, the interagency group has 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. In the meantime, the interagency group will continue to explore the issues raised by this analysis and consider public comments as part of the ongoing interagency process.

16.2.2 Social Cost of Carbon Values Used in Past Regulatory Analyses

To date, economic analyses for Federal regulations have used a wide range of values to

estimate the benefits associated with reducing carbon dioxide emissions. In the final model year 2011 CAFE rule, the Department of Transportation (DOT) used both a “domestic” SCC value of $2 per ton of CO 2 and a “global” SCC value of $33 per ton of CO2 for 2007 emission reductions (in 2007 dollars), increasing both values at 2.4 percent per year. It also included a sensitivity analysis at $80 per ton of CO 2 . 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.

A 2008 regulation proposed by DOT assumed a domestic SCC value of $7 per ton of CO 2 (in 2006 dollars) for 2011 emission reductions (with a range of $0- $14 for sensitivity analysis), also increasing at 2.4 percent per year. A regulation finalized by DOE in October of 2008 used a domestic SCC range of $0 to $20 per ton CO 2 for 2007 emission reductions (in 2007 dollars). In addition, EPA’s 2008 Advance Notice of Proposed Rulemaking for Greenhouse Gases identified what it described as “very preliminary” SCC estimates subject to revision. EPA’s global mean values were $68 and $40 per ton CO 2 for discount rates of approximately 2 percent and 3 percent, respectively (in 2006 dollars for 2007 emissions).

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 r educed 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.16 -4 The outcome of the preli minary 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 . The $33 and $5 values represented model-weighted means of the published estimates

pro duced from the most recently available versions of three integrated assessment models

— DICE (Dynamic Integrated Climate Economy), PAGE (Policy Analysis of the Greenhouse Effect), and FUND (Climate Framework for Uncertainty, Negotiation and Distribution)

— at approximately 3 and 5 percent discount rates. The $55 and $10 values were derived by adjusting the published estimates for uncertainty in the discount rate (using factors developed by Richard

Newell and William Pizer) a at 3 and 5 percent discount rates, r espectively. The $19 value was chosen as a central value between the $5 and $33 per ton estimates. All of these values were assumed to increase at 3 percent annually to represent growth in incremental damages over time as the magnitude of climate change increases.

These interim values represent 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 rules and were offered for public comment in connection with proposed rules, including the joint EPA-DOT fuel economy and CO 2 tailpipe emission proposed rules.

16.2.3 Current Approach and Key Assumptions

Since 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.

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 recognizes 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 carbon and the limits of existing effo rts to model these effects. There are a number of concerns and problems that should be addressed by the research community, including research programs housed in many of the agencies participating in the interagency process to estimate the SCC.

The U.S. Government 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 this context, statements r ecognizing the limitations of the analysis and calling for further research take on exceptional significance.

In summary, in considering the potential global benefits resulting from reduced CO 2 emissions, DOE used the values identified in Table A1 of the “Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866,” which is reprinted in appendix 16-A

a R. Newell and W. Pizer. “Discounting the Distant Future: How Much Do Uncertain Rates Increase Valuations?” J. Environ. Econ. Manage. 46 (2003) 52

- 71)16 -5 of th is TSD, escalated to 2011$ a using the GDP price deflator. For each of the four cases specified, the values used for emissions in 2011 were $4.9, $22.3, $36.5, and $67.6 per metric ton avoided. To calculate a present value of the stream of monetary values, 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.

16.3 VALUATION OF OTHER EMISSIONS REDUCTIONS

As noted above, new or amended energy conservation standards would reduce NO X emissions in those 22 States th at are not affected by the CAIR . DOE estimated the monetized

value of NO X emissions reductio ns resulting from each of the TSLs considered for today’s final

rule using a range of dollar per ton values cited by OMB. b These values, which rang e from $370 per ton to $3,800 per ton of NO X from stationary sources, measured in 2001$ (equivalent to a

ran ge of $450 to $4,623 per ton in 2011$) , are based on estimates of the mortality

- based benefits

of NO X reductions from stationary sources made by EPA. In accordance with OMB guidance, DOE conducted two calculations of the monetary benefits derived using each of the economic

values used for NO X , one using a real discount rate of 3 percent and another using a real discount rate of 7 percent. c

DOE has decided to await further guidance regarding consistent valuation and reporting of Hg emissions before it once again monetizes Hg in its rulemakings.

16.4 RESULTS

Table 16.4.1 pr esent s the global values of CO 2 emissions reductions at each 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 16.4.2.

a Table A1 presents SCC values through 2050. For DOE’s calculation, it derived values after 2050 using th e 3

- percent per year escalation rate used by the interagency group.

b U.S. Office of Management and Budget, Office of Information and Regulatory Affairs, 2006 Report to Congress on the Costs and Benefits of Federal Regulations and Unfunded Mandates on Stat e, Local, and Tribal Entities, Washington, D. C. Page 64.

c OMB, Circular A

- 4: Regulatory Analysis ( Sept. 17, 2003).16 -6 Table 16.4-1 Estimates of Global Present Value of CO 2 Emissions Reduction Under

Distribution Transformer Trial Standard Level s

TSL 5% discount
rate, average* 3% discount
rate, average* 2.5%

discount
rate, average* 3% discount rate, 95 th
percentile*

Liquid

- Immersed Million 2011$

1 259 1,390 2,377 4,230

2 454 2,428 4,151 7,390

3 494 2,649 4,530 8,060

4 855 4,609 7,891 14,024

5 851 4,588 7,855 13,960

6 991 5,366 9,195 16,325

7 1,515 8,266 14,190 25,144

Low-Voltage Dry-Type

1 450 2,470 4,245 7,512

2 480 2,637 4,532 8,020

3 603 3,313 5,694 10,075

4 870 4,779 8,214 14,535

5 884 4,857 8,348 14,771

6 949 5,211 8,956 15,847

Medium -Voltage Dry-Type

1 35 188 321 571

2 65 350 599 1,065

3 126 680 1,164 2,067

4 126 680 1,164 2,067

5 190 1,024 1,755 3,11716 -7 Table 16.4-2 Estimates of Domestic Present Value of CO 2 Emissions Reduction Under

Distribution Transformer Trial Standard Levels

TSL 5% discount rate, average* 3% discount rate, average* 2.5% discount rate, average* 3% discount rate, 95th percentile*
Million 2010$

Liquid

- Immersed

1 18 to 60 97 to 320 166 to 547 296 to 973

2 32 to 104 170 to 559 291 to 955 517 to 1700

3 35 to 114 185 to 609 317 to 1042 564 to 1854

4 60 to 197 323 to 1060 552 to 1815 982 to 3225

5 60 to 196 321 to 1055 550 to 1807 977 to 3211

6 69 to 228 376 to 1234 644 to 2115 1143 to 3755

7 106 to 348 579 to 1901 993 to 3264 1760 to 5783

Low-Voltage Dry-Type

1 31.5 to 103 173 to 568 297 to 976 526 to 1728

2 33.6 to 110 185 to 606 317 to 1042 561 to 1845

3 42.2 to 139 232 to 762 399 to 1310 705 to 2317

4 60.9 to 200.2 335 to 1099 575 to 1889 1017 to 3343

5 61.9 to 203.4 340 to 1117 584 to 1920 1034 to 3397

6 66.4 to 218 365 to 1198 627 to 2060 1109 to 3645

Medium -Voltage Dry-Type

1 2.43 to 7.99 13.1 to 43.2 22.5 to 73.9 40 to 131

2 4.53 to 14.9 24.5 to 80.5 42 to 138 74.5 to 245

3 8.8 to 28.9 47.6 to 156 81.5 to 268 145 to 476

4 8.8 to 28.9 47.6 to 156 81.5 to 268 145 to 476

5 13.27 to 43.6 71.7 to 236 123 to 404 218 to 71716 -8 Table 16.4.3 present s the cumulative monetary value of the economic benefits associated

with NO X emissions reductions for each TSL, calculated using seven -percent and three- percent
discount rates.

Table 16.4-3 Estimates of Present Value of NO X Emissions Reduction under Distribution

Transformer Trial Standard Levels

TSL 3% discount rate 7% discount rate

Liquid

- Immersed Million 2011$

1 13 to 138 6 to 57

2 24 to 242 10 to 100

3 26 to 263 11 to 109

4 44 to 454 18 to 185

5 44 to 452 18 to 184

6 51 to 525 21 to 211

7 78 to 799 31 to 314

Low-Voltage Dry-Type

1 23 to 238 9 to 92

2 25 to 254 10 to 99

3 31 to 319 12 to 124

4 45 to 460 17 to 179

5 45 to 468 18 to 182

6 49 to 502 19 to 195

Medium -Voltage Dry-Type

1 2 to 18 1 to 7

2 3 to 34 1 to 14

3 6 to 67 3 to 27

4 6 to 67 3 to 27

5 10 to 100 4 to 41