Social Cost of Greenhouse Gases: Issues for Congress

Social Cost of Greenhouse Gases: Issues for Congress

June 7, 2021
Social Cost of Greenhouse Gases: Issues for Congress
On January 20, 2021, President Biden issued Executive
source of uncertainty is discounting, which occurs in the
Order (E.O.) 13990, “Protecting Public Health and the
last step of the SC-GHG calculation.
Environment and Restoring Science to Tackle the Climate
Crisis.” It contains directives to update the social cost of
Discount Rate
greenhouse gases (SC-GHG), a tool that agencies have
Discounting, which is standard practice in benefit-cost
typically used to estimate the benefits of GHG reductions.
analysis, allows for apples-to-apples comparisons of
economic impacts that occur at different times. It helps
SC-GHG estimates have informed decisionmaking on
answer the question about how much future benefits and
federal actions, including GHG-related rules, since 2008.
costs are worth today (“present value”). It adjusts future
Members of Congress have taken divergent views on the
values based on the observation that people usually prefer a
adequacy and use of the SC-GHG. Some Members of
value today compared with the same amount in the
Congress have questioned whether the SC-GHG
future. Higher discount rates give less present value to
methodology was consistent with federal guidance. Others
benefits or costs that accrue in the future, and lower
have raised concerns that the SC-GHG estimates are
discount rates give more present value. Given the long time
outdated and that they underestimated climate benefits. The
horizons analyzed, SC-GHG estimates are highly sensitive
SC-GHG remains a topic of interest in the 117th Congress
to the discount rate.
as the Biden Administration updates the estimates and
implements its climate change directives.
Discount rate selection is particularly challenging in climate
change analyses because GHG emissions remain in the
What Is the Social Cost of Greenhouse
atmosphere for a long time—e.g., hundreds of years—
Gases (SC-GHG)?
which means the GHG impacts span generations of people.
The social cost of a specific GHG is a monetary estimate of
Observed market rates can inform this selection, but current
the economic impacts associated with emitting an
markets do not capture intergenerational rates. There is no
additional ton of that GHG in a given year. Conversely, this
consensus on the appropriate discount rate to choose in
dollar figure represents the benefit of a one-ton reduction.
estimating the SC-GHG.
The social cost of carbon dioxide (SCC) includes net
changes in agricultural productivity, property damage from
Geographic Scope
increased flood risk, and changes in energy system costs,
Another methodological consideration is whether the SC-
such as reduced costs for heating and increased costs for air
GHG should measure global or domestic impacts. While
conditioning. Similarly, the social cost of methane (SCM)
most published estimates of the SC-GHG have measured
and the social cost of nitrous oxide (SCN) estimate the
global impacts, some have called on federal agencies to use
monetary value of impacts from marginal changes in
domestic values in benefit-cost analysis. Those
methane and nitrous oxide, respectively, in a given year.
recommending use of global SC-GHG values have
Each SC-GHG is typically presented as dollars per metric
concluded that there is no clear distinction between
ton of a GHG in a given year. Hereinafter, “SC-GHG”
domestic and global climate change impacts and that a
refers collectively to estimates of the SCC, SCM, and SCN.
domestic SC-GHG understates the benefits to the United
States because climate impacts that occur outside U.S.
How Is the SC-GHG Calculated?
borders may affect the welfare of U.S. citizens and
SC-GHG values are calculated using models that translate
residents. Reciprocity—whether U.S. mitigation policies
changes in emissions into economic impacts through a
motivate other countries to likewise reduce GHGs—may
multistep process. As with any scientific or economic
also justify use of global values, given that reductions (or
analysis, there are limitations and uncertainties associated
increases) by other countries benefit (or harm) those within
with the calculation of the SC-GHG estimates. One
U.S. borders. Others disagree with a focus on global values,
limitation is that the underlying models do not include all
expressing skepticism about the likelihood of complete
potentially significant climate change impacts.
reciprocity and a view that federal analyses should focus on
domestic impacts. These stakeholders also noted that while
The sources of uncertainty associated with the SC-GHG
federal guidance allows consideration of international
estimates include the quantification of the physical effects
impacts, it requires consideration of a domestic perspective.
of GHG emissions (e.g., the way that the models estimate
changes in global average temperature), socioeconomic
How Is the SC-GHG Used?
factors (e.g., population and economic growth), projected
Federal agencies have primarily used the SC-GHG to
GHG emissions, translation of physical and climate impacts
estimate the climate benefits of GHG reductions from
into economic impacts, and the role of adaptation. Another
proposed rules. The social cost of each gas is applied to
changes in that gas (e.g., the SCC is applied to changes in
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carbon dioxide emissions with the proposed rule, and the
The IWG announced a longer-term update of the SC-GHG
SCM is applied to changes in methane emissions). The SC-
and plans to publish results by January 2022. The IWG
GHG has been used to value climate impacts in other
requested comment about how to incorporate the 2017
federal actions, though to a much lesser extent than in
NASEM recommendations and other recent science and
regulatory impact analysis. For example, the Obama
economics into the SC-GHG (86 Federal Register 24669;
Administration used the SCC and SCM to value climate
May 7, 2021), with comments due by June 21, 2021.
change impacts in some assessments under the National
Environmental Policy Act. The General Services
Table 1. IWG Interim SC-GHG Estimates
Administration also used the SCC to value carbon
Dol ars per metric ton for emissions in 2030
emissions associated with a delivery services contract. State
governments and other organizations have used the SC-

Discount Rate, Statistic
GHG in rulemakings and other applications.

5%, Average
3%, Avg
2.5%, Avg
3%, 95th
Prior Federal Actions on SC-GHG
(Avg)
percentile
Federal agencies began to consider various published SC-
SCC
$19
$62
$89
$187
GHG estimates in regulatory analysis in the 2000s. By
2009, the Obama Administration convened an interagency
SCM
$940
$2,000
$2,500
$5,200
working group (IWG) to develop a consistent set of
SCN
$7,800
$23,000
$33,000
$60,000
estimates. The IWG developed a methodology and, in 2010,
published a set of four SCC estimates, which measured the
Source: IWG Technical Support Document (February 2021).
global value of carbon dioxide reductions, for use in
Notes: Estimates are stated in 2020$/metric ton. SC-GHG estimates
regulatory analysis. The first three values were based on the
vary depending on the year of GHG emissions.
average SCC from three integrated assessment models, at
discount rates of 5%, 3%, and 2.5%. The fourth value
E.O. 13990 specifies deadlines by which the IWG is to
corresponded to the 95th percentile of the frequency
develop recommendations in three areas:
distribution of SCC estimates based on a 3% discount rate.
 recommendations for SC-GHG use in decisionmaking,
The IWG updated the SCC estimates in 2013 and published
budgeting, and procurement (by September 1, 2021);
two technical corrections to the estimates in 2015. Agencies
began using the SCM in 2015 and the SCN
 recommendations for a process to review and update
in 2016.
SC-GHG estimates (by June 1, 2022); and
The IWG also requested that the National Academies of
 recommendations for the SC-GHG calculation to
Sciences, Engineering, and Medicine (NASEM) provide
account for climate risk, environmental justice, and
advice on future updates to SCC estimates. The NASEM’s
intergenerational equity (by June 1, 2022).
January 2017 report recommended a different modeling
framework, research needs for each calculation step, and
EPA has estimated the social cost of hydrofluorocarbons
criteria for future SCC updates. It observed that advances
(HFCs), which are potent GHGs used in cooling and other
would “require significant investments in both economic
applications. EPA used a methodology consistent with the
and climate modeling.” The NASEM also recommended
IWG’s interim SC-GHG estimates. It estimated the social
development of a new approach to calculate discount rates,
cost of nine HFCs to inform a rulemaking that begins to
noting that Office of Management and Budget (OMB)
implement legislation phasing down HFCs. The average
Circular A-4 guidance does not adequately address
social cost in 2030, discounted at 3%, ranged from $7,400
discounting over long time periods or the effect of
per ton of HFC-152a to $790,000 per ton of HFC-236f(a).
uncertainty on discount rates.
Issues for Congress
In March 2017, the Trump Administration disbanded the
The Administration’s pending update of the SC-GHG and
IWG and withdrew the IWG’s SC-GHG estimates. It
consideration of additional uses raises questions, such as:
directed agencies to ensure that any new SC-GHG estimates
 What resources will be required to update the SC-GHG?
were consistent with guidance for regulatory analysis in
Should the federal government develop its own models
OMB Circular A-4. The Trump EPA developed a new set
or partner with other researchers/model developers?
of estimates using the same models and assumptions as the
IWG except they were domestic measures and included
 How can the federal government ensure that, over time,
estimates discounted at rates of 3% and 7%. The domestic
the SC-GHG accounts for advances in science and
perspective and use of a 7% rate lowered the SCC estimates
economics while reducing the risk of political volatility
of benefits related to GHG reductions. The Trump
in decisions on SC-GHG estimates and uses?
Administration presented SCC and SCM estimates in

several regulatory analyses.
Should policy deliberations inform SC-GHG estimation
and its applications? Discount rate selection reflects
Current Federal Actions on SC-GHG
implicit policy judgments (e.g., the interests of future
The Biden Administration reestablished the IWG and
generations). Equity considerations may also be relevant
reinstated the Obama Administration’s SC-GHG estimates,
within a generation.
adjusted for inflation. Table 1 presents the interim
Kate C. Shouse, Analyst in Environmental Policy
estimates for 2030. The interim estimates replace the
Trump Administration’s estimates.
IF11844
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Social Cost of Greenhouse Gases: Issues for Congress

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