Social Costs of Carbon/Greenhouse Gases: Issues for Congress

Social Costs of Carbon/Greenhouse Gases: Issues for Congress

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Updated September 24, 2017
Social Costs of Carbon/Greenhouse Gases: Issues for Congress
On March 28, 2017, President Trump issued Executive
 Will there be a process to develop new SC-GHG,
Order 13783, “Promoting Energy Independence and
including the improvements recommended by a 2017
Economic Growth.” It states that “it is essential that
panel of the National Academies of Sciences (NAS)? If
agencies use estimates of costs and benefits in their
so, what resources will be required to develop new SC-
regulatory analyses that are based on the best available
GHG, and will Congress appropriate them?
science and economics.” His order then effectively
 Without the withdrawn SC-GHG, how and at what cost
withdrew the federal “social costs of greenhouse gases”
will agencies meet continuing requirements for climate
(SC-GHG), a tool to monetize the climate-related benefits
benefit (or damage) analyses? Will agencies be required
of federal regulations and programs that would reduce GHG
to execute the complex physical and economic modeling
emissions. The withdrawn SC-GHG could also have been
potentially necessary to estimate benefits for each rule
used to estimate the climate-related costs of revising or
or to defend in litigation a decision not to do so?
rescinding regulations that would increase GHG emissions.
 Are some aspects of applying the SC-GHG best settled
through public policy deliberation because they reflect
Executive Order 12866, issued in 1993 by President
balancing diverse and difficult trade-offs (e.g., how to
Clinton, required most agencies to consider the costs and
value the risks to future generations)?
benefits of economically significant rules and to ensure that
the benefits of each rule justify the costs. A 2008 federal
Previous Uses of the SC-GHG
appeals court ruled that, despite acknowledged uncertainty,
The SC-GHG are factors (Table 1 for CO2) estimating
federal agencies must monetize climate-related benefits in
climate-related net losses in dollars per metric ton of GHG
their regulatory impact analyses. To comply, agencies used
emissions. The SC-GHG factors can be multiplied by the
their own, varying estimates of the “social costs of carbon”
projected tons of emissions avoided in a year to provide
(SCC or SC-CO2) from 2008 to 2010. Since 2010, agencies
monetary estimates of the climate-related benefits (i.e., by
have used interagency-recommended values. The
avoiding losses) of a regulation, program, or project. For
interagency process improved the methods for estimating
example, avoiding 1 million tons of CO2 emissions in 2020,
SC-CO2 values, increased the consistency of their use
at $42/ton, would yield estimated benefits of $42 million in
across rules, treated uncertainty more extensively than
present values. Since 2010, the SC-GHG have been applied
typical in benefits analyses, and dramatically reduced
in more than 75 final rulemakings. Reviews suggest that
agency costs compared with reconstructing full benefits
monetized GHG benefits have not driven regulatory
analysis for each rule. Agencies began using social costs of
stringency except perhaps in a few decisions.
methane (SC-CH4) in 2015 and of nitrous oxide (SC-N2O)
in 2016. “SC-GHG” refers to these estimates collectively.
Judicial Rulings on Uses of the SC-GHG
Courts have focused on an agency’s justification (or lack
President Trump’s executive order withdraws the technical
thereof) regarding the use of the SC-CO2 values in its
analyses that documented and recommended SC-GHG
rulemaking or environmental review. In 2008, the U.S
values and disbands the interagency group that developed
Court of Appeals for the Ninth Circuit in Center for
them. It also requires agencies to ensure, as permitted by
Biological Diversity v. National Highway Traffic Safety
law, that monetization of benefits due to changes in GHG
Administration (NHTSA) held that NHTSA’s refusal to
emissions are consistent with 2003 guidance of the Office
monetize the value of avoiding CO2 emissions in its cost-
of Management and Budget (OMB), particularly regarding
benefit analysis of vehicle efficiency standards was
appropriate “discount rates” (see text box) and whether to
arbitrary and capricious. The court rejected NHTSA’s
count global or only domestic damages associated with U.S.
argument that the values were too uncertain, concluding
emissions.
that “while the record shows there is a range of values [for
the SC-CO2], the value of carbon emissions reduction is
Issues for Congress
certainly not zero.” In August 2016, the Seventh Circuit
Members of Congress have taken divergent views on the
court in Zero Zone, Inc. v. Department of Energy upheld the
adequacy and application of the SC-GHG. With the values
use of the SC-CO2 in a federal cost-benefit analysis. This
withdrawn, a new set of issues arises:
followed a 2014 district court decision, High Country
Conservation Advocates v. U.S. Forest Service, that vacated
 Should the SC-GHG substitute for or complement a full
the Bureau of Land Management’s approval of a coal
description of benefits over decades to centuries,
exploration plan for failure to justify why the SC-CO2 was
identifying potential disparate damages and gains—
not used in its environmental review. In contrast, in April
some of which could be irreversible and/or
2016, in EarthReports, Inc. v. Federal Energy Regulatory
catastrophic—accruing to different populations? Is
Commission, the D.C. Circuit Court upheld an agency’s
global climate change like other regulatory challenges?
decision not to quantify potential GHG impacts in an
environmental review under the National Environmental
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Policy Act. The agency justified its decision by claiming
benefits to the United States—not worldwide—should
the values to be “inadequately inaccurate” to use.
count when the costs would be borne by U.S. entities. Some
Withdrawal of the SC-GHG technical support documents
believe that climate is not as sensitive to GHG emissions as
does not eliminate requirements for agencies to estimate
the IWG assumed and that the models estimating damages
climate damages in their cost-benefit analyses.
are not well based in empirical research. Some contend that
the analysis should have used a 7% discount rate (see text
Table 1. August 2016 Revision of the SC-CO2
box) reflecting private opportunity costs.
in 2007 dollars per metric ton CO2
Other commenters argue that the models likely
At Alternative Discount Rates
underestimate the potential damages. They identify some
expected damages that were not counted, such as ocean
Year of
5%
3%
2.5%
3%
acidification, air pollution, and loss of cultural values. They
Emissions Avg Avg Avg
95th
also suggest that the models overestimate potential gains of
climate change due to carbon fertilization effects and
2015
11
36
56
105
agricultural productivity. Some contend that potential
2020
12
42
62
123
catastrophic damages were incompletely included. Some
comment that the focus on global benefits was correct for
2025
14
46
68
138
economic and international cooperation reasons. Some
recommend that agencies use not the mean value of the SC-
2030
16
50
73
152
CO2 but a more risk-averse value, such as the 95th
percentile (Table 1). Some recommend use of discount
Source: Partial table from Interagency Working Group on the Social
rates as low as 1% to be consistent with the
Costs of Carbon, “Technical Update of the Social Cost of Carbon for
intergenerational character of climate change as well as the
Regulatory Impact Analysis Under Executive Order 12866,” May
2003 guidance of OMB.
2013, revised August 2016.
Notes: “Avg” is the mean of 150,000 model runs representing
Despite the shortcomings of the withdrawn SC-CO2 values,
uncertainties in some assumptions. “95th” is the fifth highest
it is not apparent whether the factors under- or over-
percentile of damages among all the runs. It shows a value for
estimated the “true” (but unknown) damages of GHGs.
decisionmakers who may be strongly averse to risks of low-
likelihood, catastrophic change.
Independent Reviews and Recommendations
Several independent, formal reviews have examined the
Future Benefits and Discount Rates
IWG’s SC-CO2. A 2014 review by the Government
Regulatory Impact Analyses typically simplify comparison of costs
Accountability Office found that the IWG’s processes
and benefits by valuing the streams of future costs and benefits as
reflected consensus-based decisionmaking, existing
“present values.” One debate involves how, in calculating present
academic literature and models, and disclosure of
values, to reflect society’s valuation of future benefits compared
limitations. Two NAS panels recommended improvements
with values today. Economists use “discount rates” for these
to the scientific basis for the estimates, characterization of
calculations. Higher discount rates give less present value than
uncertainties, and transparency. The 2017 NAS panel
lower discount rates to benefits or costs that accrue in the
recommended a different structure for modeling, updating
future. For climate change, this debate has especially strong
the formulations for damages, and a new approach to
implications, because many of the benefits of GHG mitigation
discount rates that explicitly reflects uncertainties in
would occur generations after the year of emission control.
economic growth and damages. The panel noted that
advances would “require significant investments in both
The IWG debated the appropriate discount rates for the SC-CO2
economic and climate modeling” (particularly relating to
and used three (Table 1). The IWG estimated that an approach
climate damages) and socio-economic and emission
relying on long-term Treasury notes after tax would be about
projections. The panel recommended research to support
2.7%, roughly consistent with OMB’s recommendation in 2003 of
quinquennial updates.
3% as the “consumption rate of interest.” It did not support a 7%
rate, advocated by some stakeholders as approximating (in 2004)
For further information, see:
the marginal pretax rate of return on private investment. Nor did
it recommend lower discount rates advocated by those who
CRS Report R41974, Cost-Benefit and Other Analysis
would more heavily weigh the impacts to future generations.
Requirements in the Rulemaking Process, coordinated by
Maeve P. Carey.
Varied Perspectives on the SC-CO2 Values
CRS Report R44657, Federal Citations to the Social Cost
Public comments on the recommended SC-CO2 values
of Greenhouse Gases, by Jane A. Leggett.
diverge widely. Most reflect on the scope and methods to
calculate the values, while some address how the values
CRS Legal Sidebar WSLG1684, Courts Evaluate How
should (or should not) be used.
Federal Agencies Put a Price on Carbon, by Linda Tsang.
Some commenters argue that some potential benefits of
Jane A. Leggett, Specialist in Energy and Environmental
CO
Policy
2 emissions, such as plant photosynthesis, have not been
fully tallied by the models used. Some argue that only
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Social Costs of Carbon/Greenhouse Gases: Issues for Congress

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