Regulatory Impact Analysis: Development of Social Cost of Carbon Estimates
Released: 2014-08-25T00:00:00

Letter

Background

Executive Order 12866 directs federal agencies to assess the potential costs and benefits of their significant regulatory actions, consisting of several categories of regulatory actions, including those likely to result in a rule that may have an annual effect on the economy of $100 million or more or that have a material adverse effect on the economy; a sector of the economy; productivity; competition; jobs; the environment; public health or safety; or state, local, or tribal governments or communities. Under the executive order, for regulatory actions expected to meet this threshold, or economically significant regulatory actions, agencies must also assess costs and benefits of reasonably feasible alternatives and explain why the planned regulatory action is preferable to the identified alternatives. For each significant regulatory action, the agency is to develop the proposed regulation and associated regulatory impact analysis and submit them to OMB for formal review. After OMB concludes its review, the agency is to publish the proposed rule in the Federal Register for public comment. The agency is to issue a document summarizing its consideration of the public comments and, if appropriate, modify the proposed rule in response to the comments. This phase of regulatory development may also include further internal and external review. For significant regulatory actions, the agency is to submit the final regulatory impact analysis and regulation to OMB for review before it publishes the final rule.

In 2003, OMB issued Circular A-4 to provide guidance to federal agencies on the development of regulatory analysis as directed by Executive Order 12866. Circular A-4 states that it is designed to assist agencies by defining good regulatory analysis and standardizing the way benefits and costs of federal regulatory actions are measured and reported. In particular, the guidance provides for systematic evaluation of qualitative and quantitative benefits and costs, including their monetization. Circular A-4 also provides guidance on the selection of discount rates to adjust the estimated benefits and costs for differences in timing. According to Circular A-4, a regulatory impact analysis should include an evaluation of the benefits and costs of the proposed action and any reasonable alternatives, as well as a description of assumptions and uncertainty. It acknowledges that agencies cannot analyze all regulations according to a formula, and that different regulations may call for different emphases in the analysis. Executive Order 13563, which reaffirmed and supplemented Executive Order 12866 in 2011, generally directs federal agencies to conduct regulatory actions based on the best available science. It also directs agencies to use the best available techniques to quantify benefits and costs accurately.

Federal agencies began including estimates of the social cost of carbon in regulatory impact analyses following a decision by the U.S. Court of Appeals for the Ninth Circuit. Specifically, in 2006, the Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) issued a final rule on fuel economy standards for certain vehicles which, like other regulations at the time, did not include estimates of the social cost of carbon. The final rule stated that the agency had identified a benefit from a significant reduction in carbon dioxide emissions but stated that the dollar value of the benefit could not be determined because of the wide variation in published estimates of the social cost of carbon. In 2008, in response to a challenge from 11 states and several other organizations, the Ninth Circuit held that NHTSA had acted arbitrarily and capriciously by failing to monetize the value of carbon emissions reduction and directed NHTSA to include such a monetized value in an updated regulatory impact analysis for the regulation. The court stated that, “hile the record shows that there is a range of values, the value of carbon emissions reduction is certainly not zero.” Following the court’s decision, the Department of Energy, the Department of Transportation, and EPA incorporated a variety of individually developed estimates of the social cost of carbon into their regulatory analyses. These estimates were derived from academic literature and ranged, in general, from $0 to $159 (in 2006, 2007, or 2008 dollars) per metric ton of carbon dioxide emitted in 2007. They also varied in whether they reflected domestic or global measures of the social cost of carbon.

In early 2009, in part to improve consistency in agencies’ use of social cost of carbon estimates for regulatory impact analysis, OMB’s Office of Information and Regulatory Affairs and the Council of Economic Advisers convened the Interagency Working Group on Social Cost of Carbon. The working group developed interim governmentwide social cost of carbon estimates based on an average of selected estimates published in academic literature. The interim estimates first appeared—and, thus, were first available for public review—in August 2009 in the Department of Energy’s final rule on energy standards for vending machines. Agencies subsequently incorporated the interim estimates into several published regulatory actions that sought public comments to inform the development of final estimates for future use. The middle or “central” value for the range of interim estimates was $19 (in 2006 dollars) per metric ton of carbon dioxide emitted in 2007.

In October 2009, after developing the interim estimates, the working group reassembled to begin developing the final social cost of carbon estimates issued in the Technical Support Document. While the Technical Support Document is dated February 2010, it was first released publicly in March 2010 as an appendix to the Department of Energy’s final rule on energy standards for small electric motors. Subsequently, dozens of published regulatory actions incorporated the estimates. The Technical Support Document states that the working group agreed to regularly update the social cost of carbon estimates as the research underlying the estimates evolves. In June 2013, after using the 2010 estimates in an earlier proposal of the rule, the Department of Energy’s final rule on energy standards for microwaves was the first regulatory action to incorporate the revised estimates developed by the working group in the 2013 update to the Technical Support Document. Table 1 shows the central values for the range of 2010 and 2013 social cost of carbon estimates for carbon emissions occurring in selected years.

Appendix I lists regulatory actions from 2008 to 2014 and the type of social cost of carbon estimates (i.e., individually developed, interim, 2010, or 2013) incorporated in the actions’ regulatory analyses.

Approach Used to Develop Estimates of the Social Cost of Carbon

According to the Technical Support Document and participants we interviewed, the working group consisted of participants representing six EOP offices and six federal agencies and was convened under Executive Order 12866. The working group’s processes and methods for developing the estimates reflected three key principles. Specifically, according to participants, the working group (1) used consensus-based decision making; (2) relied largely on existing academic literature and models, including technical assistance from outside resources; and (3) took steps to disclose limitations and incorporate new information by considering public comments and revising the estimates as updated research became available.

Participating Entities

According to the Technical Support Document and participants we spoke with, OMB and the Council of Economic Advisers convened and led the working group, and four other EOP offices and six federal agencies actively participated in the group. According to several participants, the participating EOP offices included the relevant subject-matter experts to best contribute on behalf of the EOP, and the other participating agencies were those likely to conduct rulemakings affecting carbon emissions and, therefore, use the social cost of carbon estimates in the future. For example, EPA and the Department of Energy have issued numerous rules using the social cost of carbon estimates (see app. I).

OMB staff and EPA officials told us that OMB and the Council of Economic Advisers decided which EOP offices and federal agencies to invite to participate in the working group and, according to participants we interviewed from several agencies, each agency that chose to participate decided which of its internal offices would send representatives. OMB staff stated that any federal agency was welcome to participate in the working group, and EPA officials told us that at least two invited agencies declined to participate. OMB staff recalled that the working group generally included up to several participants from each participating office and agency and numbered approximately two dozen participants in total.

Table 2 lists the 12 participating offices and agencies, along with the internal offices they sent to represent them on the working group.

In establishing the working group, several participants told us that OMB and the Council of Economic Advisers made efforts to ensure that the group’s members, collectively, brought the necessary technical expertise for developing social cost of carbon estimates. For example, according to these participants and EPA documentation, participants from the EOP offices included individuals with expertise in pertinent topics, such as economics and climate science. The former Deputy Assistant Secretary for Environment and Energy at the Department of the Treasury stated that he was invited to participate in the working group because of his prior experience researching ways to discount costs and benefits across generations. In addition, the former Administrator of the Energy Information Administration told us that he was asked to participate, in part, based on his previous experience evaluating climate models while conducting research with the National Academy of Sciences. According to an OMB staff member, the six participating federal agencies were also responsible for ensuring that they provided adequate technical expertise to the working group. Agency representatives included environmental economists and climate scientists, among other key professionals. According to EPA documentation, participants from EPA also provided technical expertise in climate science, economics, and academic modeling to the broader group, as needed.

When the working group reconvened in 2013 to update the estimates, the same EOP offices and agencies generally participated, although some of the individuals participating on behalf of offices or agencies changed, in part due to individuals changing positions or leaving the government altogether. Also, some participants who previously had been serving details at other participating agencies had returned to their home agencies. For example, certain participants who were on detail to the Council of Economic Advisers during the development of the 2010 Technical Support Document instead represented EPA on the working group during the development of the 2013 update.

According to the Technical Support Document, the working group was convened under the broad direction of Executive Order 12866 for agencies to assess the costs and benefits of intended regulations. In addition, participants from several agencies told us that the executive order was the key requirement driving the working group’s effort to develop social cost of carbon estimates. OMB staff stated that, while there is no single requirement or other approach for convening interagency working groups, it is appropriate for OMB to form interagency working groups to collaborate on policy or analytic needs identified under Executive Order 12866. These OMB staff members said that, instead of being organized under a written agreement or other requirements, the working group was an informal interagency working group with no charter or other convening document. According to OMB staff, there was no requirement that the informal working group should document its activities or proceedings, including the meetings held or specific discussions that occurred at each. However, OMB staff and EPA officials stated that all major issues discussed during working group meetings are documented in the Technical Support Document and its 2013 update, which is consistent with the control activities standard in the federal standards for internal control. We have also reported that interagency working groups use a variety of mechanisms to implement interagency collaborative efforts, including temporary working groups, and that not all collaborative arrangements, particularly those that are informal, need to be documented through written guidance and agreements.

Processes and Methods

Participants told us that the working group’s processes and methods reflected three key principles. First, the group used consensus-based decision making. Second, the group relied largely on existing academic literature and models, including technical assistance from outside resources. Third, the group took steps to disclose limitations and incorporate new information by considering public comments and revising the estimates as updated research became available.

Used Consensus-Based Decision Making

All of the participants we spoke with said that the working group used a consensus-based approach for making key decisions on developing the social cost of carbon estimates. Most participants said that the working group’s overall approach was open and collegial, and that participants had many opportunities to make contributions and raise issues for discussion that were important to them.

OMB staff stated that the working group did not assign roles or responsibilities, and many participants told us that different working group participants and agencies volunteered to take responsibility for various aspects of the development of the estimates that fell within their particular areas of expertise. For example, OMB staff stated that, while OMB and the Council of Economic Advisers were the official leaders of the working group meetings, all EOP offices that participated played a large role during the meetings, and discussions were informal. According to these staff and other officials we spoke with, participants could generally choose the extent of their involvement, and all participants’ contributions were considered equally.

According to many participants, the Council of Economic Advisers coordinated drafting the Technical Support Document, including gathering feedback from working group members. Specifically, they told us that, following the meetings, officials from the Council of Economic Advisers summarized the group discussions to include in the latest draft of the Technical Support Document and circulated draft sections of the Technical Support Document for the working group to review. For example, a participant told us that he raised concerns about whether the Technical Support Document provided adequate information on domestic measures of the social cost of carbon. The participant said that, in response to this feedback, the working group decided to include a separate discussion in the Technical Support Document on estimating domestic benefits and costs. The Technical Support Document states that reported domestic effects should be calculated using a range of values from 7 to 23 percent of the global measure of the social cost of carbon, although it cautions that these values are approximate, provisional, and highly speculative due to limited evidence. None of the participants we spoke with expressed concerns about how their contributions were incorporated into the final Technical Support Document. The participants generally stated that they were satisfied that the final Technical Support Document successfully addressed individual comments on the draft version and the overall consensus of the working group and its participating offices and agencies.

Relied on Existing Academic Literature and Models

The Technical Support Document states that the main objective of the working group was to develop a range of estimates of the social cost of carbon using a defensible set of modeling inputs based on existing academic literature. Many participants confirmed that the working group relied largely on existing academic literature and models to develop its estimates. According to the Technical Support Document and many participants we spoke with, the working group calculated its estimates using three models that integrate climate and economic data into a single modeling framework for estimating future economic effects resulting from climate change. In general, each model translates carbon dioxide emissions scenarios into changes in greenhouse gas concentrations in the atmosphere, greenhouse gas concentrations in the atmosphere into temperature changes, and temperature changes into net economic effects (i.e., damages and benefits). However, each model uses its own methods to estimate these effects. The Technical Support Document states that the three models are frequently cited in peer-reviewed literature. They have also been used in climate assessments by the Intergovernmental Panel on Climate Change—an organization within the United Nations that assesses scientific, technical, and economic information on the effects of climate change. In addition, the National Research Council of the National Academies recognized these three models as three of the most widely used models of their kind.

Many participants told us that the working group spent most of its meeting time reviewing and discussing academic literature to help decide on values for three key modeling inputs to run in each model. The key modeling inputs the working group selected were based on data from prevalent research organizations, such as the Stanford Energy Modeling Forum, and reflected the wide uncertainty in the academic literature, according to the Technical Support Document. These inputs were as follows: scenarios for future population and economic growth (i.e., gross domestic product) and carbon dioxide emissions, a measure of the climate’s responsiveness to increased concentrations of greenhouse gases in the atmosphere—known as equilibrium climate sensitivity, and discount rates.

Several participants told us that different meetings focused on different modeling inputs and included technical presentations by participants with expertise in each technical area. For example, due to their previous experience working with the models, EPA officials made presentations on how each model works. OMB staff stated that the technical presentations focused on the academic materials cited in the Technical Support Document, including dozens of peer-reviewed journal articles. They also said that all technical decisions discussed in the Technical Support Document were arrived at by consensus through this process. Several participants said that a significant amount of the group’s discussions focused on selecting discount rates that best reflect the most current academic literature, while also comporting with OMB’s guidance in Circular A-4. The Technical Support Document cites guidance from Circular A-4 in its discussion of many technical topics, including its selection of discount rates. It states that the discount rate (i.e., 3 percent) used to calculate the central value of the social cost of carbon estimates is consistent with Circular A-4 guidance. Some working group participants told us that they recognized the importance of using OMB guidance, including Circular A-4, in developing the Technical Support Document. The Technical Support Document states that the working group decided to calculate estimates for several discount rates (2.5, 3, and 5 percent) because the academic literature shows that the social cost of carbon is highly sensitive to the discount rate chosen, and because no consensus exists on the appropriate rate. It further states that, in light of such uncertainties, the working group determined that these three discount rates reflect reasonable judgments about the appropriate rate to use. Several participants stated that the working group chose this approach to capture varied concerns and interests, including participants’ respective knowledge of the academic literature, on selecting the discount rate.

Once the working group agreed on these modeling inputs, EPA officials supervised their use in running the models to calculate the social cost of carbon estimates. All other model assumptions and features were unchanged by the working group, which weighted each model equally to calculate the final estimates. Several participants stated that an important principle for the leaders of the working group was that the working group reach consensus on the modeling inputs before running the models and agree, in advance, to accept the results based on the inputs selected, whatever the outcome. Through this approach, the working group developed a set of four social cost of carbon estimates for use in regulatory impact analyses. The first three values are based on the average of the estimates produced by all three models and selected modeling inputs at the three discount rates chosen. The fourth value was included to represent higher-than-expected economic impacts from climate change, and it is based on an average of certain values produced by each model at a 3 percent discount rate. To capture uncertainties involved in regulatory impact analysis, the Technical Support Document emphasizes the importance of agencies considering all four estimates when conducting analyses.

According to EPA documentation and several participants, groups from outside the federal government did not participate in the working group, but the working group used some outside resources, specifically technical assistance. As noted in the Technical Support Document, the working group explored technical literature in relevant fields for developing the social cost of carbon estimates. Members of the working group sometimes contacted researchers or developers of key data in an effort to ensure that the working group had a clear understanding of the information and how to use it. For example, according to several participants, members of the working group consulted with lead authors of a chapter on climate sensitivity that appears in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. According to the Technical Support Document, after consulting with the chapter authors, the working group was able to make some decisions to assist with statistical analyses needed to develop the social cost of carbon estimates. Many participants stated that the working group also consulted with the developers of the models used by the group to develop the estimates. For example, EPA officials told us that, while they conducted runs for one model that was readily available to the public, they spent a few days training with the developer of a second model before using it to conduct runs. They also contracted with the developer of a third model to run the model according to the decisions reached by the working group. They stated that they ran all of the 2013 estimates themselves, but that they continued to consult with the model developers to do so.

According to many participants and the 2013 update to the Technical Support Document, the only changes made to the models used for the 2013 revisions were those that the model developers incorporated into the latest versions of the models and that were subsequently used in peer-reviewed academic literature. Specifically, the developers updated the academic models to reflect new scientific information, such as in sea level rise and associated damages, resulting in higher estimates. The working group did not make changes in the modeling inputs that it used for the 2010 estimates. Several participants said that, while the original working group included frequent, hours-long meetings over several months, the working group assembled to discuss the 2013 revisions only met a few times. According to the 2010 Technical Support Document, the working group is committed to updating its estimates as the science and economic understanding of climate change and its impacts on society improve over time.

Took Steps to Disclose Limitations and Incorporate New Information

According to several participants and the Technical Support Document, the working group’s processes and methods took steps to disclose limitations and incorporate new information by considering public comments and revising the estimates as updated economic and scientific research became available. The Technical Support Document discusses several limitations of its estimates and areas that the working group identified as being in particular need of additional exploration and research. For example, it points out that none of the three models accounts for damages from wildlife loss or ocean acidification caused by carbon dioxide emissions. Also, the models cannot completely predict how technology may adapt to warmer temperatures. In addition, according to the Technical Support Document, the models may not fully consider the effects of damages due to potential catastrophic events, such as the melting of Antarctic ice sheets. As a result of such limitations, the models may underestimate damages from increased carbon emissions, according to the Technical Support Document. The Technical Support Document states that, as a result of these limitations, the social cost of carbon estimates should continue to evolve as knowledge is gained, and available models improve. Some of the participating agencies have incorporated discussions of these limitations into regulatory impact analyses using social cost of carbon estimates. For example, in a 2012 rule setting pollution standards for certain power plants, EPA noted that the social cost of carbon estimates are subject to limitations and uncertainties.

Over the years, there have been opportunities for public comment on the various individually developed and working group estimates of the social cost of carbon for regulatory impact analysis, and several participants stated that these estimates were developed with input from the public. Since 2008, agencies have published over three dozen regulatory actions for public comment in the Federal Register that use various social cost of carbon estimates in regulatory impact analyses. While some of them specifically sought comments on the development of the social cost of carbon estimates used, and others did not, these regulatory actions were open to public comment, in general, for approximately 60 days and, according to OMB staff and other participants, agencies received many comments on the estimates through this process. Several participants stated that, while they discussed such public comments during working group meetings, individual agencies typically do not coordinate formally with other agencies on their reviews of comments received. According to the Technical Support Document, the working group convened, in part, to consider public comments on issues related to the social cost of carbon. After considering public comments on the interim values that agencies used in several rules, the working group developed the Technical Support Document, according to these participants and to the Technical Support Document. Several participants told us that the working group decided to revise the estimates for the first time in 2013 after agencies received a number of public comments encouraging revisions because the models used to develop the 2010 estimates had been subsequently updated and used in peer-reviewed academic literature. OMB staff stated that this theme was reflected in several public comments on regulations using the 2010 estimates.

In November 2013, OMB published a request in the Federal Register for public comments on all aspects of the Technical Support Document and its use of the models to develop estimates of the social cost of carbon. The notice stated that OMB is particularly interested in comments on the selection of the models for use in developing the estimates, how the distribution of estimates should be represented in regulatory impact analyses, and the strengths and limitations of the overall approach. OMB staff told us that they decided to issue the request in response to calls for additional transparency, and that they received over 100 unique comments and thousands of identical form-letter comments in response to the request. They said that, since they were still reviewing the comments received, they had not yet decided on steps for responding to them, but that they expect to review them with the working group to determine whether they could inform future updates to the Technical Support Document. OMB staff stated that they have already made most of the comments publicly available online at http://www.regulations.gov/ and that all of the comments would be made available soon.

The Technical Support Document states that the working group would regularly revisit the social cost of carbon estimates as new information becomes available due to improved scientific and economic research. The Technical Support Document set a goal of revisiting the estimates within 2 years, or when substantially updated models become available. Many participants told us that, to revise the estimates in 2013, the working group met only a few times and mostly for participants from EPA to present information about updates made to the models since the group last met in 2010. The updates touched on a variety of issues, including how some models represent damages from sea level rise. The 2013 update to the Technical Support Document states that it acknowledges the continued limitations described in the original Technical Support Document, and that it updates the estimates based on new versions of the underlying models without revisiting the working group’s decisions on modeling inputs. Several participants stated that they reviewed drafts of the 2013 update to the Technical Support Document, but that there was little new information to review because only the models had been updated. In addition to stating that the working group would regularly revisit its estimates, the Technical Support Document states that the working group will continue to support research to improve the estimates and hopes to develop methods to value other greenhouse gases as part of its ongoing work.

Agency Comments

We provided a draft of this report for review and comment to the Departments of Agriculture, Commerce, Energy, Transportation, and the Treasury; EPA; and OMB. Only the Department of the Treasury provided written comments, which we received on July 14, 2014, and are reproduced in appendix II; in its written comments, the Department of the Treasury stated that the draft report does a good job of capturing the interagency process through which the estimates of the social cost of carbon were developed. In oral comments provided on July 15, 2014, OMB staff confirmed that OMB generally agreed with the report findings. OMB staff also provided technical comments, which we incorporated into the report, as appropriate. The Department of Energy and EPA provided technical comments only, which we incorporated into the report, as appropriate. In e-mails received on July 1, July 9, and July 14, 2014, respectively, the liaisons from the Departments of Agriculture, Commerce, and Transportation stated that the departments did not have any comments on the draft report.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees; the Secretaries of Agriculture, Commerce, Energy, Transportation, and the Treasury; the Administrator of EPA; the Director of OMB; and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or gomezj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III.

Appendix I: Regulatory Actions, by Agency and Type of Social Cost of Carbon Estimates Used, 2008-2014

This appendix lists regulatory actions from 2008 to 2014 and the type of social cost of carbon estimates used (i.e., individually developed, interim, 2010, or 2013) in the actions’ regulatory impact analyses. For each regulatory action, table 3 lists the date published in the Federal Register, the agency conducting the action, the name and status of the rule associated with the action, and the action’s citation in the Federal Register.

Appendix II: Comments from the Department of the Treasury

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Janet Frisch (Assistant Director), Elizabeth Beardsley, Stephanie Gaines, Cindy Gilbert, Chad M. Gorman, Tim Guinane, Patricia Moye, Susan Offutt, Alison O’Neill, and Kiki Theodoropoulos made key contributions to this report.