16

- i CHAPTER 16. MONETIZATION OF EMISSION S REDUCTION 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

- 2

16.2.3 Current Approach and Key Assumptions

................................ ................................ ...... 16

- 3

16.3 VALUATION OF OTHER EMISSIONS REDUCTIONS

................................ ........... 16

- 5

LIST OF TABLES

Table 16

- 1 Social Cost of CO 2 , 2010

– 2050 (in 2007 dollars per metric ton)

......................... 16

- 416

- 1 CHAPTER 16. MONETIZATION OF EMISSION S REDUCTION BENEFITS

16.1 INTRODUCTION

As part of its assessment of energy conservation standards , DOE consider s 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 the standa rd levels considered for

distribution transformers

. In order to make this calculation similar to the calculation of the NPV of consumer benefit, DOE consider s the reduced emissions expected to result over the lifetime of products shipped in the forecast pe riod for each standard level

. This chapter summarizes the basis for the monetary values used for each of these emissions.

16.2 MONETIZING CARBON DIOXIDE EMISSIONS

16.2.1 Social Cost of Carbon

Under section 1(b) of Executive Order 12866, “Regulatory Planning and Re view,” 58 FR 51735 (Oct. 4, 1993), agencies must, to the extent permitted by law, “assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.”

The purpose of the social cost of carbon ( SCC ) estimates presented here is to allow

Federal 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 th at 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 th e existing scientific and economic literatures. In this way, key uncertainties and model differences transparently and consistently inform the range of SCC estimates used in the rulemaking process.

The social cost of carbon is an estimate of the monetize d 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 ec osystem services. Estimates of the SCC are provided in dollars per metric ton of carbon dioxide.16

- 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) t he 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 s erious 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 emissio ns. Consistent with the directive quoted above, the purpose of the SCC estimates presented here is to make it possible for agencies to incorporate the social benefits from reducing carbon dioxide emissions into cost

benefit analyses of regulatory actions t hat 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 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 appropri ate discount factor and summing across all affected years. This approach assumes that the marginal damages from increased emissions are constant for small departures from the baseline emissions path, an approximation that is reasonable for policies that ha ve 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 c alculating 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 chang e 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 resea rch 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 “domest ic” SCC value of

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

. National Academies Press : Washington, DC . 2009

.16

- 3 $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 domest ic 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). I n 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

valu es 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 be nefits 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 avoi ded climate change damages from reduced CO 2 emissions. The interagency group did not undertake any original analysis. Instead, it combined SCC estimates from the existing literature to use as interim values until a more comprehensive analysis could be cond ucted. The outcome of the preliminary assessment by the interagency group was a set of five interim values: global SCC estimates for 2007 (in 2006 dollars) of $55, $33, $19, $10, and $5 per ton of CO 2

.

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. T he interagency group relied on three integrated assessment models (IAMs)

comm only used to estimate the SCC: the FUND, DICE, and PAGE models. b These models are frequently cited in the peer

- reviewed literature an d were used in the last assessment of the Intergovernmental Panel on Climate Change. Each model wa s given equal weight in the SCC

values that were developed

.

Each model takes a slightly different approach to model how changes in emissions result in changes in economic damages. A key objective of the interagency process was to enable a consistent exploration of the three mod els while respecting the different approaches to

b The models are described in appendix 16

- A of the TSD.16

- 4 quantifying damages taken by the key modelers in the field. An extensive review of the literature was conducted to select three sets of input parameters for these models: (1) climate sensitivity ; (2) socio

- e conomic and emissions tra jectories; and (3) discount rates. A probability distribution for climate sensitivity was specified as a n input into all three models. In addition, the interagency group used a range of scenarios for the socio

- economic parameters and a range of values for the

discount rate. All other model features were left unchanged, relying on the model developers’ best estimates and judgments.

The interagency group selected four SCC values for use in regulatory analyses. Three

values are bas ed on the average SCC from three integrated assessment models, at discount rates of 2.5, 3, and 5 percent. The fourth value, which represents the 95th percentile SCC estimate across all three models at a 3 percent discount rate, is included to represent hi gher

- than

- expected impacts from temperature change further out in the tails of the SCC distribution. For emissions (or emission reductions) that occur in later years, these values grow in real terms over time, as depicted in Table 16

- 1

. Additionally, the i nteragency group determined that a range of values from 7 percent to 23 percent should be used to adjust the global SCC to calculate domestic effects, c although preference is given to consideration of the global benefits of reducing CO 2 emissions.

Table 16

- 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

It is important to recognize that a number of key uncertainties remain, and that current SCC estimates should be treated as provisional and revisable since they will evolve with improved scientific and economic understanding. The interagency group also rec ognizes that the existing models are imperfect and incomplete. The National Research Council report mentioned above points out that there is tension between the goal of producing quantified estimates of the economic damages from an incremental ton of carbo n and the limits of existing efforts to model

c It is recognized that this calculation for domestic values is approximate, provisional, and highly speculative. There

is no a priori reason why domestic benefits should be a constant fraction of net global damages over time.16

- 5 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 modeli ng. In this context, statements recognizing the limitations of the analysis and calling for further research take on exceptional significance. The interagency group offers the new SCC values with all due humility about the uncertainties

embedded in them an d with a sincere promise to continue work to improve them.

In summary, in considering the potential global benefits resulting from reduced CO 2 emissions, DOE intends to use the most recent SCC values identified by the interagency process, adjusted to 2009$ using the GDP price defl ator values for 2008 and 2009. For each of the four cases specified, the values for emissions in 2010 a re $4.9, $22.1, $36.3, and $67.1 per metric ton avoided (values e xpressed in 2009$ ). For later years

, DOE intends to use 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 1 6

- A of th is TSD, appropriately escalated to 2009$

. d

16.3 VALUATION OF OTHER EMISSIONS REDUCTIONS To calculate a present value of the stream of monetary values, DOE discount s 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.

DO E consider s the potential monetary benefit of reduced NO X emissions from new or amended energy conservation standards . As noted in chapter 15 , new or amended energy

conservation standards would reduce NO X emissions in those 22 States that are not affected by the CAIR, in addition to the reduction in site NO X emissions nationwide. DOE will estimate the

monetized value of NO X emissions reductions resulting from each of the standard levels considered based on environmental damage estimates from the literature. Available estimates suggest a very wide range of monetary values, ranging from $370 per ton to $3,800 per ton of

NO X from stationary sources, measured in 2001$ (equivalent to a range of $447 to $4,591 per ton in 2009$). e In accordance with OMB guidance, D OE conduc ts two calculations of the monetary benefits using each of the above values used for NO X , one using a real discount rate of 3 percent and another using a real discount rate of 7 percent. f

DOE is aware of multiple agency efforts to determin e the appropriate range of values used in evaluating the potential economic benefits of reduced Hg emissions. DOE has decided to await further guidance regarding consistent valuation and reporting of Hg emissions before it once again monetizes Hg in its ru lemakings.

d Table A1 presents SCC values through 2050. For DOE’s calculation, it derive s values after 2050 using the 3

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

e F or additional information , refer to 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 State, Local, and Tr ibal Entities,’’ Washington, DC

. f OMB, Circular A

- 4: Regulatory Analysis ( Sept. 17, 2003).