CHAPTER 15

. ENVIRONMENTAL ASSESSMENT FOR PROPOSED ENERGY

CONSERVATION STANDARDS FOR ROOM AIR CONDITIONERS AND CLOTHES

DRYERS

TABLE OF CONTENTS

15

. 1 INTROD U CTION

......................................................................................................... 15-1

15

. 2 METHODOLOGY

........................................................................................................ 15-2

15

. 2

. 1 A ir E missions

................................................................................................................. 15-2

15

. 2

. 2 E conomic V alue of E mission R eductions

...................................................................... 15-6

15

. 3 RES U LTS

.................................................................................................................... 15-15

LIST OF TABLES

T able 15

. 2

. 1 G lobal S ocial C ost of C arbon E stimates ($/t CO 2 in 2007 in 2007$), B ased

on 3% and 5% D iscount R ates

......................................................................... 15-11

T able 15

. 2

. 2 G lobal S ocial C ost of C arbon E stimates ($/t CO 2 in 2007 in 2007$),

Using N ewell & P izer A djustment for F uture D iscount R ate Uncertainty

...... 15-12

15-iCHAPTER 15

. ENVIRONMENTAL ASSESSMENT FOR PROPOSED ENERGY

CONSERVATION STANDARDS FOR ROOM AIR CONDITIONERS AND CLOTHES

DRYERS

15

. 1 INTROD U CTION

T he U .S. D epartment of E nergy ( DOE ) will conduct an environmental assessment as part

of the notice of proposed rulemaking

. DOE will assess the impacts of proposed energy

conservation standards for room air conditioners and clothes dryers on certain environmental

indicators using a variant of the E nergy I nformation A dministration ( EIA )'s N ational E nergy

M odeling S ystem ( NEMS )

. a EIA uses NEMS to produce the Annual Energy Outlook (AEO). 1

D OE will use a variant known as N E MS

- BT to provide key inputs to the analysis, based on the

2009 version of the AEO ( AEO2009 )

. R esults of the environmental assessment will be similar to

those provided in AEO2009.

T he intent of the environmental impact assessment is to fulfill requirements to properly

quantify and consider the enviro nmental effects of all new F ederal rules

. D OE intends the

environmental assessment to provi de emissions results to policym akers and other stakeholders,

and to fulfill requirements that the environmental effects of all new F ederal rules be properly

quantified and considered

.

T he primary environmental effects of energy conservation standards for room air

conditioners and clothes dryers would be reduced power plant emissions resulting from reduced

consumption of electricity; there are also red uced household emissions from gas appliances

. T he

environmental assessment considers three pollutants- sulfur dioxide ( S O 2 ), nitrogen oxides

( N O

x ), and mercury ( H g)-as well as carbon emissions

. T he only form of carbon emissions

tracked by N E MS

- BT is carbon dioxide ( C O 2 ), so the carbon discussed in this report is in the

form of C O 2

. F or each of the trial standard levels, D OE will calculate power sector emissions

using N E MS

- BT , using additional external analysis as needed

.

D OE notes that the C lean A ir A ct requires the U .S. E nvironmental P rotection A gency

( E P A ) to set N ational A mbient A ir Quality S tandards for the following six common air

pollutants, also know as "criteria pollutants": (1) ozone, (2) particulate matter ( PM ), (3) carbon

2 monoxide ( C O ), (4) nitrogen dioxide, (5) S O 2 , and (6) lead . N one of the "criteria pollutants"

not already considered (i

. e

. , ozone, PM

, C O , and lead) are driven significantly by either electric

utility power plants or fuel-fired appliances

. T herefore, D OE does not intend on addressing them

in the environmental assessment

. I n the case of ozone and particulate matter, other pollutants are

precursors to their formation and atmospheric co nditions are the driver behind their formation

. A lso, S O 2 and N O

x are the primary precursors to ozone and PM , respectively, and will already

a F or more information on N E MS , please refer to the U .S. D epartment of E nergy, E nergy I nformation

A dministration documentation

. A useful summary is National Energy Modeling System: An Overview 2003

, D OE / E I A -0581(2003), M arch 2003

. E I A approves use of the name N E MS to describe only an official version of the

model without any modification to code or data

. B ecause this analysis entails some minor code modifications and

the model is run under various polic y scenarios that are variations on E I A assumptions, D OE refers to the model as

N E MS

- BT ( BT is D OE 's B uilding T echnologies P rogram)

. N E MS

- BT was previously called N E MS

- BR S

.

15-1be addressed by the envi ronmental assessment

. I n the case of C O , electric utilities and fuel-fired

appliances are not significant sources

. F inally, with regard to lead, industrial processes (not

electric utilities), including primary and secondary lead smelters and battery manufacturers, are

responsible for most of the lead emissions

.

15

. 2 METHODOLOGY

D OE plans to conduct the utility impact ana lysis as a policy deviation from the 2009

version of the AEO that reflect provisions of the A merican R ecovery and R einvestment A ct

( A RR A ) and recent changes in the economic outlook ( AEO2009 ), 1 applying the same basic set

of assumptions

. F or example, the emissions characteristics of an electricity generating plant will

be exactly those used in AEO2009. T he N E MS reference case and alternative growth scenarios

are as described in the utility impact analysis (see C hapter 13 of the preliminary technical

support document)

. B elow are descriptions of the air emissions that D OE will analyze in the

environmental assessment

.

15

. 2

. 1 A i r E missi on s

Carbon Dioxide (C0 2 )

C arbon dioxide ( C O 2 ) is not a regulated or criteria pollutant, but it is of interest because

of its classification as a greenhouse gas ( GHG )

. GHG s trap the sun's radiation inside the E arth's

atmosphere and either occur naturally in the atmosphere or result from human activities

. N aturally occurring GHG s include water vapor, C O 2 , methane ( C H 4 ), nitrous oxide ( N 2 O ), and

ozone ( O 3 )

. H uman activities, however, add to the levels of most of these naturally occurring

gases

. F or example, C O 2 is emitted to the atmosphere when solid waste, fossil fuels (oil, natural

gas, and coal), wood, and wood products are burned

. D uring the past 20 years, about threequarters of anthropogenic (i

. e

. , human-made) C O 2 emissions resulted from burning fossil fuels

.

C oncentrations of C O 2 in the atmosphere are naturally regulated by numerous processes,

collectively known as the "carbon cycle

. " T he movement of carbon between the atmosphere and

the land and oceans is dominated by natur al processes, such as plant photosynthesis

. While these

natural processes can absorb some of the anthropogenic C O 2 emissions produced each year,

billions of metric to ns are added to the a tmosphere annually

. I n the U

. S.

, C O 2 emissions from

both energy generation and indus trial processes account for 84

. 6 percent of total U .S. GHG

emissions

.

I n the absence of any regulation of power plant emissions of C O 2 , a D O E standard is

likely to result in reductions of these emissions

. T he C O 2 emission reductions likely to result

from a standard will be estimated using NEMS

- BT and national energy savings estimates drawn

from the NIA spreadsheet model

. T he net benefit of the standard is the difference between

emissions estimated by NEMS

- BT at each standard level considered and the AE 0 R eference

C ase

.

NEMS

- BT tracks carbon emissions using a detailed carbon module; this approach

provides good results because of its broad covera ge of all sectors and inclusion of interactive

effects

. P ast experience with carbon results from NEMS suggests that the NEMS -generated

15-2emissions estimates are somewhat lower th an estimates based on simple average factors

. O ne of

the reasons for this divergence is that NEMS tends to predict that conservation displaces

renewable generating capacity in the later years of its forecast

. O n the whole, NEMS

- BT

provides carbon emissions results of reasonable accuracy, at a level consistent with other

published F ederal results

.

S

ulfur Dioxide ( S 0 2 )

D O E has preliminarily determined that S O 2 emissions from affected E lectric G enerating

Units ( EG Us) are subject to nationwide and regional emissions cap and trading programs that are

likely to eliminate the standards' impact on S O 2 emissions

. T he costs of meeting such emission

cap requirements are integrated in the electricity prices used in D O E 's analysis of the standards

. T itle IV of the C lean A ir A ct sets an annual emissions cap on S O 2 for all affected EG Us

. S O 2 emissions from 28 eastern S tates and the D istrict of C olumbia ( DC ) are also limited under

the C lean A ir I nterstate R ule ( C AIR , published in the F ederal R egister on M ay 12, 2005

. 70 FR

25162 ( M ay 12, 2005)), which creates an allowance-ba sed trading program that will gradually

replace the T itle IV program in those S tates and DC

. ( T he recent legal history surrounding C AIR

is discussed below

. ) T he attainment of the emissions caps is flexible among EG Us and is

enforced through the use of emissions allowances and tradable permits

. Under existing EPA

regulations, any excess S O 2 emission allowances resulting from the lower electricity demand

caused by the imposition of an efficiency standard could be used to permit offsetting increases in

S O 2 emissions by any regulated EG U

. H owever, if the standard resulted in a permanent increase

in the quantity of unused emission allowan ces, there would be an overall reduction in S O 2

emissions from the standards

. While there remains some uncertainty about the ultimate effects

of efficiency standards on S O 2 emissions covered by the exis ting cap and trade system, the

NEMS

- BT modeling system that D O E plans to use to forecast em issions reductions currently

indicates that no physical reductions in po wer sector emissions would occur for S O 2

.

E ven if there is no significant redu ction in the overall emissions of S O 2 that results from

the standard, there may still be some economic benefit from reduced demand for S O 2 emission

allowances that is not fully reflected in the cost savings experienced by individual consumers

. E lectricity savings that decrease the overall demand for S O 2 emissions allowances could lower

allowance prices and thereby result in some economic benefits for all electricity consumers, not

just those that reduced their electricity use as a result of an efficiency standard

. H owever, D O E

does not plan to monetize this particular benefit because, as discussed in section 2

. 2, the effect

on the allowance price from any single energy conservation standard is likely small and highly

uncertain

.

N

itrogen 0xides ( N

0x)

N itrogen oxides

, or N O x, are the generic term for a group of highly reactive gases, all of

which contain nitrogen and oxygen in varying amounts

. M any of the nitrogen oxides are

colorless and odorless

. H owever, one common pollu tant, nitrogen dioxide ( N O 2 ), along with

particles in the air can often be seen as a reddish-brown layer over many urban areas

. N O 2 is the

specific form of N O x reported in this document

. N O x is one of the main ingredients involved in

the formation of ground-level ozone, which can trigger serious respiratory problems

. I t can

15-3contribute to the formation of acid rain, and can impair visibility in areas such as national parks

. N O

x also contributes to the formation of fine particles that can impair human health

.

N itrogen oxides form when fossil fuel is burn ed at high temperatures, as in a combustion

process

. T he primary manmade sources of N O

x are motor vehicles, electric utilities, and other

industrial, commercial, and residential source s that burn fossil fuels

. N O

x can also be formed

naturally

. E lectric utilities account for about 22 percent of N O

x emissions in the United S tates

.

NEMS

- BT has an algorithm for estimating N O x emissions from power generation

. T he

impact of these emissions, however, will be affected by the C lean A ir I nterstate R ule ( C AIR ),

which the U .S. E nvironmental P rotection A gency ( EPA ) issued under sections 110 and 111 of

the C lean A ir A ct (40 C FR P arts 51, 96, and 97) on M ay 12, 2005

. 4 C AIR will permanently cap

emissions of S O 2 and N O x in eastern states of the United S tates

. F or those 22 S tates not covered

by C AIR

, D O E intends to estimate the impact on N O x emissions using NEMS

- BT.

M uch like S O 2 emissions, a cap on N O x emissions means that energy conservation

standards may have little or no physical effect on these emissions in the 28 eastern S tates and DC

covered by C AIR. A lthough C AIR has been remanded to the EPA by the DC C ircuit, it will

remain in effect until it is replaced by a rule consistent with the C ourt's July 11, 2008, opinion in

N orth C arolina v

. EPA. 531 F. 3d 896 ( DC C ir

. 2008); see also N orth C arolina v

. EPA , 550 F. 3d

1176 ( DC C ir

. 2008)

. B ecause all S tates covered by C AIR opted to reduce N O x emissions

through participation in cap-and-trade programs for electric generating units, emissions from

these sources are capped across the C AIR region

.

T he NEMS

- BT version to be used by D O E to estimate N O x emission impacts includes

the cap on N O x emissions as specified by C AIR. A s with S O 2 emissions, a cap on N O x emissions means that equipment efficiency standards may have no physical effect on these

emissions in the 28 eastern S tates and DC covered by C AIR. While the emissions cap may mean

that physical emissions reductions will not result from standards in those states covered by

C AIR , standards could produce an environmental-rela ted economic benefit in the form of lower

prices for emissions allowance credits

. H owever, as with S O 2 allowance prices, D O E does not

plan to monetize this particular benefit because the effect on the N O x allowance price from any

single energy conservation standard i s likely small and highly uncertain

.

M ercury ( H

g)

C oal-fired power plants emit H g found in coal during the burning process

. While coalfired power plants are the largest remaining source of human-generated H g emissions in the

United S tates, they contribute very little to the global H g pool or to contamination of U .S.

waters

. U .S. coal-fired power plants emit H g in three different forms: oxidized H g (likely to

deposit within the United S tates); elemental H g, which can travel thousands of miles before

depositing to land and water; and H g that is in particulate form

. A tmospheric H g is then

deposited on land, lakes, rivers, and estuaries through rain, snow, and dry deposition

. O nce

there, it can transform into methylmercury and accumulate in fish tissue through

bioaccumulation

.

15-4A mericans are exposed to methylmercury primarily by eating contaminated fish

. B ecause

the developing fetus is the most sensitive to the toxic effects of methylmercury, women of

childbearing age are regarded as th e population of greatest concern

. C hildren exposed to

methylmercury before birth may be at increased r isk of poor performance on neurobehavioral

tasks, such as those measuring attention, fine motor function, language skills, visual-spatial

abilities, and verbal memory

.

S imilar to emissions of S O 2 and N O x , future emissions of H g would have been subject to

emissions caps

. I n M ay 2005, EPA issued the C lean A ir M ercury R ule ( C AMR )

. 70 FR 28606

( M ay 18, 2005)

. C AMR would have permanently capped emissions of mercury for new and

existing coal-fired power plants in all S tates by 2010

. H owever, on F ebruary 8, 2008, the DC

C ircuit issued its decision in N ew Jersey v

. E nvironmental P rotection A gency , in which the DC

C ircuit, among other actions, vacated the C AMR. 517 F. 3d 574 ( DC C ir

. 2008)

. EPA has

decided to develop emissions sta ndards for power plants under the C lean A ir A ct ( S ection 112),

consistent with the DC C ircuit's opinion on the C AMR. S ee

http://www

. epa

. gov/air/mercuryrule/pdfs/certpetition withdrawal

. pdf

. P ending EPA 's

forthcoming revisions to the rule, D O E is excluding the C AMR from its E nvironmental

A nalysis

. I n the absence of C AMR , energy conservation standards would likely reduce H g

emissions, and D O E plans to use NEMS

- BT to estimate these emission reductions

.

Particulate Matter

DOE acknowledges that particulate matter ( PM ) impacts are of concern due to human

exposures that can impact health

. B ut impacts of PM emissions reduction are much more

difficult to estimate than other emissions reductions due to the complex interactions between

PM , other power plant emissions, meteorology, and atmospheric chemistry that impact human

exposure to particulates

. H uman exposure to PM usually occurs at a significant distance from the

power plants that are emitting particulates and particulate precursors

. When power plant

emissions travel this distance, they undergo highly complex atmospheric chemical reactions

. A lthough the E P A does keep inventories of direct PM emissions of power plants, in its source

attribution reviews, the E P A does not separate direct PM emissions from power plants from the

sulfate particulates indirectly produced through complex atmospheric chemical reactions

. T he

great majority of PM emissions from power plants are of these secondary particles (secondary

sulfates)

. T hus, it is not useful to examine how the amended standard impacts direct PM

emissions independent of indirect PM production and atmospheric dynamics

. T herefore, DOE is

not planning to assess the impact of these standards on particulate emissions

. F urther, even the

cumulative impact of PM emissions from power plants and i ndirect emissions of pollutants from

other sources is unlikely to be significant

.

E

missions at H omes from Gas- Fired Appliances

NEMS does not estimate emissions at homes from gas-fired appliances (e

. g

. , gas-fired

clothes dryers)

. T herefore, DOE plans to conduct an analysis tha t includes separate estimates of

the effect of energy conservation standards on CO 2 , NO

x , and SO 2 emissions from gas-fired

appliances, based on simple emissions factors derived from the literature

. 8 A lthough household

15-5NO

x and SO 2 emissions reductions will be small, DOE will report them because the emissions

caps do not apply to the residential sector

.

15

. 2

. 2 M o ne t i z a t i o n of E m issi o n R e d u c t i o n s B ene f i t s

F or those emissions for which real natio nal emission reductions are anticipated ( CO 2 , H g,

and NO x for 22 states), ranges of estimated economi c values based on environmental damage

studies of varying quality and applicability are available

. T herefore, DOE plans on reporting

estimates of monetary benefits derived using these values and plans to co nsider these benefits in

weighing the costs and benefits of e ach of the standard levels considered

. I n accordance with

U .S. O ffice of M anagement and B udget ( OMB ) guidance, DOE will conduct two calculations of

the monetary benefits derived using each of the ec onomic values used, one using a real discount

rate of 3 percent and another using a real discount rate of 7 percent

. b

C

arb o n D i o xide ( C 0 2 )

I n order to estimate the monetary value of benefits resulting from reduced emissions of

CO 2 emissions, DOE intends to use in its ana lysis the most current S ocial C ost of C arbon ( SCC )

values developed and/or agreed to by interagency reviews

. T he SCC is intended to be a monetary

measure of the incremental damage resulting from greenhouse gas ( GHG ) emissions, including,

but not limited to, net agricultural productivity loss, human health effects, property damages

from sea level rise, and changes in ecosystem services

. A ny effort to quantify and to monetize

the harms associated with climate change will raise serious questions of science, economics, and

ethics

. B ut with full regard for the limits of both quantification and monetization, the SCC can be

used to provide estimates of the social benefits of reductions in GHG emissions

.

F or at least three reasons, any single estimate of the SCC will be contestable

. F irst,

scientific and economic knowle dge about the impacts of climate change continues to grow

. With

new and better information about relevant questions, including the cost, burdens, and possibility

of adaptation, current estimates will inevitably change over time

. S econd, some of the likely and

potential damages from climate change-for ex ample, the value society places on adverse

impacts on endangered species-are not incl uded in all of the existing economic analyses

. T hese

omissions may mean that the best current estimates are too low

. T hird, controversial ethical

judgments, including those involving the treatm ent of future generations, play a role in

judgments about the SCC (see in particular the discussio n of the discount rate, below)

.

T o date, regulations have used a range of values for the SCC. F or example, a regulation

proposed by the U .S. D epartment of T ransportation ( DOT ) in 2008 assumed a value of $7 per

ton CO 2 (2006$) for 2011 emission reductions (with a range of $0-14 for sensitivity analysis)

. R egulation finalized by DOE used a range of $0-$20 (2007$)

. B oth of these ranges were

designed to reflect the val ue of damages to the United S tates resulting from carbon emissions, or

the "domestic" SCC. I n the final M odel Y ear 2011 C orporate A verage F uel E conomy rule, DOT

used both a domestic SCC value of $2/t CO 2 and a global SCC value of $33/t CO 2 (with

sensitivity analysis at $80/t CO 2 ), increasing at 2

. 4 percent per year thereafter

.

b OMB

, C ircular A -4: R egulatory A nalysis ( S ept

. 17, 2003)

.

15-6I n recent months, a variety of agencies have worked to develop an objective methodology

for selecting a range of interim SCC estimates to use in regulatory analyses until improved SCC

estimates are developed

. T he following summary reflects the initial results of these efforts and

proposes ranges and values f or interim social costs of carbon used in this rule

. I t should be

emphasized that the analysis d escribed below is preliminary

. T hese complex issues are of course

undergoing a process of continuing review

. R elevant agencies will be evaluating and seeking

comment on all of the scientific, economic, and eth ical issues before establishing final estimates

for use in future rulemakings

.

T he interim judgments resulting from the r ecent interagency review process can be

summarized as follows: (a) DOE and other F ederal agencies should cons ider the global benefits

associated with the reductions of CO 2 emissions resulting from efficiency standards and other

similar rulemakings, rather conti nuing the previous focus on domestic benefits; (b) these global

benefits should be based on SCC estimates (in 2007$) of $55, $33, $19, $10, and $5 per ton of

CO 2 equivalent emitted (or av oided) in 2007; (c) the SCC value of emissions that occur (or are

avoided) in future years should be escalated using an annual growth rate of 3 percent from the

current values); and (d) domestic benefits are estimated to be approximately 6 percent of the

global values

. T hese interim judgments are based on the following considerations

.

1

. G lobal and domestic estimates of SCC

. B ecause of the distinctive nature of the climate

change problem, estimates of both global and domestic SCC values should be considered,

but the global measure should be "primary

. " T his approach represents a departure from

past practices, which relied, for the most part, on measures of only domestic impacts

. A s

a matter of law, both global and domestic values are permissible; the relevant statutory

provisions are ambiguous and allow the agency to choose either measure

. ( I t is true that

F ederal statutes are presumed not to have extrat erritorial effect, in part to ensure that the

laws of the United S tates respect the interests of foreign sovereigns

. B ut use of a global

measure for the SCC does not give extraterritorial effect to F ederal law and hence does

not intrude on such interests

. )

I t is true that under OMB guidance, analysis from the do mestic perspective is required,

while analysis from the international perspective is optional

. T he domestic decisions of

one nation are not typically based on a judg ment about the effects of those decisions on

other nations

. B ut the climate change pr oblem is highly unusual in the sense that it

involves (a) a global public good in which (b) the emissions of one nation may inflict

significant damages on other nations and (c) the United S tates is actively engaged in

promoting an international agreement to reduce worldwide emissions

.

I n these circumstances, the global measure is preferred

. Use of a global measure reflects

the reality of the problem and is expected to c ontribute to the continuing efforts of the

United S tates to ensure that emission reductions occur in many nations

.

D omestic SCC values are also presented

. T he development of a domestic SCC is greatly

complicated by the relatively few region- or country-specific estimates of the SCC in the

literature

. O ne potential estimate comes from the DICE ( D ynamic I ntegrated C limate

E conomy, William N ordhaus) model

. I n an unpublished paper, N ordhaus (2007)

15-7produced disaggregated SCC estimates using a regional version of the DICE model

. H e

reported a U .S. estimate of $1/t CO 2 (2007 value, 2007$), which is roughly 11 percent of

the global value

.

A n alternative source of estimates comes from a recent EP A modeling effort using the

F U ND ( C limate F ramework for Uncertainty, N egotiation and D istribution, C enter for

I ntegrated S tudy of the H uman D imensions of G lobal C hange) model

. T he resulting

estimates suggest that the ratio of domestic to global benefits varies with key parameter

assumptions

. With a 3-percent discount rate, for example, the U .S. benefit is about 6

percent of the global benefit for the "central" (mean) F U ND results, while, for the

corresponding "high" estimates associated with a higher climate sensitivity and lower

global economic growth, the U .S. benefit is less than 4 percent of the global benefit

. With

a 2-percent discount rate, the U .S. share is about 2 to5 per cent of the global estimate

.

B ased on this available evidence, a domestic SCC value equal to 6 percent of the global

damages is used in this rulemaking

. T his figure is in the middle of the range of available

estimates from the literature

. I t is recognized that the 6 percent figure is approximate and

highly speculative and alternative approaches will be explored before establishing final

values for future rulemakings

.

2

. F iltering existing analyses

. T here are numerous SCC estimates in the existing literature,

and it is legitimate to make use of those estimates to produce a figure for current use

. A

reasonable starting point is provided by the meta-analysis in R ichard T ol, " T he S ocial

C ost of C arbon: T rends, O utliers, and C atastrophes, E conomics: T he O pen- A ccess,

O pen- A ssessment E -Journal," V ol

. 2, 2008-25

. http://www

. economics

ejournal

. org/economics/jo urnalartic les/2008-25 (2008)

. With that starting point, it is

proposed to "filter" existing SCC estimates by using those that (1) are derived from peerreviewed studies; (2) do not weight the mo netized damages to one country more than

those in other countries; (3) use a "business as usual" climate scenario; and (4) are based

on the most recent published version of each of the three major integrated assessment

models ( I A M s): F U ND

, DICE and P A GE ( P olicy A nalysis of the G reenhouse E ffect)

.

P roposal (1) is based on the view that those s tudies that have been subject to peer review

are more likely to be reliable than those that have not been

. P roposal (2) is based on a

principle of neutrality and simplicity; it does not treat the citizens of one nation

differently on the basis of speculative or controversial considerations

. P roposal (3) stems

from the judgment that as a general rule, the proper way to assess a policy decision is by

comparing the implementation of the policy against a counterfactual state where the

policy is not implemented

. A departure from this approach wo uld be to consider a more

dynamic setting in which other countries might implement policies to reduce GHG

emissions at an unknown future date, and the United S tates could choose to implement

such a policy now or in the future

.

P roposal (4) is based on three complementary judgments

. F irst, the F U ND

, P A GE , and

DICE models now stand as the most comprehensive and reliable efforts to measure the

damages from climate change

. S econd, the latest versions of the three I A M s are likely to

15-8reflect the most recent evidence and learning, and hence they are presumed to be superior

to those that preceded them

. I t is acknowledged that earlier versions may contain

information that is missing from the latest versions

. T hird, any effort to choose among

them, or to reject one in favor of the other s, would be difficult to defend at this time

. I n

the absence of a clear reason to choose among them, it is reasonable to base the SCC on

all of them

.

T he agency is keenly aware that the current I A M s fail to include all relevant information

about the likely impacts from greenhouse gas emissions

. F or example, ecosystem

impacts, including species loss, do not appear to be included in at least two of the models

. S ome human health impacts, including increases in food-borne illnesses and in the

quantity and toxicity of airborne allergens, also appear to be excluded

. I n addition, there

has been considerable recent discussion of the risk of catastrophe and of how best to

account for worst-case scenarios

. I t is not clear whether the three I A M s take adequate

account of these potential effects

.

3

. Use a model-weighted average of the estimates at each discount rate

. A t this time, there

appears to be no scientifically valid reas on to prefer any of the three major I A M s ( F U ND

, P A GE , and DICE )

. C onsequently, the estimates are based on an equal weighting of

estimates from each of the models

. A mong estimates that remain after applying the filter,

the average of all estimates within a model is derived

. T he estimated SCC is then

calculated as the average of the three model-specific averages

. T his approach ensures that

the interim estimate is not biased towards specific models or more prolific authors

.

4

. A pply a 3-percent annual growth rate to the chosen SCC values

. SCC is assumed to

increase over time, because future emissions are expected to produce larger incremental

damages as physical and economic systems become more stressed as the magnitude of

climate change increases

. I ndeed, an implied growth rate in the SCC is produced by most

studies that estimate economic damages caused by increased GHG emissions in future

years

. B ut neither the rate itself nor the information necessary to derive its implied value

is commonly reported

. I n light of the limited amount of debate thus far about the

appropriate growth rate of the SCC , applying a rate of 3 percent per year seems

appropriate at this stage

. T his value is consistent with the range recommended by IPCC

(2007) and close to the latest published estimate ( H ope, 2008)

.

F or climate change, one of the most complex issues involves the appropriate discount

rate

. OMB 's current guidance offers a detailed discu ssion of the relevant issues and calls for

discount rates of 3 percent and 7 percent

. I t also permits a sensitivity analysis with low rates for

intergenerational problems

. (" I f your rule will have important intergenerational benefits or costs

you might consider a further sensitivity analysis using a lower but positive discount rate in

addition to calculating net benefits using discount rates of 3 and 7 percent

. ") T he SCC is being

developed within the general context of the current guidance

.

T he choice of a discount rate, especially o ver long periods of time, raises highly

contested and exceedingly difficult questions of science, economics, philosophy, and law

. S ee,

e

. g

. , William N ordhaus, " T he C hallenge of G lobal Warming (2008); N icholas S tern, T he

15-9E conomics of C limate C hange" (2007); " D iscounting and I ntergenerational E quity" ( P aul

P ortney and John Weyant, eds

. , 1999)

. Under imaginable assumptions, decisions based on costbenefit analysis with high discount rates might harm future generations-at least if investments

are not made for the benefit of those generations

. ( S ee R obert L ind, " A nalysis for

I ntergenerational D iscounting," id

. at 173, 176-177

. ) A t the same time, use of low discount rates

for particular projects might itself harm future generations, by ensuring that resources are not

used in a way that would greatly benefit them

. I n the context of climate change, questions of

intergenerational equity are especially important

.

R easonable arguments support the use of a 3-percent discount rate

. F irst, that rate is

among the two figures suggested by OMB guidance, and hence it fits with existing N ational

policy

. S econd, it is standard to base the discount rat e on the compensation that people receive

for delaying consumption, and the 3-percent rate is close to the risk-free rate of return, proxied

by the return on long term inflation-adjusted U .S. T reasury B onds

. ( I n the context of climate

change, it is possible to object to this sta ndard method for deriving the discount rate

. ) A lthough

these rates are currently closer to 2

. 5 percent, the use of 3 percent provides an adjustment for the

liquidity premium that is refle cted in these bonds' returns

.

A t the same time, other arguments support use of a 5-percent discount rate

. F irst, that rate

can also be justified by reference to the level o f compensation for delaying consumption, because

it fits with market behavior with respect to individuals' willingness to trade off consumption

across periods as measured by the estimated post-tax average real returns to private investment

( e

. g

. , the S & P 500)

. I n the climate setting, the 5-percent discount rate may be preferable to the

riskless rate because it is based on risky investments and the return to projects to mitigate climate

change is also risky

. I n contrast, the 3-percent riskless rate may be a more appropriate discount

rate for projects where the return is known with a high degree of confidence ( e

. g

. , highway

guardrails)

.

S econd, 5 percent, and not 3 percent, is roughly consistent with estimates implied by

reasonable inputs to the theoretically derived R amsey equation, which specifies the optimal time

path for consumption

. T hat equation specifies the optimal discount rate as the sum of two

components

. T he first reflects the fact that consumption in the future is likely to be higher than

consumption today (even accounting for climat e impacts), so diminishing marginal utility

implies that the same monetary damage will cause a smaller reduction of utility in the future

. S tandard estimates of this term from the economics literature are in the range of 3 to 5 percent

. T he second component reflects the possibility that a lower weight should be placed on utility in

the future, to account for social impatience or extinction risk, which is specified by a pure rate of

time preference ( PRTP )

. A conventional estimate of the PRTP is 2 percent

. ( S ome observers

believe that a principle of intergenerational equity suggests that the PRTP should be close to

zero

. ) I t follows that discount rate of 5 percent is w ithin the range of values which are able to be

derived from the R amsey equation, albeit at the low end of the range of estimates usually

associated with R amsey discounting

.

I t is recognized that the arguments above-for use of market behavior and the R amsey

equation-face objections in the context of clim ate change, and of course there are alternative

approaches

. I n light of climate change, it is possible that consumption in the future will not be

15-10higher than consumption today, and if so, the R amsey equation will suggest a lower figure

. S ome

people have suggested that a very low discount rat e, below 3 percent, is justified in light of the

ethical considerations calling for a principle of intergenerational neutrality

. S ee N icholas S tern,

" T he E conomics of C limate C hange" (2007); for contrary views, see William N ordhaus, T he A

Question of B alance (2008); M artin Weitzman, " R eview of the S tern R eview on the E conomics

of C limate C hange

. " Journal of E conomic L iterature , 45(3): 703-724 (2007)

. A dditionally, some

analyses attempt to deal with uncertainty with respect to interest rates over time; a possible

approach enabling the consideration of such uncertainties is discussed below

. R ichard N ewell

and William P izer, " D iscounting the D istant F uture: H ow M uch do Uncertain R ates I ncrease

V aluations?" J

. E nviron

. E con

. M anage

. 46 ( 2003 ) 52-71

.

T he application of the methodology outlined above yields estimates of the SCC that are

reported in T able 15

. 2

. 1

. T hese estimates are reported separat ely using 3-percent and 5-percent

discount rates

. T he cells are empty in rows 10 and 11 because these studies did not report

estimates of the SCC at a 3-percent discount rate

. T he model-weighted means are reported in the

final or summary row; they are $33 per t CO 2 at a 3-percent discount rate and $5 per t CO 2 with a

5-percent discount rate

.

T a b le 15

. 2

. 1 G l o b al S o c i al C o s t of C ar b o n E s t i m a t e s ( $/t CO 2 i n 2007 i n 2007$ )

, B a s e d

o n 3% an d 5% D is c ou n t R a t e s *

M o d el S tu d y C l i m a t e S c enar i o 3% 5%

1 F U ND A nthoff et al

. 2009 F U ND default 6 -1

2 F U ND A nthoff et al

. 2009 SRES A 1b 1 -1

3 F U ND A nthoff et al

. 2009 SRES A 2 9 -1

4 F U ND L ink and T ol 2004 N o THC 1 2 3

5 F U ND L ink and T ol 2004 THC continues 12 2

6 F U ND G uo et al

. 2006 C onstant PRTP 5

- 1

7 F U ND G uo et al

. 2006 G ollier discount 1 14 0

8 F U ND G uo et al

. 2006 G ollier discount 2 7 -1

F U ND M ean 8

. 25 0

9 P A GE Wahba & H ope 2006 A 2-scen 57 7

10 P A GE H ope 2006 7

11 DICE N ordhaus 2008 8

S umm ar y M o d el -w e i ght e d M ean 33 5

* T he sample includes all peer reviewed, no n-equity-weighted estimates included in T ol (2008), N ordhaus (2008),

H ope (2008), and A nthoff et al

. (2009), that are based on the most recent published version of F U ND

, P A GE , or

DICE and use business-as-usual climate scenarios

. A ll values are based on the best available information from the

underlying studies about the base year and year dollars, rather than the T ol (2008) assumption that all estimates

included in his review are 1995 values in 1995$

. A ll values were updated to 2007 using a 3-percent annual growth

rate in the SCC , and adjusted for inflation using GDP deflator

.

DOE has conducted analyses at $33 and $5 per ton as these represent the estimates

associated with the 3 percent and 5 percent discount rates, respectively

. T he 3 percent and 5

percent estimates have independent appeal and at t his time a clear preference for one over the

other is not warranted

. T hus, DOE has also included-and centered its current attention on-the

average of the estimates associated w ith these discount rates, which is $19

. ( B ased on the $19

global value, the dome stic value would be $1

. 14 per ton of CO 2 equivalent

. )

15-11I t is true that there is uncertainty about interest rates over long time horizons

. R ecognizing that point, N ewell and P izer have made a careful effort to adjust for that

uncertainty

. S ee N ewell and P izer, supra

. T his is a relatively recent contribution to the literature

.

T here are several concerns with usi ng this approach in this context

. F irst, it would be a

departure from current OMB guidance

. S econd, an approach that would average what emerges

from discount rates of 3 percent and 5 percent re flects uncertainty about the discount rate, but

based on a different model of uncertainty

. T he N ewell- P izer approach models discount rate

uncertainty as something that evolves over time; in contrast, one alternative approach would

assume that there is a single discount rate with equal probability of 3 percent and 5 percent

.

T able 15

. 2

. 2 reports on the application of the N ewell- P izer adjustments

. T he precise

numbers depend on the assumptions about the data generating process that governs interest rates

. C olumns (1a) and (1b) assume that "random walk " model best describes the data and uses 3

-

percent and 5-percent discount rates, respectively

. C olumns (2a) and (2b) repeat this, except that

it assumes a "mean-reverting" process

. A s N ewell and P izer report, there is stronger empirical

support for the random walk model

.

T a b le 15

. 2

. 2 G l o b al S o c i al C o s t of C ar b o n E s t i m a t e s ( $/t CO 2 i n 2007 i n 2007$ )

, *

U si n g N e w ell & P i z er A dju s tm en t fo r F utu re D is c ou n t R a t e

U n c er t a i n ty **

M o d el S tu d y C l i m a t e S c enar i o R andom- walk

model M ean-reverting

model

3% 5% 3% 5%

(1a) (1b) (2a) (2b)

1 F U ND A nthoff et al

. 2009 F U ND default 10 0 7 -1

2 F U ND A nthoff et al

. 2009 SRES A 1b 2 0 1 -1

3 F U ND A nthoff et al

. 2009 SRES A 2 15 0 10 -1

4 F U ND L ink and T ol 2004 N o THC 20 6 13 4

5 F U ND L ink and T ol 2004 THC continues 20 4 13 2

6 F U ND G uo et al

. 2006 C onstant PRTP 9 0 6 -1

7 F U ND G uo et al

. 2006 G ollier discount 1 14 0 14 0

8 F U ND G uo et al

. 2006 G ollier discount 2 7 -1 7 -1

F U ND M ean 12 1 9 0

9 P A GE Wahba & H ope 2006 A 2-scen 97 13 63 8

10 P A GE H ope 2006 13 8

11 DICE N ordhaus 2008 15 9

S umm ar y M o d el -w e i ght e d M ean 55 10 36 6

*T he sample includes all peer reviewed, no n-equity-weighted estimates included in T ol (2008), N ordhaus (2008),

H ope (2008), and A nthoff et al

. (2009), that are based on the most recent published version of F U ND

, P A GE , or

DICE and use business-as-usual climate scenarios

. A ll values are based on the best available information from the

underlying studies about the base year and year dollars, rather than the T ol (2008) assumption that all estimates

included in his review are 1995 values in 1995$

. A ll values were updated to 2007 using a 3-percent annual growth

rate in the SCC , and adjusted for inflation using GDP deflator

.

** A ssumes a starting discount rate of 3 percent

. N ewell and P izer (2003) based adjustment factors are not applied to

estimates from G uo et al

. (2006) that use a different approach to account for discount rate uncertainty (rows 7-8)

.

15-12T he resulting estimates of the social cost of carbon are necessarily greater

. When the

adjustments from the random walk model are applied, the estimates of the social cost of carbon

are $10 and $55, with the 3 percent and 5 percent discount rates, respectively

. T he application of

the mean-reverting adjustment yields estimates of $6 and $36

. S ince the random walk model has

greater support from the data, DOE also conducted analyses with the value of the SCC set at $10

and $55

.

I n summary, DOE will consider in its decision process for the notice of proposed

rulemaking the potential global benefits resulting from reduced CO 2 emissions valued (in 2008$)

at $5, $10, $20, $34 and $56 per metr ic ton, and will also present t he domestic benefits derived

using a value of approximately $1 per metric ton

.

DOE is well aware that scientific and economi c knowledge about the contribution of CO 2

and other GHG emissions to changes in the future global climate and the potential resulting

damages to the world economy continues to evolve rapidly

. T hus, any value placed in this

rulemaking on reducing CO 2 emissions is subject to likely change

.

DOE , together with other F ederal agencies, is reviewing various methodologies for

estimating the monetary value of reductions in CO 2 and other GHG emissions

. T his review will

consider the comments on this subject that are part of the public record for this and other

rulemakings, as well as other methodological assumptions and issues, such as whether the

appropriate values sho uld represent domestic U .S. benefits, as well as global benefits (and costs)

. G iven the complexity of the many issues involved, this review is ongoing

.

N

i t r og en 0 xides ( N

0

x)

A s discussed earlier, with respect to NO x the C A IR rule has been reinstated by the

courts

. T herefore, NO x emissions in those states covered by C A IR will be subject to a cap with

corresponding annual allowances openly traded

.

F or those states not covered by C A IR

, DOE plans on estimating the monetized benefits

of NO x emissions reductions in these states based on environmental damage estimates from the

literature

. A vailable estimates suggest a very wi de range of monetary values for NO x emissions,

ranging from $370 per ton to $3,800 per ton of NO x from stationary sources, measured in 2001$,

or a range of $442 per ton to $4,540 per ton in 2008$

. 9

M erc u r y ( H

g

)

DOE plans on estimating the monetized benefits of H g emissions reductions based on

environmental damage estimates from the literature

. DOE has previously determined that t he

basic science linking mercury emissions from powe r plants to impacts on humans is considered

highly uncertain

. H owever, DOE identified two estimates of the environmental damages of

mercury based on two estimates of the adverse impact of childhood exposure to methyl mercury

on I Q for A merican children, and subsequent loss of lifetime economic productivity resulting

from these I Q losses

. T he high-end estimate is based on an estimate of the current aggregate cost

of the loss of I Q in A merican children that results from exposure to mercury of U .S. power plant

15-13origin-$1

. 3 billion per year in 2000$, which translates to $33

. 3 million per ton emitted per year

in 2008$

. 10 DOE derived the low-end estimate o f $664,000 per ton emitted in 2004$, or

$745,000 per ton in 2008$, from a published evaluation of mercury control using different

methods and assumptions from the first study, but also based on the present value of the lifetime

earnings of children exposed

. 11 c

Su l fu r D i o xide ( S 0 2 ) and N i t r og en 0 xides ( N

0

x) All ow ance P rices

With regard to SO 2 emissions, unlike the other pollutants to be considered in this

analysis, these emissions have for some time been subject to a national cap with corresponding

annual allowances openly traded; therefore, c onsiderable market experience with these

instruments has already been accumulated

. I t has been argued that imposition of any standard

that lowers U .S. national electricity consumption creat es beneficial downward pressure on the

prices of these allowances, and this cost reduction benefit should be considered in any analysis of

a proposed standard

. While this assertion is fundamentally sound (i

. e

. , reduced electricity

demand should ce t eris parib u s bring about lower SO 2 and NO x allowance prices), there are a

myriad of complications impeding any meaningf ul quantification of any associated benefit

. While complexity of analysis alone cannot justify disregarding a potential consequence of a

standard, DOE additionally believes these benefits to be both volatile and de m ini m is when

compared to the direct effects of a standard as estimated in this analysis

.

S ome of the problems to be confronted in an allowance price effect forecast are:

• O nly any net lowering of the total allowance bill to generators free of transfers is the

potential source of a benefit

. A ny such compliance cost saving would need to be

accurately estimated, and this effect is no dif ferent from the benefit derived from a cost

reduction for other inputs, such as fuel

. When the SO 2 allowance market that was created

in 1995 under the C lean A ir A ct A mendments began, initial allowance allocations were

directly granted to large a ff

ec t ed u ni t s based on their historic (1985-87) use of fuel

. F or

30 years, allowances for the following year are issued every spring at a declining rate to

these entitled parties, and thereafter can be freely used, traded, or banked

. S ome

additional allowances are allocated in diverse ways (e

. g

. as rewards to generators

installing control equipment)

. I n other words, the entitled generators holding emission

rights are losers when the value of allowances declines, while the buyers of allowances

are gainers

. B efore they are used, allowances may be traded many times at prices

reflecting the marginal not average cost of compliance

.

• T he trading system allows for allowance banking

. C onsequently, any observed change in

a forecast year could represent the manifestation of market fundamentals but could

similarly just indicate deposit or withdrawal of allowances

. I n general, used allowances

have fallen short of the cap so emissions m ay exceed the specified cap for future years

.

• C ontrol efforts could further reduce the SO 2 cap for some jurisdictions, creating

regulatory uncertainty that perturbs the allowance market

. T he issuance of the proposed

c T he estimate was derived by back-calculating the annual benefits per ton from the net present value of benefits

reported in the study

.

15-14and final C A IR rules were likely contributing factors to allowance price increases leading

to a dramatic 2005 allowance price spike

. While prices had already fallen far below their

historic highs by the time C A IR was vacated in the summer of 2008, spot allowance

prices nonetheless made a further precipitous drop following the D.C. C ircuit C ourt

ruling

.

• B ecause allowances can be traded freely by gen erators, brokers, and investors, they can

serve as financial instrumen ts, and, especially since 2003, allowance prices have been

volatile

. B etween 2000, when a tightened C lean A ir A mendment cap came into force,

and 2007, allowances traded between a low of ab out $120/short ton in 2002 and a high of

12 13 about $1600/short ton, with the 2005 spike being particularly dramatic

. S ince there

is no reason to believe that these conditions will alter over the life of a proposed standard,

the challenge of forecasting prices is much more complex than a simple supply-demand

balance might suggest

. A lso, note that any quantification of the benefit likely depends on

the level of prices as well as their net change

. T o believe that a simple delta in the prices

could be used to estimate the benefit is to believe that the same numerical reduction in

price would result from the standard whether the prevailing trading price were $100 or

$1000 per short ton

.

With regard to NO x emissions, C A IR has only recently been reinstated by the courts,

therefore market instruments with regard to NO x are not known

. B ut DOE is left to presume that

the same problems that confront an SO 2 allowance price effect forecast would also apply to a

NO x allowance price effect forecast

.

A s noted earlier, the forecasting tool to be used for this analysis is the A E 0 2009 version

of NEMS

- BT , which generates forecasts of both SO 2 and NO x emissions and allowance prices

. DOE intends to review the allowance price forecasts and the effect that the considered standards

may have on them

. I f this review suggests that the SO 2 and NO x allowance price effects are

both significant and estimable using NEMS

- BT , it may be included in the environmental

assessment for the notice of proposed rulemaking

.

15

. 3 RES U LTS

T he results for the environmental assessment are similar to a complete NEMS run, as

published in the A E 0 2009

. T hese include emissions for SO 2 , NO

x , mercury, and CO 2 in fiveyear forecasted increments , extrapolated to the year 2043

. DOE will report the outcome of the

analysis for each trial standard level as a deviation from the A E 0 2009 reference case results

.

15-15REFERENCES

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ase S ervice R ep o r t , 2009

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12

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15-1613

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15-17