17 -i CHAPTER 17. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

TABLE OF CONTENTS

17.1 INTRODUCTION ............................................................................................................ 17-1 17.2 M ON ET IZ ING CAR B ON DIOXIDE EMI SS I ONS ........................................................ 17-1 17.2.1 Soc ial Costof Carbon ........................................................................................ 17-1 17.2.2 Monetizing Carbon Dioxide Emissions ............................................................. 17-2 17.2.3 Soc ial Costof Carbon Val ue s Us ed in P astRegu la tor y A n alys es ..................... 17-2 17.2.4 Cu rre nt Approach and Ke y Ass umpt io ns .......................................................... 17-3 17.3 VA L UA T ION OFOTHE R EMI SS IONS RED UC T IONS .............................................. 17-5 REFERENCES .......................................................................................................................... 17-6

LIST OF TABLES

Table 17.1 Social Cost of CO 2 , 2010 – 2050 (in 2007$ per metric ton) .................................... 17-417 -1 CHAPTER 17. MONETIZATION OF EMISSION REDUCTIONS BENEFITS

17.1 INTRODUCTION

As p art of its notice of proposed rulemaking (NOPR) , the U.S. Department of Energy (DOE) will consider the e stim ated monetary benef its lik ely to re sult fr om the re duced e missions of car bon dioxide (CO 2 ) and nitrogen ox id e s ( NO X ) th a t ar e exp ec te d to re sult from trial standard levels (TSLs) consid ere d. In order to make this ca lcula tion simil ar to the ca lculation of the NP V of consumer ben ef it, DOE will consider the re duced e missions exp ec te d to re sult over the li fe time of produc ts ship ped in the fore ca st p er iod for e ac h TSL . Th i s chapter summ ar ize s the ba sis for the monetary va lu e s that will be used for each of the se e missions in the NOPR analysis

.
17.2 M ON ET IZ ING CAR B ON DIOXIDE EMI SS I ONS

17.2.1 Social Cost of Ca rbon

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 CO 2 . A domestic SCC value is meant to reflect the value of damages in the United States resulting from a unit change in CO 2 emissions, while a g lobal SCC value is meant to reflect the value of damages worldwide.

Under section 1(b) of 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

co sts 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 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 p art of the interagency pro ce ss th a t d eveloped th e se SC C e stim ates, t ec hni ca l exp erts fr om num er ous agencies met on a regular ba sis to consider public comments, explore the
t ec hni ca l lit era tu re in re levant fields, and discuss key mo del inputs and assumptions. The main obj ec tive of this p ro ce ss was to develop a ra nge of SC C va lu es using a defensible set of input assumptions grounded in the ex isting scientif ic and ec onomic lit eratu re s. In this w ay, ke y

un certa inti e s and mode l di ffere n ce s transparently and consistently in for m the ra nge of SC C

e stim ates use d in the rulemaking pro ce ss.17 -2 17.2.2 Monetizing Carbon Dioxide Emissions

When a tt e mpting to a ss e ss the in cre menta l econo mic imp ac ts of car bon diox ide emissions, the analy st face s a number of s er ious cha ll enge s. A r ece nt report fr om the Na tion a l Res earc h Council 1 points out th a t any a ss e ssm ent will su ffe r fr om un certainty, speculation, and l ac k of in formation about (1) future emissions of g ree nhouse gases; (2) the eff ects of pa st and future e missions on the c lim a te sy st em; (3) the imp ac t of changes in c lim ate on the phy si ca l and biologi ca l environment; and (4) the translation of th e se environmenta l im p ac ts into ec onomic damage s. As a re sult, any eff ort to quantify and mone ti ze the h ar ms a sso ciated with c lim a te change will ra ise s er ious questions of scien ce , ec onomics, and ethic s and should be viewed a s provisiona l.

Despite the serious limits of both quantification and monetization, SCC estimates can be

u seful in estimating the social benefits of reducing CO 2 emissions. Most Federal regulatory actions can be expected to have marginal impacts on global emiss ions. 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 b enefits 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 from 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 CO 2 emissions.

17.2.3 Social Cost of Ca rbon Val ue s Us ed in Past Regu la tory Analyses

In the past

, ec onomic analyse s for Fe de ra l re gul ations have used a wide range of va lu e s to e stim a te the ben ef its a ss ociated with re duc ing carbon dioxide e missio n s. In the f in a l mod el
y ea r 2011Corporate Average Fuel Economy (CAFE) rule, the Dep artm ent of Transportation ( DOT) used both a “dome sti c” SC C value of $2 per ton of CO 2 and a “globa l” SC C value of $33 per ton of CO 2 for 2007 e mission re ductions (in 2007$), in cr easing both va lu e s at 2.4 per ce nt per ye ar

. 2 Italso 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 $7 per ton of CO 2 (in 2006$) for 2011 emission reductions (with a range of $0-$14 for sensitivity analysis), also increasing at 2.4 percent per year

. 3 A regulation for packaged terminal air conditioners and packaged terminal heat pumps finalized by DOE in 2008 used a domestic SCC range of $0 to $20 per metric ton CO 2 for 2007 emission reductions (in 2007$). 73 FR 58772, 58814 (Oct. 7, 2008). In addition, EPA’s 2008 Advance Notice of Proposed Rulemaking on Regulating Greenhouse Gas Emissions Under the Clean Air Act identified what it described as “very preliminary” SCC estimates subject to revision. 73 FR 44354 (July 30, 2008). EPA’s global mean values were $68 and $40 per metric ton CO 2 for discount rates of approximately 2 percent and 3 percent, respectively (in 2006$ for 2007 emissions).

In 2009, an int er agency pro ce ss wa s initi ated to o ffe r a p re limin ary asse ssm ent of how best to quantify the benef its fr om re ducing CO 2 e missio ns. To ensure consistency in how ben ef its17 -3 are eva lu ated acr oss agencies, the Ad ministra tion sought to develop a tra nspare nt and d efe nsible method, sp ec ifi ca lly designed for the rulemaking pro ce ss, to quantify avoided c lim a te change damages fr om re duced CO 2 emissions. The int er agency group did not und ertake any origina l analy sis. Inst ea d, it combined SC C e stim ate s fr om the ex isting lit era tu re to use as int er im v a lu e s until a mo re comprehensive analy sis could be conducted. The outcome of the p re limin ary

a ss e ssm ent by the interagency group wa s a set of five int er imva lu e s: globa l SC C e stim ate s for 2007 (in 2006$) 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 s proposed rules. See CAFE Rule f or Passenger Cars and Light Trucks Draft EIS and Final EIS, cited above.

17.2.4 Cu rre nt A pp roach and Ke y Ass umpt io ns

Since the release of the interim values, the interagency group reconvened on a regular b asis to generate improved SCC estimates. Specifically, the group considered public comments and further explored the technical literature in relevant fields. The interagency group relied on three integrated assessment models commonly used to estimate the SCC: the FUND, DICE, and PAGE models

. a Th e se mod e ls ar e f re quently c it ed in the pe er -reviewe d lit e ra tu re and w er e used in the la st asse ssm e nt of the Intergov er nmenta l Panel on C lim a te Change. E ac h mode l w as g iv en equal weight in the SC C v a lu e s th a t w ere 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 models while respecting the different approaches to 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: climate sensitivity, socio -economic and emissions trajectories, and discount rates. A probability distribution for climat e sensitivity was specified as an input into all three models. In addition, the interagency group used a range of scenarios for the socio- economic parameters and a range of values for the discount rate. All other model features were left unchanged, relying on the model developers’ best estimates and judgments.

The int er agency group sel ec ted four SC C va lu e s for use in regula to ry analyses. Th re e

va lu e s are based on the av er age SC C fr om th ree integrated asse ssm ent models, a t dis count ra t es of 2.5, 3, and 5 per ce nt. The fourth va lu e, whi ch rep re sents the 95th percen tile SC C e st ima te

acr oss a ll th ree mode ls at a 3-p er cent discount ra te , is in cluded to re p re se nt hi gher- th an-exp ec t ed imp ac ts fr om te mp era tu re chan ge furth er out in the ta ils of the SC C distribution. For emissions (or emission reductions) that occur in later years, these values grow in real terms over time , a s depicted in Table 17.1 . A dditionally, the int er agency group det er min ed tha t a ra n ge of value s fr om 7 p er cent to 23 percent should be used to adjust the globa l SC C to ca lcula te dome stic

a The m od els are describ ed in a pp end ix 17 A of the T SD.17 -4 eff ec ts , b although pre fe rence is given to consideration of the globa l ben ef its of re ducing CO 2
e missions.

Table 17.1 Social Cost of CO 2 , 2010 – 2050 (in 2007$ per metric ton)

Dis count Ra te 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 impo rtant to recognize th a t a number of key un certa inti e s remain, and tha t current SC C e stim ates should be trea ted a s provisiona l an d re visable sin ce they will evolve with imp roved scientif ic and economic und er st anding. The int er agency group also rec ognize s th a t the

ex isting mode ls ar e imp e rfec t and incomplete. The Na tion a l Rese arc h Counc il re port m entioned above points out tha t th ere is t ension be tw ee n the goal of producing quantified e stim ates of the

ec onomic damage s fr om an in cre mental ton of carbon and the limits of exis ting efforts to mode l th e se ef f

ec ts. Th ere ar e a number of con cer ns and proble ms th at should be add re ss ed by th e

re searc h community, including re s earch prog ra ms housed in many of the agencie s p arti c ip a tin g in the int er agency process to e stim a te the SCC

.DOE recognizes the uncertainties embedded in the estimates of the SCC used for costb enefit analyses. As such, DOE and others in the U.S. Government intend to periodically review and reconsider those estimates to reflect increasing knowledge of the science and economics of climate impacts, as well as improvements in modeling. In this context, statements recognizing the limitations of the analysis and calling for further research take on exceptional significance.

In summary, in consid er ing the potential globa l b en ef its re sulting from re du ce d CO 2 emissions, DOE will use the v a lu e s id entified in Table A1 of the “Socia l Cost of C ar bon for Re gula to ry I mp ac t An aly sis Und er Ex ec utive Order 12866,” whi ch is re pr int ed in appendix 17A of the interim technical support document (TSD), appropriatel y es ca lated for the year of the analysis using the Gross Domestic Product price deflator

. c To ca lcula te a present value of the

b It is r ec o gn ized th at this calc u lati on for domest ic valu es is a ppro xima te, pro vision al, and highly sp ec u lat iv e. Ther e is n o a pr i or i r ea son why domes tic benef its sh ou ld be a c o ns ta nt fr acti on of n et gl ob al damag es ov ertime.

c Table 17 .1 pr esen ts SC C values th roug h 2050 . For DO E’s ca lc u lati on, it deriv ed valu es aft er 20 50 us ing the 3-
per ce nt p ery eares calati on r ate us ed by the in te ragency gro up

.17 -5 strea m of monetary va lu e s, DOE will discount the va lu es using the sp ec if ic discount ra te th a t h ad been used to obtain the SC C va lu es in eac h cas e.

17.3 VA L UA T ION OF OTHE R EMI SS IONS RED UC T IONS

DOE will consider the potentia l mon etary benef it of re du ce d NO X e missions from the TSL s it consid ers . As noted in chapter 16 of the interim TSD, ne w or ame nd ed ene rg y conservation stand ar ds would re duce NO X emissions in those 22 State s th at ar e not aff ected by
caps . DOE will e stim ate the mone ti zed value of NO X e missions re duc tions re s ulting fr om e ac h of the TSL s considered based on environmental damage e stim ate s from the lit era tu re

. Av a il able

e stim ate s sug ge st a very wide ra nge of monetar y v a lu es, ra nging from $468 to $4,809 per ton in 2012$. d In a cc ordance with Office of Management and Budget ( OMB) guidan ce , DO E will calculate a range of monetary benefits using eac h of the economic va lu e s for NO X andr ea l discount ra te s of 3 per ce nt and 7 p er cent. 4

DOE is still evaluating appropriate values to use to monetize avoided SO 2 and Hg emissions in energy conservation standards rulemakings.

dFor a dd iti on al informa ti on, ref er to U

. S. Off ice of Management and Budg et, Off ice of In form ati on and Regu lat or y Aff ai rs, “ 200 6 Re por t to Co ng ress on the Cos ts and Benef it s of Fe der al Re gu la tions and Unfund ed Mand ates on State, Lo cal, and Trib al En tit ies,” Washington, D.C.17 -6 REFERENCES

1. National Research Council. Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use. 2009. National Academies Press: Washington, D. C.

2. National Highway Traffic Safety Administration. Average Fuel Economy Standards Passenger Cars and Light Trucks Model Year 2011, 74 FR 14196 (March 30, 2009); Final Environmental Impact Statement Corporate Average Fuel Economy Standards, Passenger Cars and Light Trucks, Model Years 2011-2015 at 3-90 (Oct. 2008) < www.nhtsa.gov/fueleconomy >

3. National Highway Traffic Safety Administration. Average Fuel Economy Standards Passenger Cars and Light Trucks Model Year 2011, 73 FR 24325 (May 2, 2008) (Proposed Ru le); Draft Environmental Impact Statement Corporate Average Fuel Economy Standards, Passenger Cars and Light Trucks, Model Years 2011-2015 at 3-58 (June 2008)

< www.nhtsa.gov/fuel-economy >

4. U.S. Office of Management and Budget. Circu lar A-4: Regu la tory Anal ys is ( Se p t. 17, 2 00 3 ). Washington, D

. C.