# Institute for Policy Integrity

New York University School of Law

1 Carol M. Browner, Assistant to the President Office of Energy and C limate Change Policy

Dr. Steven Chu, Secretary Department of Energy

Dr. John Holdren, Director Office of Science and Technology Policy

Lisa Jackson, Administrator Environmental Protection Agency

Raymond H. LaHood, Secretary Department of Transportation

Dr. Jane Lubchenco, Administrator National Oceanic and Atmospheric

Administration Peter Orszag, Director Office of Management and Budget

Dr. Christina Romer, Chair

Council of Economic Advisors

Kenneth Lee Salazar, Secretary Department of the Interior

Cass Sunstein, Administrator

Office of Information an d Regulatory Affairs

Lawrence H. Summers, Director

National Economic Council

Nancy Helen Sutley, Chair Council on Environmental Quality

September 11, 2009

Subject: Federal Interagency Review on the Social Cost of Carbon

Dear Senior U.S. Government Officials:

We were pleased to learn from a recent Department of Energy rul emaking that an interagency initiative has made significant progress in developing a more r igorous and consistent approach to valuing the benefits of reducing greenhouse gas emissions. 1 

### We understand that the results of this review process are preliminary, and we support the continuation of efforts to refine these

calculations. 2 

### We offer the following comments to inform the process as it m oves forward:

 

### While the social cost of carbon is a useful tool for evaluating policy, analysts must recognize the limitations of the integrate d assessment models (IAMs) on w hich estimates are based, and they should clarify where are as of uncertainty in the model s may obscure potential benefits of greenhouse gas reductions.

 

### The full range of environmental, social, and economic impacts o f greenhouse gas emissions

should be taken into account when calculating the social cost o f carbon; where impacts

1 Energy Conservation Program: En ergy Conservation Standards for Refrigerated Bottled or Canned Beverage Vending Machines, 74 Fed. Reg. 44913, 44947 (Aug. 31, 2009) (to be codi fied at 10 C.F.R. pt. 431) (hereinafter BVM Rule).

2 Id. at 44948 (“It should be emphasized that the analysis described below is preliminary. Thes e complex issues are of course undergoing a process of c ontinuing review.  Relevant age ncies will be evaluating and seeking comment on all of the scientific, economic, and eth ical issues before establishin g final estimates for use in future rulemakings.”).

### 2 cannot be quantified, analysts sho uld present a balanced qualit ative analysis, along with a recognition that monetized benefits are likely to be underestim ates.  Any ancillary benefits of specific climate policies—such as health and ecological bene fits from the reductions in conventional air pollutants that will likely accompany greenhou se gas controls—must also be incorporated in economic analysis.

 

### Future rulemakings must adopt so me model for accounting for the potentially catastrophic

and irreversible nature of clima te change—otherwise, a core eco nomic justification for reducing greenhouse gas em issions will be obscured.

 

### Because climate change mitigation is a prime example of a globa l public good, the most appropriate measure of the social cost of carbon is a global on e.  If a U.S.‐specific value of the social cost of carbon is to be estimated, it should reflect the full rang e of pathways through which internat ional events can affect the United States , including increased risks to national security, the transnati onal spread of infectious disea ses, and market disruptions.

 

### Discounting benefits to future generations raises important and controversial questions of

ethics and fairness that are b eyond the scope of economic analy sis alone.  In the context of the social cost of carbon, analy sts should explicitly consider a range of discount rates, including very low ones, as well as alternative discounting met hodologies (such as hyperbolic discounting and diffe rential discount rates) in orde r to convey the sensitivity of results to assumptions on discou nting.  Alternative ethical fra meworks should also be used to inform discussions of intergen erational discounting and equi ty.

To strengthen analytical rigor a nd transparency, we respectfull y ask that these concerns be addressed in considering the social cost of carbon in future re gulatory actions.

Background on the Social Cost of Carbon

The “social cost of carbon” (SCC) is a monetary measure of the incremental damage resulting from greenhouse gas (GHG) emissions. The SCC assigns a net present value to the margi nal impact of one

additional ton of carbon dioxid e‐equivalent emissions released at a specific point in time.  SCC

estimates take into considerati on such factors as net agricultu ral productivity loss, human health effects, property damages from s ea level rise, and changes in e cosystem services. 3



### Until recently, the SC C has been estimated b y federal agencies only on a rather ad hoc and inconsistent basis.  Over the pa st few years, various federal a gencies have selected a wide range of SCC estimates when calculating t he benefits of proposed regulat ions.  For example, in 2008, the Department of Transportation assu med a value of $7 per ton of c arbon dioxide for emissions reductions achieved by a propose d vehicle efficiency standard. 4 

### But by the following year, the agency was instead using a mean value of $33 for essentially th e same regulation (and was also

3 See EPA, 420‐D‐09‐001, D RAFT R EGULATORY I MPACT A NALYSIS : C HANGES TO R ENEWABLE F UEL S TANDARD P ROGRAM 690 tbl. 5.3‐3 (2009) (listing the following areas as modeled by FUND:  agricultural and forestry production; water resources; energy consumption for cooling and heatin g; sea level rise, dry land l oss, wetland loss, and coast al protection costs; forced migration due to dry land loss; c hanges in human health associa ted with diarrhea incidence, vector‐borne diseases, cardiovascular disorders, and re spiratory disorders; hurricane damage; and loss of ecosystems/biodiversity).

4 Average Fuel Economy Standards, Passenger Cars and Light Truck s; Model Years 2011‐2015, 73 Fed. Reg. 24351, 24414 (proposed May 2, 2008) (selectin g $7 as the midpoint of a possi ble $0‐$14 range).

### 3 analyzing possible values at $2 and $80). 5 

### The Department of Energy has at times used a range of $0‐$20, while in other rulemaking s has copied the Department of Transportation’s figures. 6 

### Finally, in 2008, EPA developed a technic al support document on the SCC. Using both a meta‐analysis of existing literature and a specif ic economic model, EPA calculat ed a wide range of possible SCC estimates from ‐$6 to $695. 7 

### Even more troubling than this very wide range of valuations i s the historic tendency of some federal agencies not to quantify the benefits of reducing GHG emissions. 8



### By remedying these inconsistencies and promoting use of a stand ard SCC range a cross the entire federal government, the interage ncy review process will help ad vance sound climate change policy, grounded in rigorous economic and scientific analysis.  Such ba lanced analysis is an essential decisionmaking tool for regulat ors.  To craft specific measures and approaches, to compare a proposal with competing policy a lternatives, and ultimately to make a rational and educated decision, policymakers need to un derstand the full range of con sequences—both positive and negative—that their rules will ha ve on the economy, the environ ment, and public health.  Reliable and transparent valuation of all costs and benefits is vital to this process, and the interagency review will help ensure that fut ure rulemakings fully evaluate the effects of climate policies. Moreover, now that a range of SCC estimates has been calculated , peer‐reviewed, and published by a collection of federal agencies, policymakers can no longer ch oose to ignore the benefits of reducing GHG emissions.

The Department of Energy’s recen t energy efficiency standards f or refrigerated ve nding machines, required by the Energy Policy and Conservation Act as amended b y the 2005 Energy Policy Act, represent the first regulatory a ction to utilize the results of the interagency SCC review. 9 

### We are encouraged by the quality of ana lysis in that rulemaking, but w e believe both the interagency review process and future rulemakings based on the interagency review should consider the following recommendations.

Recognizing the Limits of Integrated Assessment Models

A robust benefits analysis must be thorough, transparent, and a nchored in science.  The Department of Energy’s rulemaking acknowledges that the results of the SCC interagency process may be contestable because scientific knowledge about climate c hange’s speed and severity is imperfect, and because the economic models of climate change’s impacts are incomplete. 10 

### While admitting these limitations is a valuable first step, any feder al rulemaking that uses the SCC

5 Average Fuel Economy Standards, Passenger Cards and Light Truc ks Model Year 2011, 74 Fed. Reg. 14195, 14350 (Mar. 30, 2009) (to be codified at 49 C.F.R. pts. 523, 531‐37) (revis ing SCC calculations, in light of substantial public comments).

6 Compare, e.g. , Energy Conservation Program fo r Commercial and Industrial Equ ipment, 74 Fed. Reg. 1091, 1133 (Jan. 9, 2009) (to be codified at 10 C.F. R. pt. 431) (presenting indepen dent SCC calculations by th e Department of Energy), with,

e.g. , Energy Conservation Program fo r Certain Industrial Equipment: Energy Conservation Stand ards and Test Procedures for Commercial Heating, Air‐Condi tioning, and Water‐Heating Equ ipment 74 Fed. Reg. 36312, 36342 (July 22, 2009) (to be codified at 10 C.F.R. pt. 431) (using Department of Transpor tation’s calculations in Depar tment of Energy rulemaking).

7 EPA, T ECHNICAL S UPPORT D OCUMENT ON B ENEFITS OF R EDUCING GHG E MISSIONS (2008) (developing a range of SCC estimates, for the agency’s own use and as possible guidance for other federal agencies).

8 See M ARTHA G. R OBERTS & N ANCY S PENCER

, E NVIRONMENTAL D EFENSE F UND

, C ARBON C OUNTS : I NCORPORATING THE B ENEFITS OF
C LIMATE P ROTECTION INTO F EDERAL R ULEMAKING 12‐15 (2008) (detailing various federal rulemakings that omitt ed the benefits of GHG reductions); Ctr. for Biological Diversity v. NHTSA

, 538 F.3d 1172 (9th Cir. 2008) (hold ing that the Department of Transportation’s failure to calc ulate the social cost of carbon when promulgating vehicle fue l efficiency standards was arbitrary and capricious and in violation of the Administrative Procedure Act).

9 BVM Rule, supra note 1, at 44947.

10 Id.

### 4 estimates developed by the inter agency process must go further in explaining how such limitations affect the weighing of costs and benefits.

Rulemakings should make it expli cit that, given current methodo logical limitations of integrated assessment models, SCC estimates are likely to be underestimate s, meaning that the calculated benefits from reducing GHG emissi ons are likely to represent a lower bound.  For example, as EPA recently affirmed in a rulemakin g, “the current trajectory for [global] GHG emissions is higher than typically modeled” and the “curre nt regional population and inc ome trajectories...are more asymmetric than typically modeled.” 11 

### As a result, actual climate c hange and vulnerability to climate change is likely much gre ater than captured by current SCC estimates.   Other potential limitations of integrated assessm ent models include inadequate accounting for catastrophic risk,

failure to measure cumulative an d cross‐sector impacts, assumpt ions that climate change will not impact economic productivity, an d the difficulty of counting no n‐market costs. 12 

### In the past, EPA has stated that such significant omissions in the economic mode ls suggest that current SCC estimates are “very likely” to be underestimates. 13 

### Including similar language and discussions in rulemakings would help place SCC valuations in the appropriate framework for interpretation.

Underestimated, Un

­ Quantified, and Omitted Impacts

Listing only a few examples of omitted variables—as the Departm ent of Energy’s recent rulemaking

does 14 

### —undervalues significant benefit s of climate policies simply be cause they are not quantifiable.  All costs and bene fits, whether or not they can be quantified and monetized, deserve equal attention in economic analysis.  Rulemakings should provi de a detailed list of all known impacts not accounted for in the economic models.  A good examp le can be found in the table set out below, adapted from EPA’s pr oposed rulemaking on renewable fuel standards.

To whatever extent possible, those variables not included in th e economic models should be quantified, even if they cannot be fully monetized.  Executive Order 12,866 inst ructs federal agencies to quantify costs and b enefits “to the extent feasible ” when conducting economic analysis of significant regulatory actions. 15 

### Quantification greatly facilita tes the weighing of costs and benefits and improves the quality of the rulemaking.  In its Circular A

­ 4 , the White House Office of Management and Budget admits that some costs and benefits will be difficult to monetize, but directs agencies to consider other means of quantification. 16 

### Where quantification proves impossible, an in‐depth qualita tive discussion is necessary to ensure that importan t impacts are not ignored by decisionmakers.

11 EPA, D RAFT R EGULATORY I MPACT A NALYSIS

, supra note 3, at 689.

12 See Jody Freeman & Andrew Guzman, Seawalls Are Not Enough: Climate Change and U.S. Interests 18 (U.C. Berkeley Pub. L. Res. Paper No. 1357690, 2009).

13 EPA, T ECHNICAL S UPPORT D OCUMENT

, supra note 7, at 15.

14 See BVM Rule, supra note 1, at 44947 (“[S]ome of the l ikely and potential damages from climate change—for example, the value society places on adver se impacts on endangered speci es—are not included in all of the existing economic analyses”); id. at 44979 (“The agency is keenly a ware that the current IAMs fai l to include all releva nt information about the likely impacts from greenhous e gas emissions. For example, ecosystem impacts, including s pecies loss, do not appear

to be included in at least two o f the models.  Some human healt h impacts, including increases in food‐borne illnesses and in the quantity and toxicity of a irborne allergens, also appear to be excluded.”).

15 Exec. Order No. 12,866 § 6(3)(C), 58 Fed. Reg. 51,735, 51,741 (Oct. 4, 1993) (codified at 45 C.F.R. pt. 88).

16 See O FFICE OF M GMT

. & B UDGET

, C IRCULAR A‐4, 26 (2003).

### 5 List of Impacts Typically Omitted from SCC Models 17



### Reduction in growing season (e .g., in Sahel/southern Africa)
Increase in growing season in moderate climates Impact of precipitation changes on agriculture Agriculture

Impact of weather variabil ity on crop production Reverse of carbon uptake, ampl ification of climate change Thresholds or “tipping points” a ssociated with species loss, ec osystem collapse, and long‐term catastrophic risk (e.g ., Antarctic ice sheet collapse ) Species existence value and the value of having the option for future use Earlier timing of spring eve nts; longer growing season Poleward and upward shift in habitats; species migration Shifts in ranges of ocean life Increases in algae and zooplankton Range changes/earlier migr ation of fish in rivers Impacts on coral reefs Ecosystem service disruption (e. g. loss of cold water fish habi tat in the U.S.) Biomes/ Ecosystems

Coral bleaching due to ocean warming Energy production/infrastructure Energy Water temperature/supply imp acts on energy production Social and political unrest abroad that affects U.S. national s ecurity (e.g., violent conflict or humanitarian crisis) Damage to foreign economies that affects the U.S. economy Foreign

Affairs
Domestic valuation of international impacts Longer fire seasons, l onger burning fires, and increased burn a rea Disappearance of alpine habitat in the United States Forest Tropical forest dieback in the Amazon Insurance costs with changes in extreme weather, flooding, sea level rise Global transportation and trade impacts from Arctic sea ice mel t Distributional effects within regions Vulnerability of societies highly dependent on climate‐sensitiv e resources Infrastructure costs (roads, bridges) GDP/ Economy

Extreme weather events (droughts, floods, fires, and heavy wind s) Increased deaths, injuries, infe ctious diseases, stress‐related disorders with more frequent extreme weather (drought s, floods, fires, and heavy wi nds)

Increases in malnutritio n, food‐borne illnesses Health

Air quality interactions (e.g., ozone effects, including premat ure mortality) Changes in Arctic/Antarctic ecosystems Enlargement and increased numbers of glacial lakes; increased f looding Snow/

Glacier Snow pack in southeastern United States Changes in tourism rev enues due to ecosystem s and weather event s Tourism Arctic hunting/travel/mountain sports River flooding Infrastructure, water supply Precipitation changes on water supply; increased runoff in snow ‐fed rivers Water

Increasing ground instability and avalanches

17 Information and format for table based on EPA, T ECHNICAL S UPPORT D OCUMENT

, supra note 7, at 16‐17, and EPA, D RAFT
R EGULATORY I MPACT A NALYSIS

, supra note 3, at 691 tbl. 5.3‐4.

### 6 Finally, most climate policies wi ll generate ancillary benefits , wholly apart from any effect tied to climate change.  These ancillary benefits are definitely not ca ptured in the social cost of carbon, but could be very large and will mo stly accrue to current generatio ns.  For example, measures that increase energy efficiency or enc ourage clean energy generation will also lead to reductions in local air pollutants, with attendant benefits for human health and ec osystems.  Other ancillary benefits

include reduced ocean acidifica tion and increased forest preser vation. 18



### The magnitude of such ancillary b enefits may be significant.  F or example, a forthcoming working paper estimates that representat ive federal clima te legislation would result in health‐related co‐ benefits of $3 to $9 per ton of carbon dioxide avoided (due to reductions in conventional air pollutants). 19 

### Other studies, using different methodologies, have found simi larly large benefits. 20 

### Because the ancillary b enefits of greenhouse gas reductions cou ld represent an important component of total benefits, it is essential for rulemakings th at use the interagency SCC estimates not to omit significant ancillary benefits, but rather to ident ify and quantify t hem separately.

Accounting for Catastrophic Risk

Certain events, even though they carry a very low probability c hance of occurring, would impose catastrophic costs if they come to pass.  For example, there ma y be certain temperature “tipping points,” when the environmental consequences of global warming will themselves begin to reinforce the climatic changes. Polar ice currently reflects h eat away from the planet’s surface; if that ice melts as temperatures r ise, more heat will be absorbed by newly exposed land and water, thereby dramatically speeding up global warming. 21 

### Similarly, if the oceanic heat and salinity dynamics change enough that entire ocean currents shift, the im pact on worldwide weather patterns could be unprecede nted and unpredictable. 22 

### Many of these changes are irreversible, certainly over relev ant time scales.

Because there is no consensus ec onomic model for how to value s uch high‐impact/low‐probability damages, they have been exclude d from past SCC calculations.  B ut failure to acco unt appropriately for irreversible catastrophic ri sk will skew social cost of car bon numbers, because some of the most economically relevant rationales for moving forward with greenh ouse gas controls will be ignored. The same rationale that encourages individuals and firms to pay a premium to pu rchase insurance (i.e., risk aversion) justifies additional expenditures in the face of uncertainty, especially uncertainty about ca tastrophic losses. 23 

### Furthermore, when choices a re irreversible, there is a

18 For a more complete discussion o f possible ancillary benefits, see E NV ’ T P OL ’ Y C OMM

., O RG

. FOR E CON

. C OOPERATION & D EV

. (OECD), ENV/EPOC/GSP(2001)13/Final, A NCILLARY B ENEFITS AND C OSTS OF GHG M ITIGATION : P OLICY C ONCLUSIONS 6 (2001),

available at http://www.olis.oecd.or g/olis/2001doc.nsf /LinkTo/NT00000ABA/$FI LE/JT00124610.pdf

19 Britt Groosman, Nicholas Z. Muller, & Erin O’Neill, The Ancillary Benefits from Reductions of Greenhouse Gas Emissions from Mobile and Electric Power Sources in the United States (Middlebury College Dept. of Economics Working Paper, forthcoming 2009).

20 John Balbus, Ramya Chari, & Kristie L. Ebi, A Wedge

­ Based Approach to Estimating Health Co

­ Benefits of Climate Change Mitigation Activities in the United States: Health Co

­ Benefits of Specific US Climate Activities, (estimating co‐benefits for the year 2020 in the range of $29 and $68 per ton of carbon ($8 to $19 per ton of avoided  CO 2 ‐equivalent ton)).

21 See Timothy M. Lenton et al., Tipping Elements in the Earth’s Climate System , 105 P ROC

. OF THE N AT ’ L A CAD

. OF S CI . 1786 (2008).

22 See id.

23 See Nicholas Stern, The Economics of Climate Change , A M

. E CON

. R EV ., May 2008, at 1, 17, available at http://www.atypon‐link.com/AEAP /doi/pdf/10.1257/aer.98.2.1 (exp laining attitudes to risk).

### 7 value to preserving options in the face of uncertainty, and rat ional actors are willing to pay a premium to preserve the option t o avoid an irreversible mistake

. 24



### Indeed, recent research in the ec onomics literature has suggest ed that conventional welfare analysis ignoring these “fat‐tail risks” may be fundamentally i napplicable to the case of climate change, and has shown that the treatment of low‐probability but catastrophic events can have a greater impact on the outcome of analysis than even the choice of discount rate. 25



### There are methods to account for irreversibility, including the theory of real options, 26 

### as well as approaches that emphasize risk management rather than consumpti on smoothing. 27 

### Though uncertainty can compli cate economic analysis, uncertainty does not justify ignoring a significant element of a regulatory issue.  Courts have repeatedly declared that “[t]he agency’s job is to exercise its expertise to make tough choices about which of the competing estimates is most plausible, and to hazard a guess as to which is correct....Regula tors by nature work under conditions of serious uncertainty, and regulation would be at a n end if uncertainty alone were an

excuse....” 28 

### In future rulemakings, agencies must attempt to develop a mod el that best accounts for the potentially catastrophic asp ects of climate change risks. Merely acknowledgin g the limitation, as the Department of Energy does in its recent rulemaking, 29 

### is an insufficient response.

International versus Domestic Valuations

A central question in estimating the SCC is the geographic scop e of climate change impacts to be considered.  We strongly agree w ith the conclusi on of the inter agency review process that that the global SCC should be the “primary ” and preferred figure for est imating the benefits of climate legislation. 30 

### The Department of Energy’s recent rulemaking explained that t he global SCC value is appropriate since climate change “involves a global public good in which the emissions of one nation may inflict significant d amages on other nations and [wh ere] the United States is actively engaged in promoting an internat ional agreement to reduce world wide emissions.” 31 

### However, because of past confusion and inconsistency on this issue, 32 

### future rulemaking s should go into

24 See Letter from Michael Livermore, E xecutive Director of IPI, to Mi nerals Management Service, U.S. Dep’t of Interior (Apr. 6, 2009) (discussing the p roblems of irreversibility and uncertainty with respect to valuing offshore natural resources, and the need to incorp orate an options value framewo rk into the federal oil and gas leasing program).

25 See Martin L. Weitzman, On Modeling and Interpreting the Economics of Catastrophic Climate Change (Harvard Univ. Working Paper, Feb. 2008), available at http://www.economics.harvard.ed u/faculty/weitzman/files/modeli ng.pdf; E. Nævdal & J. Vislie, Climate Change, Catastrophic Risk and the Relative Unimportance of Discounting (Univ. of Oslo Dept. of Econ. Memorandum 28, 2008).

26 See Jon Anda, Alexander Golub, & Elena Strukova, Economics of Climate change Under Uncertainty: Benefits of Flexibility

, 37 E NERGY P OL ’ Y 1345 (2009); Andrea Baranzini et al., The Impact of Possible Climate Catastrophes on Global Warming Policy , 31 E NERGY P OL ’ Y 691 (2003) (applying an options approach to cost‐benefit analy sis of climate policy, to account for uncertainty, irreversibility, and catastrophes); Livermore, supra note 24.

27 

### See e.g. Gary W. Yohe, Lessons for Mitigation from the Foundations of Monetary Policy in the United States in

H UMAN 

### I NDUCED 

### C LIMATE 

### C HANGE 

### : A N 

### I NTERDISCIPLINARY 

### A SSESSMENT 

### 294 (2007, Michael E. Schlensinger et al. eds.).

28 Pub. Citizen, Inc. v. Fed. Motor Carrier Safety Admin. , 374 F.3d 1209, 1221 (D.C. Cir. 2004).

29 BVM Rule, supra note 1, at 44949 (“In addition, there has been considerable re cent discussion of the risk of catastrophe

and of how best to account for wo rst‐case scenarios. It is not clear whether the three IAMs take adequate account of these potential effects.”).

30 Id. at 44948.

31 Id.

32 For example, some federal agenc ies (such as the Department of Transportation) have at times decided to count only climate change costs imposed dir ectly on the United States, exc luding broader global effects. See Average Fuel Economy

### 8 greater detail, explaining why the global SCC figures are the a ppropriate measurements and providing clear, strong gu idance to agency staff.

At the same time, the interagenc y review process also concluded that a domestic SCC should be computed.  In its recent rulemaking, the Department of Energy c hooses to approximate the domestic SCC as 6 percent of the global SCC, based on citations in the literature that range from 2 to 11 percent. 33 

### These low percentages appear t o reflect the conclusions of so me analysts that the

United States’s share of climate effects will be comparatively small, because of the country’s “relatively temperate climate, [the] small dependence of its ec onomy on climate, the positive amenity value of a warmer climate in many parts of the United S tates, its advanced health system, and [its] low vulnerability to catastrophic climate change.” 34



### Future rulemakings should cite the growing body of analysis tha t documents the profound impacts of climate change on the United States.  For example, the U.S. Global Change Research Program recently released a re port on the significant climate impacts a lready observed and projected in the

United States. 35 

### Perhaps as importantly, the imp acts of global warming will no t be limited to where specific changes in temperature or precipitation occur, but wil l be felt far bey ond geographic and political boundaries.  As EPA ha s observed, a de cision to exclu de global impact s would falsely

assume that Americans are unwilli ng to pay to avoid internation al damages caused by U.S. emissions, and ignores the potential for in ternational impacts to produce security risks or economic disruptions felt within U.S. borders. 36 

### Foreign damages from climate change could have domestic economic “spillover effects”:  c onsider the impacts on the Unit ed States of the worldwide disruption of agricultural production and w ater resources, the widespread loss of biodiversity, the spread of infectious disease, and the potential for social unrest. 37 

### In deriving or applying any estimate of either the global or domestic S CC, analysts should explicitly c onsider these spillover effects.

National security is a particular concern.  Analysts in governm ent and academia have increasingly begun to realize that the United States has a deep stake in pre venting the geopolitical instability associated with climatic disrupti ons in other regions of the wo rld. 38 

### Climate effects like droughts,

Standards, Passenger Cars and Light Trucks; Model Years 2011‐20 15, 73 Fed. Reg. at 24414.  The Department of Transportation contended this re striction was dictated by consi stency, since no other non‐d omestic costs or benefits

were measured. Id. However, even the Office of Management and Budget (OMB)—the f ederal agency charged with overseeing cost‐benefit analyses —specifically permits considera tion of significant internat ional costs and benefits.

C IRCULAR A‐4, supra note 17, at 15 (“When you choose to evaluate a regulation that is likely to ha ve effects beyond the borders of the United States, these effects should be reported separately.”) (emphasis added).

33 BVM Rule, supra note 1, at 44948.

34 W ILLIAM N ORDHAUS & J OSEPH B OYER

, W ARMING THE W ORLD 96‐97 (2000).

35 U.S. G LOBAL C HANGE R ESEARCH P ROGRAM

, G LOBAL C LIMATE C HANGE I MPACTS IN THE U NITED S TATES (2009), available at http://downloads.globalc hange.gov/usimpacts/pdfs/climate‐impact s‐report.pdf.

36 See EPA, T ECHNICAL S UPPORT D OCUMENT

, supra note 7, at 11.

37 

### See e.g. Freeman & Guzman, supra note 13, at 7 (“We do not claim that all of these things will happen at catastrophic levels, or that the United States will necessarily be dragged i nto every climate‐related conflict around the world, but simply that the United States ca nnot sequester itself from all such spillovers.”).

38 See, e.g. , John M. Broder, Climate Change Seen as Threat to U.S. Security , N.Y. T IMES , Aug. 8, 2009; Climate Change and

Global Security: Challenges, Threats, and Global Opportunities: Hearing Before the S. Comm. on Foreign Relations , 111th Cong. (2009) (statement of V ice Admiral Dennis McGinn), available at http://foreign.senate. gov/testimony/2009/ McGinnTestimony090721p.pdf; U.S. G OV ’ T A CCOUNTABILITY O FFICE

, K EY C HALLENGES R EMAIN FOR D EVELOPING AND D EPLOYING
A DVANCED E NERGY T ECHNOLOGIES TO M EET F UTURE N EEDS (2006), available at http://www.gao.gov/n ew.items/d07106.pdf;

G EN

. C HARLES F. “C HUCK ” W ALD ET AL

., CNA M ILITARY A DVISORY B OARD

, P OWERING A MERICA ’ S D EFENSE : E NERGY AND THE R ISKS TO
N ATIONAL S ECURITY , at i, vii, x (2009), available at http://www.cna.org/documents/Po weringAmericasDefense.pdf; P ETER
S CHWARTZ & D OUG R ANDALL

, A N A BRUPT C LIMATE C HANGE S CENARIO AND I TS I MPLICATIONS FOR U NITED S TATES N ATIONAL S ECURITY (2003).

### 9 food shortages, and rising sea l evels could trigger refugee cri ses and regional con flicts, both with the potential for violence.  Addi tionally, U.S. dependence on f oreign sources of oil carries very real security implications; climate pol icies may change these dynami cs by shifting the nation’s fuel portfolio away from non‐renewabl e, imported sources.  Though th ese national security effects are difficult to quantify and monetiz e, they are crucial to conside r.

In addition, while it is true that any actions taken by the Uni ted States on climate change will produce some external benefits, the same is true for the polici es of other nations.  Greenhouse gases are global pollutants, meaning that emissions anywhere in the w orld generate damages everywhere.  In other words, eac h ton of reduced emissions in t he United States will generate benefits to every other nation, and each ton of our emissions w ill have global im pacts.  There is currently no mechanism for the Un ited States to capture benefit s exclusively for ourselves. 39 

### But once other countries take recip rocal action on climate change, they will likewise generate global benefits that will in part be reaped by the United States.  Ana lysts should bear in mind this reciprocal relationship when applying SCC estimates.

These considerations—particularly the far‐reaching national sec urity benefits from domestic

abatement measures—shed doubt on how accurate or useful the 6% figure is, especially since it

seems to have been derived in an almost ad hoc manner without careful consideration of the underlying assumptions.  At the ve ry least, it seems potentiall y arbitrary for the Department of Energy only to calculate a domes tic SCC based on a single prefe rred global SCC es timate (namely, picking $19 as the global SCC for year 2007 emissions and calcu lating a domestic SCC of $1.14), 40 

### instead of looking at the full range of glo bal SCC estimates. At a more fundamental level, if a

domestic estimate of the SCC is t o be estimated, analysts must conduct a rigorous assessment of the likely impacts of climate change on the United States, includin g not only the geographically localized changes in climatic patterns but also the spillover e ffects from changes that take place

elsewhere.

Discounting

Embedded within the various SCC values calculated by the intera gency review process are discount rates.  Averting climate change will mostly produce benefits in the future, and discount rates are traditionally applied to account f or a general preference for i mmediate benefits, so that a benefit accruing years from now is not w orth as much as a benefit accru ing today.  In many contexts, discounting is an appropriate and necessary economic tool.  How ever, in the context of climate change, benefits accrue not just i n the future but to future ge nerations of people.  Such inter‐generational discounting re quires us to compare risks fac ed by different individuals and

choose to value one individual’s preferences more simply becaus e he or she is alive first.   These factors make discounting much mo re problematic and controversia l than in the settings to which cost‐benefit analysis is conventionally applied.

The interagency review process ac knowledges that “[t]he choice of a discount rate , especially over long periods of time, raises hig hly contested and exceedingly d ifficult questions of science, economics, philosophy, and law.” 41 

### Nevertheless, the process draws on literature that uses 3% an d

39 See Brian Copeland & M. Scott Taylor, Trade and Transboundary Pollution , 95 A M

. E CON

. R EV . 716‐737 (1995); Hilary Sigman, International Spillovers and Water Quality in Rivers: Do Countries Free Ride? , 92 A M

. E CON

. R EV . (1992).

40 BVM Rule, supra note 1, at 44948.

41 Id.

### 10 5% discount rates, applied either constantly each year or via a “random walk” method that better accounts for uncertainty. 42



### There is a long literature on th e appropriate rate of discounti ng in the context of climate change.  In that literature, discount rates of 5% are toward the high end, while some analyst s have advocated
discount rates as low as 1.4%. 43 

### Legal scholars have also called into question the basic tenets of intergenerational discounting. 44 

### Because there is no widely agreed‐upon appropriate rate of discounting for climate change, a nd because discounting is such a central determinant of the estimates of the SCC, at the very least future rulemakings shou ld also look at previous SCC estimates by EPA that used a 2% discount rate. 45 

### In its 2008 Technical Support Document, EPA stated that “[a] review of the literature indicates that rates of three percent or lower are more consistent with conditions associated with long‐run uncertainty in economic growth and interest rates, inter‐generational considerations, and the risk of high impact climate damages (which could reduce or reverse economic growth).” 46 

### Alternative methodologies, including hyperbolic or differential discount rates, should also be explored.

Moreover, discounting is not the only tool available for defini ng our moral obligations to future generations. Sustainable develop ment, utilitarianism, correctiv e‐justice, and other ethical theories

all offer social decision‐makers a model for how to treat futur e costs and benefits.  Choosing

between these ethical theories r emains a difficult task, but th e key point is that our obligation to future generations is fundamentally an ethical question that ca nnot be resolved by economic analysis alone.

Selecting the Proper Range of Estimates

The Department of Energy’s recent rulemaking, based on the inte ragency review process, looked at a range of five global SCC estima tes.  Four estimates represent ed mean, model‐weighted values, calculated under four assumptions about discount rates.  The fi fth estimate is the Department of Energy’s own average of two of t hose previous estimates.  We ha ve two separate concerns with this approach.

First, the Department of Energy’ s single preferred SCC estimate of $19 is the arithmetic mean of model‐weighted SCC values based o n discount rates of 3% and 5%. Given the compelling arguments for choosing a lower discount rate, an equal weightin g of these discount rates may not be justified, and analysts shoul d consider putting more weight on SCC estimates that rely on lower discount rates.  Even setting as ide such judgments, however, th e arithmetic mean is the wrong number to use.  As we have emphasized (and as the rulemaking go es on to note 47 

### ), there is considerable uncertainty over th e proper choice of discount rat e.  As the economics literature on this subject has made clear, in the presence of uncertainty ove r discount rates, the correct approach is to average discount factors rather than discount rates

. 48 

### Thus the correct average of a 3% and 5% discount rate, for benefits a ccruing a century from now, is 3.6% — not 4%.  By extension, it is incorrect to take the simple average of two SCC estimates based on different discount rates.  Indeed,

42 Id. at 44949‐44951.

43 See N ICHOLAS S TERN

, U NITED K INGDOM C ABINET O FFICE

, T HE E CONOMICS OF C LIMATE C HANGE : T HE S TERN R EVIEW (2006).

44 See R ICHARD L. R EVESZ & M ICHAEL A. L IVERMORE

, R ETAKING R ATIONALITY : H OW C OST ‐B ENEFIT A NALYSIS C AN B ETTER P ROTECT THE
E NVIRONMENT AND O UR H EALTH 107‐17 (2008).

45 EPA, T ECHNICAL S UPPORT D OCUMENT

, supra note 7, at 12.

46 Id. at 9 (emphasis added).

47 BVM Rule, supra note 1, at 44950 (“It is true that there is uncertainty about interest rates over long time horizons”).

48 See Martin Weitzman, Review of the Stern Review on the Economics of Climate Change, J. E CON

. L IT

. 45(2007), at 709.

### 11 it is precisely this importance of uncertainty over long time h orizons that motivates the Newell‐ Pizer analysis relied upon by the Department of Energy in calcu lating two of its SCC estimates. 49 

### While that approach yields estima tes of $10 and $55, those figu res are ignored by the Department in computing the $19 figure.

Second, by focusing on means, the interagency process produces a relatively narrow and seemingly consistent range:  from $5 to $55 for year 2007 emissions. 50 

### The preferential use of the single value of $19 compounds the problem fur ther.  By comparison, EPA previ ously looked at the 5 th 

### percentile

and 95 th 

### percentile figures as well as means, and found a possible rang e of ‐$6 to $695 for year 2007 emissions (with a mean of around $17 to $88). 51 

### EPA’s figures suggest a very wide dispersion,

with at least a few estimates fa lling significantly above the m ean.  By focusing only on the means, the Department of Energy’s rulem aking obscures the wide dispers ion in estimates of the social cost of carbon, and overlooks the possibility that estimates could b e much higher.

Given how uncertain the SCC estimates are, and given how likely the SCC estimates are to be understated, it is important for the interagency review process to consider whether a focus on model‐weighted means is most appropriate and useful.  A more ri gorous approach might consider conducting a sensitivity analysi s to capture the implications o f SCC values throughout a wider range, including much higher val ues.  Another potentially usefu l technique is to calculate the “breakeven SCC” (the SCC at which estimated benefits of the pol icy would exactly equate with estimated costs) and analyze whe re that value fa lls compared to the interagency’s range of SCC

estimates. 52



### Conclusion

We are greatly encouraged by the federal government’s efforts t o ensure that the benefits of reducing greenhouse gas emissions are weighed accurately and co nsistently.  The interagency review process on the social cost of carbon is a positive and s ignificant step toward grounding the nation’s climate policies in sou nd economics and science.  We h ope that the interagency process— as well as individual agency ana lysts—will continue working to improve their estimates of the social cost of carbon, and will consider our recommendations fo r strengthening the analytical rigor and transparency of the calculations.

Sincerely,

Richard L. Revesz          Nathaniel Keohane, Ph.D Dean, New York University School of Law    Director, Economic Pol icy and Analysis Faculty Director, Institute for Policy Integrity    Environmental Defense Fund

49 Richard Newell and William Pizer, Discounting the Distant Future: How Much Do Uncertain Discount Rates Increase Valuations? ̧ J. E NVIRON

. E CON

. M ANAGE

. 46 (2003): 52‐71, cited in BVM Rule, supra note 1, at 44950.

50 BVM Rule, supra note 1, at 44949‐51.

51 EPA, T ECHNICAL S UPPORT D OCUMENT

, supra note 7, at 12.

52 See IPI, T HE O THER S IDE OF THE C OIN : T HE E CONOMIC B ENEFITS OF C LIMATE L EGISLATION (2009), available at http://policyintegrity.org/docum ents/OtherSideoftheCoin.pdf (ca lculating the breakeven SCC for H.R. 2454, the American Clean Energy and Security Act of 2009).