Social cost of carbon process needs strengthening

Report recommends new framework for estimating the social cost of carbon.

To estimate the social cost of carbon dioxide for use in regulatory impact analyses, the federal government should use a new framework that would strengthen the scientific basis, provide greater transparency and improve characterization of the uncertainties of the estimates, according to a new report by the National Academies of Sciences, Engineering & Medicine.

The report also identifies a number of near- and longer-term improvements that should be made for calculating the social cost of carbon.

The social cost of carbon (SC-CO2) is an estimate, in dollars, of the net damages incurred by society from a 1 metric ton increase in carbon dioxide emissions in a given year. The SC-CO2 is intended to be a comprehensive estimate of the net damages from carbon emissions — that is, the net costs and benefits associated with climate change effects such as changes in net agricultural productivity, risks to human health and damage from such events as floods.

As required by executive orders and a court ruling, government agencies use the SC-CO2 when analyzing the impacts of various regulations, including standards for vehicle emissions and fuel economy, regulation of emissions from power plants and energy efficiency standards for appliances, the National Academies said.

The federal Interagency Working Group on the Social Cost of Greenhouse Gases (IWG) developed in 2010 a methodology to estimate SC-CO2. The National Academies committee that authored the report was charged with examining potential approaches for a comprehensive update to this methodology to ensure that SC-CO2 estimates reflect the best available science. The committee was not asked to estimate a value for the social cost of carbon.

According to the report, IWG’s methodology used three distinct models to estimate the economic consequences of carbon dioxide emissions. First, a baseline of emissions was defined along with projections of underlying socioeconomic factors — global economic growth and population — decades into the future. Then, a small increase in carbon dioxide emissions was added to the baseline for each of the three models, which was translated into an increase in atmospheric carbon dioxide and a resulting increase in global mean temperature. These results were used to estimate potential net damages in dollars, using discounting to convert future damages into present dollars. The final IWG analysis averaged the results from the three models.

The report recommends that IWG “unbundle” this process and instead use a framework in which each step of the SC-CO2 calculation is developed as one of four separate but integrated “modules”: the socioeconomic module, which generates projections of greenhouse gas emissions based on its estimates of population and world economic output; the climate module, which translates changes in emissions into changes in temperature; the damages module, which estimates the net impact of temperature changes in dollar terms, and the discounting module. Data generated by the socioeconomic module would feed into each of the other three modules, and the temperature changes generated by the climate module would inform the damages module. Each module would be developed based on expertise in the relevant scientific disciplines to reflect the most up-to-date research.

The report offers detailed recommendations about how IWG should develop each of the modules and how the proposed framework could include feedbacks between and interactions within the modules.

The current SC-CO2 methodology uses constant discount rates of 2.5%, 3.0% and 5.0%. The report notes that differences in the discount rates have large impacts on the estimates; the SC-CO2 estimates per metric ton emitted in 2020 is $62 using a 2.5% rate, $42 using a 3.0% rate and $12 using the 5.0% rate (in 2007 dollars).

Instead of using fixed discount rates, the discounting module should incorporate the relationship between economic growth and discounting for calculating the rates, which would help account for uncertainty surrounding discount rates over long time periods, the committee said. IWG should clearly state how the SC-CO2 estimates should be combined with other types of cost-benefit estimates in regulatory impact analyses, the report says.

Efforts by IWG to estimate SC-CO2 focus primarily on total global damages because the impacts of carbon dioxide emissions are global regardless of where they originate. While estimating net damages per ton of carbon dioxide emissions to the U.S. alone is “feasible in principle,” the report says, these efforts are limited by existing SC-CO2 methodologies. Thorough estimates of U.S.-specific damages would need to consider how climate change and carbon dioxide reductions in other parts of the world could also affect the U.S. — for example, through increased migration because of economic or political destabilization, and through reciprocal actions by other countries in response to U.S. emission reductions.

IWG should update SC-CO2 roughly every five years following a regular, three-step process, the report says. This process will ensure that for each update, the components of each module, module feedbacks and interactions and the SC-CO2 framework itself are consistent with the current state of scientific knowledge as reflected in peer-reviewed literature.

Copies of "Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide" are available at www.nap.edu.

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