CHAPTER 15. ENVIRONMENTAL ASSESSMENT FOR PROPOSED ENERGY 

CONSERVATION STANDARDS FOR ROOM AIR CONDITIONERS AND CLOTHES 

DRYERS 

TABLE OF CONTENTS 

15.1 INTRODUCTION ......................................................................................................... 15-1 

15.2 METHODOLOGY ........................................................................................................ 15-2 

15.2.1 Air Emissions................................................................................................................. 15-2 

15.2.2 Economic Value of Emission Reductions...................................................................... 15-6 

15.3 RESULTS .................................................................................................................... 15-15 

LIST OF TABLES 

Table 15.2.1 Global Social Cost of Carbon Estimates ($/t CO2 in 2007 in 2007$), Based 

on 3% and 5% Discount Rates......................................................................... 15-11 

Table 15.2.2 Global Social Cost of Carbon Estimates ($/t CO2 in 2007 in 2007$), 

Using Newell & Pizer Adjustment for Future Discount Rate Uncertainty...... 15-12 

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CHAPTER 15. ENVIRONMENTAL ASSESSMENT FOR PROPOSED ENERGY
 

CONSERVATION STANDARDS FOR ROOM AIR CONDITIONERS AND CLOTHES
 

DRYERS

15.1 INTRODUCTION 

The U.S. Department of Energy (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 Energy Information Administration (EIA)'s National Energy

Modeling System (NEMS).

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

DOE will use a variant known as NEMS-BT to provide key inputs to the analysis, based on the 

2009 version of the AEO (AEO2009). Results of the environmental assessment will be similar to 

those provided in AEO2009.

The intent of the environmental impact assessment is to fulfill requirements to properly

quantify and consider the environmental effects of all new Federal rules. DOE intends the 

environmental assessment to provide emissions results to policymakers and other stakeholders, 

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

quantified and considered.

The 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 reduced household emissions from gas appliances. The

environmental assessment considers three pollutants- sulfur dioxide (SO2), nitrogen oxides 

(NOx), and mercury (Hg)-as well as carbon emissions. The only form of carbon emissions 

tracked by NEMS-BT is carbon dioxide (CO2), so the carbon discussed in this report is in the

form of CO2. For each of the trial standard levels, DOE will calculate power sector emissions 

using NEMS-BT, using additional external analysis as needed.

DOE notes that the Clean Air Act requires the U.S. Environmental Protection Agency

(EPA) to set National Ambient Air Quality Standards for the following six common air 

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

2 monoxide (CO), (4) nitrogen dioxide, (5) SO2, and (6) lead. None of the "criteria pollutants"

not already considered (i.e., ozone, PM, CO, and lead) are driven significantly by either electric 

utility power plants or fuel-fired appliances. Therefore, DOE does not intend on addressing them 

in the environmental assessment. In the case of ozone and particulate matter, other pollutants are 

precursors to their formation and atmospheric conditions are the driver behind their formation.

Also, SO2 and NOx are the primary precursors to ozone and PM, respectively, and will already

a For more information on NEMS, please refer to the U.S. Department of Energy, Energy Information 

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

DOE/EIA-0581(2003), March 2003. EIA approves use of the name NEMS to describe only an official version of the 

model without any modification to code or data. Because this analysis entails some minor code modifications and

the model is run under various policy scenarios that are variations on EIA assumptions, DOE refers to the model as

NEMS-BT (BT is DOE's Building Technologies Program). NEMS-BT was previously called NEMS-BRS.

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be addressed by the environmental assessment. In the case of CO, electric utilities and fuel-fired 

appliances are not significant sources. Finally, 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 

DOE plans to conduct the utility impact analysis as a policy deviation from the 2009 

version of the AEO that reflect provisions of the American Recovery and Reinvestment Act

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

of assumptions. For example, the emissions characteristics of an electricity generating plant will 

be exactly those used in AEO2009. The NEMS reference case and alternative growth scenarios 

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

support document). Below are descriptions of the air emissions that DOE will analyze in the

environmental assessment.

15.2.1 Air Emissions

Carbon Dioxide (C02)

Carbon dioxide (CO2) is not a regulated or criteria pollutant, but it is of interest because

of its classification as a greenhouse gas (GHG). GHGs trap the sun's radiation inside the Earth's 

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

Naturally occurring GHGs include water vapor, CO2, methane (CH4), nitrous oxide (N2O), and 

ozone (O3). Human activities, however, add to the levels of most of these naturally occurring

gases. For example, CO2 is emitted to the atmosphere when solid waste, fossil fuels (oil, natural

gas, and coal), wood, and wood products are burned. During the past 20 years, about threequarters of anthropogenic (i.e., human-made) CO2 emissions resulted from burning fossil fuels.

Concentrations of CO2 in the atmosphere are naturally regulated by numerous processes, 

collectively known as the "carbon cycle." The movement of carbon between the atmosphere and 

the land and oceans is dominated by natural processes, such as plant photosynthesis. While these 

natural processes can absorb some of the anthropogenic CO2 emissions produced each year, 

billions of metric tons are added to the atmosphere annually. In the U. S., CO2 emissions from 

both energy generation and industrial processes account for 84.6 percent of total U.S. GHG

emissions.

In the absence of any regulation of power plant emissions of CO2, a DOE standard is 

likely to result in reductions of these emissions. The CO2 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. The net benefit of the standard is the difference between 

emissions estimated by NEMS-BT at each standard level considered and the AE0 Reference

Case.

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

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

effects. Past experience with carbon results from NEMS suggests that the NEMS-generated 

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emissions estimates are somewhat lower than estimates based on simple average factors. One 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. On the whole, NEMS-BT

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

published Federal results.

Sulfur Dioxide (S02)

DOE has preliminarily determined that SO2 emissions from affected Electric Generating

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

likely to eliminate the standards' impact on SO2 emissions. The costs of meeting such emission 

cap requirements are integrated in the electricity prices used in DOE's analysis of the standards.

Title IV of the Clean Air Act sets an annual emissions cap on SO2 for all affected EGUs.

SO2emissions from 28 eastern States and the District of Columbia (DC) are also limited under 

the Clean Air Interstate Rule (CAIR, published in the Federal Register on May 12, 2005. 70 FR

25162 (May 12, 2005)), which creates an allowance-based trading program that will gradually

replace the Title IV program in those States and DC. (The recent legal history surrounding CAIR

is discussed below.) The attainment of the emissions caps is flexible among EGUs and is 

enforced through the use of emissions allowances and tradable permits. Under existing EPA

regulations, any excess SO2 emission allowances resulting from the lower electricity demand 

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

SO2 emissions by any regulated EGU. However, if the standard resulted in a permanent increase 

in the quantity of unused emission allowances, there would be an overall reduction in SO2

emissions from the standards. While there remains some uncertainty about the ultimate effects 

of efficiency standards on SO2 emissions covered by the existing cap and trade system, the 

NEMS-BT modeling system that DOE plans to use to forecast emissions reductions currently

indicates that no physical reductions in power sector emissions would occur for SO2.

Even if there is no significant reduction in the overall emissions of SO2 that results from 

the standard, there may still be some economic benefit from reduced demand for SO2 emission 

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

Electricity savings that decrease the overall demand for SO2 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. However, DOE

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.

Nitrogen 0xides (N0x)

Nitrogen oxides, or NOx, are the generic term for a group of highly reactive gases, all of 

which contain nitrogen and oxygen in varying amounts. Many of the nitrogen oxides are 

colorless and odorless. However, one common pollutant, nitrogen dioxide (NO2), along with 

particles in the air can often be seen as a reddish-brown layer over many urban areas. NO2 is the

specific form of NOx reported in this document. NOx is one of the main ingredients involved in 

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

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

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

Nitrogen oxides form when fossil fuel is burned at high temperatures, as in a combustion 

process. The primary manmade sources of NOx are motor vehicles, electric utilities, and other

industrial, commercial, and residential sources that burn fossil fuels. NOx can also be formed 

naturally. Electric utilities account for about 22 percent of NOx emissions in the United States.

NEMS-BT has an algorithm for estimating NOx emissions from power generation. The 

impact of these emissions, however, will be affected by the Clean Air Interstate Rule (CAIR), 

which the U.S. Environmental Protection Agency (EPA) issued under sections 110 and 111 of 

the Clean Air Act (40 CFR Parts 51, 96, and 97) on May 12, 2005.

4 CAIR will permanently cap 

emissions of SO2 and NOx in eastern states of the United States. For those 22 States not covered 

by CAIR, DOE intends to estimate the impact on NOx emissions using NEMS-BT.

Much like SO2 emissions, a cap on NOx emissions means that energy conservation 

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

covered by CAIR. Although CAIR has been remanded to the EPA by the DC Circuit, it will 

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

North Carolina v. EPA. 531 F.3d 896 (DC Cir. 2008); see also North Carolina v. EPA, 550 F.3d 

1176 (DC Cir. 2008). Because all States covered by CAIR opted to reduce NOx emissions 

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

these sources are capped across the CAIR region.

The NEMS-BT version to be used by DOE to estimate NOx emission impacts includes 

the cap on NOx emissions as specified by CAIR. As with SO2 emissions, a cap on NOx

emissions means that equipment efficiency standards may have no physical effect on these 

emissions in the 28 eastern States and DC covered by CAIR. While the emissions cap may mean 

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

CAIR, standards could produce an environmental-related economic benefit in the form of lower

prices for emissions allowance credits. However, as with SO2 allowance prices, DOE does not 

plan to monetize this particular benefit because the effect on the NOx allowance price from any

single energy conservation standard is likely small and highly uncertain.

Mercury (Hg)

Coal-fired power plants emit Hg found in coal during the burning process. While coalfired power plants are the largest remaining source of human-generated Hg emissions in the 

United States, they contribute very little to the global Hg pool or to contamination of U.S.

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

deposit within the United States); elemental Hg, which can travel thousands of miles before 

depositing to land and water; and Hg that is in particulate form. Atmospheric Hg is then 

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

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

bioaccumulation.

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Americans are exposed to methylmercury primarily by eating contaminated fish. Because 

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

childbearing age are regarded as the population of greatest concern. Children exposed to 

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

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

abilities, and verbal memory.

Similar to emissions of SO2 and NOx, future emissions of Hg would have been subject to 

emissions caps. In May 2005, EPA issued the Clean Air Mercury Rule (CAMR). 70 FR 28606 

(May 18, 2005). CAMR would have permanently capped emissions of mercury for new and 

existing coal-fired power plants in all States by 2010. However, on February 8, 2008, the DC

Circuit issued its decision in New Jersey v. Environmental Protection Agency, in which the DC

Circuit, among other actions, vacated the CAMR. 517 F.3d 574 (DC Cir. 2008). EPA has 

decided to develop emissions standards for power plants under the Clean Air Act (Section 112), 

consistent with the DC Circuit's opinion on the CAMR. See 

http://www.epa.gov/air/mercuryrule/pdfs/certpetition withdrawal.pdf. Pending EPA's

forthcoming revisions to the rule, DOE is excluding the CAMR from its Environmental 

Analysis. In the absence of CAMR, energy conservation standards would likely reduce Hg 

emissions, and DOE 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. But 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. Human 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.

Although the EPA does keep inventories of direct PM emissions of power plants, in its source 

attribution reviews, the EPA does not separate direct PM emissions from power plants from the 

sulfate particulates indirectly produced through complex atmospheric chemical reactions. The 

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

sulfates). Thus, it is not useful to examine how the amended standard impacts direct PM

emissions independent of indirect PM production and atmospheric dynamics. Therefore, DOE is 

not planning to assess the impact of these standards on particulate emissions. Further, even the 

cumulative impact of PM emissions from power plants and indirect emissions of pollutants from 

other sources is unlikely to be significant.

Emissions at Homes from Gas-Fired Appliances

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

clothes dryers). Therefore, DOE plans to conduct an analysis that includes separate estimates of

the effect of energy conservation standards on CO2, NOx, and SO2 emissions from gas-fired 

appliances, based on simple emissions factors derived from the literature.

8 Although household 

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NOx and SO2 emissions reductions will be small, DOE will report them because the emissions 

caps do not apply to the residential sector.

15.2.2 Monetization of Emission Reductions Benefits

For those emissions for which real national emission reductions are anticipated (CO2, Hg,

and NOx for 22 states), ranges of estimated economic values based on environmental damage

studies of varying quality and applicability are available. Therefore, DOE plans on reporting

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

weighing the costs and benefits of each of the standard levels considered. In accordance with

U.S. Office of Management and Budget (OMB) guidance, DOE will conduct two calculations of 

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

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

b

Carbon Dioxide (C02)

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

CO2 emissions, DOE intends to use in its analysis the most current Social Cost of Carbon (SCC) 

values developed and/or agreed to by interagency reviews. The 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. Any effort to quantify and to monetize 

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

ethics. But 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.

For at least three reasons, any single estimate of the SCC will be contestable. First, 

scientific and economic knowledge 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. Second, some of the likely and 

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

impacts on endangered species-are not included in all of the existing economic analyses. These

omissions may mean that the best current estimates are too low. Third, controversial ethical 

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

judgments about the SCC (see in particular the discussion of the discount rate, below).

To date, regulations have used a range of values for the SCC. For example, a regulation 

proposed by the U.S. Department of Transportation (DOT) in 2008 assumed a value of $7 per 

ton CO2 (2006$) for 2011 emission reductions (with a range of $0-14 for sensitivity analysis).

Regulation finalized by DOE used a range of $0-$20 (2007$). Both of these ranges were 

designed to reflect the value of damages to the United States resulting from carbon emissions, or

the "domestic" SCC. In the final Model Year 2011 Corporate Average Fuel Economy rule, DOT

used both a domestic SCC value of $2/t CO2 and a global SCC value of $33/t CO2 (with 

sensitivity analysis at $80/tCO2), increasing at 2.4 percent per year thereafter.

b OMB, Circular A-4: Regulatory Analysis (Sept. 17, 2003).

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In 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. The following summary reflects the initial results of these efforts and 

proposes ranges and values for interim social costs of carbon used in this rule. It should be

emphasized that the analysis described below is preliminary. These complex issues are of course

undergoing a process of continuing review. Relevant agencies will be evaluating and seeking

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

for use in future rulemakings.

The interim judgments resulting from the recent interagency review process can be 

summarized as follows: (a) DOE and other Federal agencies should consider the global benefits 

associated with the reductions of CO2 emissions resulting from efficiency standards and other

similar rulemakings, rather continuing 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 

CO2 equivalent emitted (or avoided) 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. These interim judgments are based on the following considerations.

1. Global and domestic estimates of SCC. Because 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." This approach represents a departure from 

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

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. (It is true that

Federal statutes are presumed not to have extraterritorial effect, in part to ensure that the 

laws of the United States respect the interests of foreign sovereigns. But use of a global 

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

not intrude on such interests.) 

It is true that under OMB guidance, analysis from the domestic perspective is required, 

while analysis from the international perspective is optional. The domestic decisions of 

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

other nations. But the climate change problem 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 States is actively engaged in 

promoting an international agreement to reduce worldwide emissions.

In these circumstances, the global measure is preferred. Use of a global measure reflects

the reality of the problem and is expected to contribute to the continuing efforts of the 

United States to ensure that emission reductions occur in many nations.

Domestic SCC values are also presented. The development of a domestic SCC is greatly

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

literature. One potential estimate comes from the DICE (Dynamic Integrated Climate 

Economy, William Nordhaus) model. In an unpublished paper, Nordhaus (2007) 

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produced disaggregated SCC estimates using a regional version of the DICE model. He 

reported a U.S. estimate of $1/tCO2 (2007 value, 2007$), which is roughly 11 percent of 

the global value.

An alternative source of estimates comes from a recent EPA modeling effort using the 

FUND (Climate Framework for Uncertainty, Negotiation and Distribution, Center for 

Integrated Study of the Human Dimensions of Global Change) model. The 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) FUND 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 percent of the global estimate.

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

damages is used in this rulemaking. This figure is in the middle of the range of available 

estimates from the literature. It 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. Filtering existing analyses. There 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 Richard Tol, "The Social

Cost of Carbon: Trends, Outliers, and Catastrophes, Economics: The Open-Access, 

Open-Assessment E-Journal," Vol. 2, 2008-25. http://www.economicsejournal.org/economics/journalarticles/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 monetized 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 (IAMs): FUND, DICE and PAGE (Policy Analysis of the Greenhouse Effect).

Proposal (1) is based on the view that those studies that have been subject to peer review 

are more likely to be reliable than those that have not been. Proposal (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. Proposal (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 would 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 States could choose to implement 

such a policy now or in the future.

Proposal (4) is based on three complementary judgments. First, the FUND, PAGE, and 

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

damages from climate change. Second, the latest versions of the three IAMs are likely to 

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

to those that preceded them. It is acknowledged that earlier versions may contain 

information that is missing from the latest versions. Third, any effort to choose among

them, or to reject one in favor of the others, would be difficult to defend at this time. In 

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

all of them.

The agency is keenly aware that the current IAMs fail to include all relevant information 

about the likely impacts from greenhouse gas emissions. For example, ecosystem

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

Some human health impacts, including increases in food-borne illnesses and in the

quantity and toxicity of airborne allergens, also appear to be excluded. In addition, there

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

account for worst-case scenarios. It is not clear whether the three IAMs take adequate 

account of these potential effects.

3. Use a model-weighted average of the estimates at each discount rate. At this time, there

appears to be no scientifically valid reason to prefer any of the three major IAMs (FUND, 

PAGE, and DICE). Consequently, the estimates are based on an equal weighting of 

estimates from each of the models. Among estimates that remain after applying the filter,

the average of all estimates within a model is derived. The estimated SCC is then 

calculated as the average of the three model-specific averages. This approach ensures that 

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

4. Apply 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. Indeed, an implied growth rate in the SCC is produced by most 

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

years. But neither the rate itself nor the information necessary to derive its implied value

is commonly reported. In 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. This value is consistent with the range recommended by IPCC

(2007) and close to the latest published estimate (Hope, 2008).

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

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

discount rates of 3 percent and 7 percent. It also permits a sensitivity analysis with low rates for

intergenerational problems. ("If 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.") The SCC is being

developed within the general context of the current guidance.

The choice of a discount rate, especially over long periods of time, raises highly

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

e.g., William Nordhaus, "The Challenge of Global Warming (2008); Nicholas Stern, The 

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Economics of Climate Change" (2007); "Discounting and Intergenerational Equity" (Paul

Portney 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. (See Robert Lind, "Analysis for 

Intergenerational Discounting," id. at 173, 176-177.) At 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. In the context of climate change, questions of 

intergenerational equity are especially important.

Reasonable arguments support the use of a 3-percent discount rate. First, that rate is 

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

policy. Second, it is standard to base the discount rate 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. Treasury Bonds. (In the context of climate 

change, it is possible to object to this standard method for deriving the discount rate.) Although 

these rates are currently closer to 2.5 percent, the use of 3 percent provides an adjustment for the 

liquidity premium that is reflected in these bonds' returns.

At the same time, other arguments support use of a 5-percent discount rate. First, that rate

can also be justified by reference to the level of 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). In 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. In 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).

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

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

path for consumption. That equation specifies the optimal discount rate as the sum of two 

components. The first reflects the fact that consumption in the future is likely to be higher than 

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

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

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

The 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. (Some observers 

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

zero.) It follows that discount rate of 5 percent is within the range of values which are able to be 

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

associated with Ramsey discounting.

It is recognized that the arguments above-for use of market behavior and the Ramsey

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

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

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higher than consumption today, and if so, the Ramsey equation will suggest a lower figure. Some

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

ethical considerations calling for a principle of intergenerational neutrality. See Nicholas Stern, 

"The Economics of Climate Change" (2007); for contrary views, see William Nordhaus, The A

Question of Balance (2008); Martin Weitzman, "Review of the Stern Review on the Economics 

of Climate Change." Journal of Economic Literature, 45(3): 703-724 (2007). Additionally, 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. Richard Newell 

and William Pizer, "Discounting the Distant Future: How Much do Uncertain Rates Increase 

Valuations?" J. Environ. Econ. Manage. 46 (2003) 52-71.

The application of the methodology outlined above yields estimates of the SCC that are 

reported in Table 15.2.1. These estimates are reported separately using 3-percent and 5-percent

discount rates. The cells are empty in rows 10 and 11 because these studies did not report

estimates of the SCC at a 3-percent discount rate. The model-weighted means are reported in the 

final or summary row; they are $33 per t CO2 at a 3-percent discount rate and $5 per t CO2 with a 

5-percent discount rate.

Table 15.2.1	 Global Social Cost of Carbon Estimates ($/t CO2 in 2007 in 2007$), Based

on 3% and 5% Discount Rates* 

Model Study Climate Scenario 3% 5%

1 FUND Anthoff et al. 2009 FUND default 6 -1 

2 FUND Anthoff et al. 2009 SRES A1b 1 -1 

3 FUND Anthoff et al. 2009 SRES A2 9 -1

4 FUND Link and Tol 2004 No THC 12 3

5 FUND Link and Tol 2004 THC continues 12 2

6 FUND Guo et al. 2006 Constant PRTP 5 -1

7 FUND Guo et al. 2006 Gollier discount 1 14 0

8 FUND Guo et al. 2006 Gollier discount 2 7 -1

FUND Mean 8.25 0

9 PAGE Wahba & Hope 2006 A2-scen 57 7

10 PAGE Hope 2006 7

11 DICE Nordhaus 2008 8 

Summary Model-weighted Mean 33 5

*The sample includes all peer reviewed, non-equity-weighted estimates included in Tol (2008), Nordhaus (2008), 

Hope (2008), and Anthoff et al. (2009), that are based on the most recent published version of FUND, PAGE, or 

DICE and use business-as-usual climate scenarios. All values are based on the best available information from the 

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

included in his review are 1995 values in 1995$. All 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. The 3 percent and 5 

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

other is not warranted. Thus, DOE has also included-and centered its current attention on-the

average of the estimates associated with these discount rates, which is $19. (Based on the $19 

global value, the domestic value would be $1.14 per ton of CO2 equivalent.)

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It is true that there is uncertainty about interest rates over long time horizons.

Recognizing that point, Newell and Pizer have made a careful effort to adjust for that

uncertainty. See Newell and Pizer, supra. This is a relatively recent contribution to the literature.

There are several concerns with using this approach in this context. First, it would be a 

departure from current OMB guidance. Second, an approach that would average what emerges 

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

based on a different model of uncertainty. The Newell-Pizer 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.

Table 15.2.2 reports on the application of the Newell-Pizer adjustments. The precise 

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

Columns (1a) and (1b) assume that "random walk" model best describes the data and uses 3-

percent and 5-percent discount rates, respectively. Columns (2a) and (2b) repeat this, except that 

it assumes a "mean-reverting" process. As Newell and Pizer report, there is stronger empirical 

support for the random walk model.

Table 15.2.2 Global Social Cost of Carbon Estimates ($/t CO2 in 2007 in 2007$),* 

Using Newell & Pizer Adjustment for Future Discount Rate

Uncertainty**

Model Study Climate Scenario

Random- walk

model

Mean-reverting

model

3% 5% 3% 5%

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

1 FUND Anthoff et al. 2009 FUND default 10 0 7 -1

2 FUND Anthoff et al. 2009 SRES A1b 2 0 1 -1

3 FUND Anthoff et al. 2009 SRES A2 15 0 10 -1

4 FUND Link and Tol 2004 No THC 20 6 13 4

5 FUND Link and Tol 2004 THC continues 20 4 13 2

6 FUND Guo et al. 2006 Constant PRTP 9 0 6 -1

7 FUND Guo et al. 2006 Gollier discount 1 14 0 14 0

8 FUND Guo et al. 2006 Gollier discount 2 7 -1 7 -1

FUND Mean 12 1 9 0

9 PAGE Wahba & Hope 2006 A2-scen 97 13 63 8

10 PAGE Hope 2006 13 8

11 DICE Nordhaus 2008 15 9

Summary Model-weighted Mean 55 10 36 6

*The sample includes all peer reviewed, non-equity-weighted estimates included in Tol (2008), Nordhaus (2008), 

Hope (2008), and Anthoff et al. (2009), that are based on the most recent published version of FUND, PAGE, or 

DICE and use business-as-usual climate scenarios. All values are based on the best available information from the 

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

included in his review are 1995 values in 1995$. All values were updated to 2007 using a 3-percent annual growth

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

**Assumes a starting discount rate of 3 percent. Newell and Pizer (2003) based adjustment factors are not applied to 

estimates from Guo et al. (2006) that use a different approach to account for discount rate uncertainty (rows 7-8).

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The 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. The application of 

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

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

rulemaking the potential global benefits resulting from reduced CO2 emissions valued (in 2008$) 

at $5, $10, $20, $34 and $56 per metric ton, and will also present the domestic benefits derived 

using a value of approximately $1 per metric ton.

DOE is well aware that scientific and economic knowledge about the contribution of CO2

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

damages to the world economy continues to evolve rapidly. Thus, any value placed in this

rulemaking on reducing CO2 emissions is subject to likely change.

DOE, together with other Federal agencies, is reviewing various methodologies for 

estimating the monetary value of reductions in CO2 and other GHG emissions. This 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 should represent domestic U.S. benefits, as well as global benefits (and costs).

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

Nitrogen 0xides (N0x)

As discussed earlier, with respect to NOx the CAIR rule has been reinstated by the 

courts. Therefore, NOx emissions in those states covered by CAIR will be subject to a cap with 

corresponding annual allowances openly traded.

For those states not covered by CAIR, DOE plans on estimating the monetized benefits 

of NOx emissions reductions in these states based on environmental damage estimates from the 

literature. Available estimates suggest a very wide range of monetary values for NOx emissions, 

ranging from $370 per ton to $3,800 per ton of NOx from stationary sources, measured in 2001$, 

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

9

Mercury (Hg)

DOE plans on estimating the monetized benefits of Hg emissions reductions based on 

environmental damage estimates from the literature. DOE has previously determined that the 

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

highly uncertain. However, 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 IQ for American children, and subsequent loss of lifetime economic productivity resulting

from these IQ losses. The high-end estimate is based on an estimate of the current aggregate cost

of the loss of IQ in American children that results from exposure to mercury of U.S. power plant 

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origin-$1.3 billion per year in 2000$, which translates to $33.3 million per ton emitted per year

in 2008$.

10 DOE derived the low-end estimate of $664,000 per ton emitted in 2004$, 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

Sulfur Dioxide (S02) and Nitrogen 0xides (N0x) Allowance Prices

With regard to SO2 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, considerable market experience with these 

instruments has already been accumulated. It has been argued that imposition of any standard

that lowers U.S. national electricity consumption creates 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 ceteris paribus bring about lower SO2 and NOx allowance prices), there are a 

myriad of complications impeding any meaningful 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 minimis when 

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

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

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

potential source of a benefit. Any such compliance cost saving would need to be 

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

reduction for other inputs, such as fuel. When the SO2 allowance market that was created 

in 1995 under the Clean Air Act Amendments began, initial allowance allocations were 

directly granted to large affected units based on their historic (1985-87) use of fuel. For 

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. Some

additional allowances are allocated in diverse ways (e.g. as rewards to generators 

installing control equipment). In other words, the entitled generators holding emission 

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

are gainers. Before they are used, allowances may be traded many times at prices 

reflecting the marginal not average cost of compliance.

•	 The trading system allows for allowance banking. Consequently, any observed change in 

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

similarly just indicate deposit or withdrawal of allowances. In general, used allowances 

have fallen short of the cap so emissions may exceed the specified cap for future years.

•	 Control efforts could further reduce the SO2 cap for some jurisdictions, creating

regulatory uncertainty that perturbs the allowance market. The issuance of the proposed 

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

reported in the study.

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and final CAIR 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 CAIR was vacated in the summer of 2008, spot allowance 

prices nonetheless made a further precipitous drop following the D.C. Circuit Court 

ruling.

•	 Because allowances can be traded freely by generators, brokers, and investors, they can 

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

volatile. Between 2000, when a tightened Clean Air Amendment cap came into force, 

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

12 13 about $1600/short ton, with the 2005 spike being particularly dramatic. Since 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. Also, note that any quantification of the benefit likely depends on 

the level of prices as well as their net change. To 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 NOx emissions, CAIR has only recently been reinstated by the courts, 

therefore market instruments with regard to NOx are not known. But DOE is left to presume that 

the same problems that confront an SO2 allowance price effect forecast would also apply to a 

NOx allowance price effect forecast.

As noted earlier, the forecasting tool to be used for this analysis is the AE02009 version 

of NEMS-BT, which generates forecasts of both SO2 and NOx emissions and allowance prices.

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

may have on them. If this review suggests that the SO2 and NOx 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 RESULTS

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

published in the AE02009. These include emissions for SO2, NOx, mercury, and CO2 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 AE02009 reference case results.

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REFERENCES

1. Energy Information Administration, Updated Annual Energy 0utlook 2009 Reference

Case Service Report, 2009. Washington, DC. Report No. DOE/EIA-0383(2009).

<http://www.eia.doe.gov/oiaf/aeo/> 

2. U.S. Environmental Protection Agency, National Ambient Air Quality Standards, 2008.

(Last accessed March 11, 2008.) <http://www.epa.gov/air/urbanair/> 

3. U.S. Environmental Protection Agency, Clean Air Act. 1990. http://www.epa.gov/air/caa/

4. U.S. Federal Register, Rule To Reduce Interstate Transport o Fine Particulate Matter

and Ozone (Clean Air Interstate Rule); Revisions to Acid Rain Program; Revisions to the

NOX SIP Call, Final Rule, May 12, 2005, 2005.

5. U.S. Environmental Protection Agency, Clean Air Interstate Rule. .

<http://www.epa.gov/cleanairinterstaterule/> 

6. U.S. Federal Register, Standards of Performance for New and Existing Stationary

Sources: Electric Utility Steam Generating Units, Final Rule, May 18, 2005, 2005.

Report No. 70 FR 28606.

7. U.S. Environmental Protection Agency, Clean Air Mercury Rule.

<http://www.epa.gov/oar/mercuryrule/> 

8. U.S. Environmental Protection Agency, Compilation of Air Pollutant Emission Factors, 

AP-42, Fifth Edition, Volume I: Stationary Point and Area Sources.

1998<http://www.epa.gov/ttn/chief/ap42/> 

9. 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 Tribal Entities, 2006. Washington, DC.

<http://www.whitehouse.gov/omb/inforeg/2006 cb/2006 cb final report.pdf> 

10. Trasande, L., C. Schechter, K.A. Haynes, and P.J. Landrigan,, Applying Cost Analyses to 

Drive Policy That Protects Children : Mercury as a Case Study. Annals of the New York

Academy of Sciences, 2006. 1076 

11. Ted Gayer and Robert Hahn, Designing Environmental Policy: Lessons from the

Regulation of Mercury Emissions," 2004. AEI-Brookings Joint Center For Regulatory

Studies. A version of this paper was published in the Journal of Regulatory Economics in 

2006.

12. U.S. Environmental Protection Agency, Allowance Prices (1995-2004), SO2 Allowance

Price Index. Washington, DC. <http://www.epa.gov/airmarkets/progress/alprices.html> 

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13. U.S. Environmental Protection Agency, Clean Air Markets - Data and Maps.

Washington, DC. <http://camddataandmaps.epa.gov/gdm/> 

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