In response to public comments, the Interagency Working Group (IWG) and Office of Management and Budget (OMB) have slightly
reduced the estimate for the social cost of carbon (SCC) used by federal agencies for the years 2010-2050. Under the new calculations, the value of a metric ton of CO2 that will be used by most federal agencies to evaluate their actions has been reduced from $37 to $36 per
for 2015. OMB reports that this adjustment is in response to “some minor technical revisions to the SCC.” While the IWG did not discuss the impact of this change, the minor decrease is unlikely to have significant impacts on most projects; it could, however, lower the estimated value of regulations like the
Clean Power Plan that will greatly decrease Greenhouse Gas emissions. The IWG also responded to a number of public comments on its updated figures.
Economists have developed the SCC tool over the past two decades in an attempt to quantify the global costs associated with incremental changes in GHG emissions on a macro-level. In theory, an SCC model could capture all of the changes, both positive and negative, that each
additional unit of CO2 would have on various regions of the globe and result in a single resulting monetary value for the impact of that unit of emissions. For more background on the SCC, please see this
In 1993, President Clinton issued
Executive Order 12866, which requires federal agencies, to the extent permitted by law, “to assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a
regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” By 2008, federal agencies had begun using SCC as part of their cost-benefit analysis. Originally, these agencies relied on differing models and estimates to assess SCC. These estimates ranged anywhere
from approximately $0-150/ton CO2.
In 2010, the IWG released a report which created a uniform SCC value for federal agencies to use in assessing the impacts of their actions. The stated purpose of the SCC value was to “incorporate the social benefits from reducing carbon dioxide emissions into cost-benefit analyses of regulatory actions that have
small, or ‘marginal,’ impacts on cumulative global emissions.” The IWG revised its report in 2013, increasing the SCC estimates at the various discount rates for 2020 from $7, $26, $42 to $81 to $12, $43, $65, and $129/ton CO2 (in 2007 dollars) depending on the discount rate applied. For practical purposes, this meant federal agencies were
valuing the SCC at about
$37/ton CO2 for 2015, which was
based on a 3 percent discount rate. OMB
explained that these upward adjustments in the estimates reflect changes in the three models’ (known as IAMs) underlying the calculation of the SCC. The IWG’s explanation of its key changes in these models are summarized below.
Chart produced by the IWG
OBM sought public comments on this revised 2013 report. In response it received “about 150 substantive comments, some quite lengthy and technical, as well as about 39,000 form letters that expressed support for [OMB’s] efforts to establish a harmonized SCC.”
in SCC could impact the estimated value of air emission programs
In a July 2, 2015 post on OMB’s website, Office of Information and Regulatory Affairs Administrator Howard Shelanski and Maurice Obstfeld, a member of the Council of Economic Advisers, reaffirmed their support for the use of SCC as a tool for measuring the costs associate with
climate change. The post linked to the IWG’s
technical document for the 2013 report, which has been updated to include the new figures that agencies will use to calculate the SCC for various actions for 2010-2050. The OMB post describes the rate adjustment as a response to “some minor technical
revisions to the SCC.” The rate changes, which are summarized in the charts below, average about $1-2 (depending on the year) at the 3% discount rate employed by federal agencies.
While neither the OMB nor the IWG discussed the impact of this modification, the slight decrease is unlikely to have much effect on the valuation for most projects, because an individual project is unlikely to have GHG emissions on a magnitude where a single $1/ton of CO2 with materially
impact the costs and benefits of the project. However, federal agencies also use the IWG’s SCC calculation to determine the costs and benefits of their regulatory programs. For regulatory programs like the EPA’s proposed
Clean Power Plan, which will cut GHG emissions from domestic power plants by and estimated
30 percent, this small decrease in the cost per ton of CO2 could dramatically reduce the estimated current benefits of implementing the Plan. The IWG charts below summarize the new figures at different discount rates (shown in the first chart), followed by the
previous 2013 discount rates (in the second chart).
Previous 2013 IWG figures
Charts produced by the IWG
Responses to Public Comments
The IWG divided the comment it received into nine major categories and published a detailed
response to each category.
1. Choice of Integrated Assessment Models
and Damage Functions
2. Climate Science
3. Socio Economic and Emissions Scenarios
4. Discount Rates
5. Aggregation of Results and Selection of
6. Use of Global vs. Domestic SCC
7. Consideration of Uncertainty
8. Use of Global vs. Domestic SCC
9. Process by which the SCC Estimates were
The IWG reaffirmed the decision to use an amalgamation of three IAMs (DICE, FUND, and PAGE) to calculate the SCC, explaining that they are the most widely used and widely cited models in the economic literature that link physical impacts to economic damages for the purposes of estimating
the SCC. While the IWG recognizes that none of the three IAMs “fully incorporates all climate change impacts, either positive or negative,” the IWG has decided to “accept the models as currently constituted, and omitted any damages or beneficial effects that the model developers themselves do not
include.” IWG also argued that “[u]sing three models rather than one helps address, but does not eliminate, uncertainty associated with model choice.”
The IWG also noted that there is further room for improvement in the calculation of the SCC, explaining that the 2013 revision to the SCC figures was “limited in scope to those improvements available in more recent versions of the IAMs. As such, there remain additional opportunities for
technical improvements to the SCC estimates that should be considered for future updates.”
The commenters were also divided on whether it is appropriate for the SCC to take into account climate change damages experienced outside U.S. borders, given its use in domestic regulatory analysis. Critics of the IWG’s approach of including global costs argue that the use of a global figure
may overstate the net benefits to the U.S. of reducing emissions, because global benefits are compared to domestic costs.
The IWG concluded that a focus on global SCC estimates is appropriate because “greenhouse gases contribute to damages around the world’s economies are now highly interconnected.” The IWG also argued that if all countries set policies based only on the domestic costs and benefits of carbon emissions, it
would lead to an economically inefficient level of emissions reductions because each country would be underestimating the full value of its own reductions. According to the response, the IWG “believes that accounting for global benefits can encourage reciprocal action by other nations, leading ultimately to
international cooperation that increases both global and U.S. net benefits relative to what could be achieved if each nation considered only its own domestic costs and benefits when determining its climate policies.”
The IWG’s responses to public comments suggest that it is open to continuing to modify the figures and models used for its SCC estimates. The IWG’s responses suggest, however, that it continues to firmly support many of the more
controversial aspects of its method for determining the appropriate SCC to use for federal regulatory analysis. Decreasing the SCC by single dollar per ton/CO2 is unlikely to impact the cost benefit analysis for most individual projects, but could decrease the estimated value of large regulatory programs
designed to limit GHG emissions.
Posted by Corinne Snow
at 07/14/2015 10:00 AM