While cost-benefit analysis has been a part of rulemaking analysis for federal agencies since the early days of the Reagan Administration,1 federal agencies have only recently begun incorporating climate change impacts into their analyses. The preferred measure for incorporating climate change into regulatory cost-benefit analysis is the social cost of carbon (SCC)—the monetized damages associated with an incremental increase in emissions of a particular GHG in a given year, discounted to a present value.2
The determination of a "price" for environmental goods and services that do not have a market value is subject to uncertainties.3 Even for environmental goods whose benefits can all be experienced today, economic analyses often struggle to comprehend and monetize all of the benefits of the relevant ecosystems and the services they provide. For example, a cost benefit analysis seeking to quantify the benefits of wetland ecosystems would need to place a price on water filtration, flood protection, breeding habitat, and carbon sequestration functions served by wetlands and potentially many other ecosystem functions that are not yet fully understood. These challenges become even more pronounced when principles of cost-benefit analysis are applied to climate change, as the timing and magnitude of predicted climate changes and their resulting impacts remains uncertain. As a result of these inherent challenges, there have been numerous attempts to estimate the social cost of carbon that have produced widely varying numbers.4
This article focuses on the SCC values for carbon dioxide (CO2) currently used in federal rulemaking and examines applications of the SCC. To date, it appears that though federal agencies consider the SCC as part of their regulatory cost-benefit assessment, the SCC itself is considered too uncertain to serve as the basis of a definitive cost benefit analysis. However, recent Environmental Protection Agency actions have shown a potential willingness to stretch the SCC to non-CO2 greenhouse gases (GHGs) as a means of providing rough estimates of the benefits of federal rules that reduce GHG emissions, suggesting that its use may become more widespread.
Preliminary Government Attempts to Quantify the Social Cost of Carbon
In the context of contemporary rulemaking with cost-benefit analysis, federal regulations are considered to be economically efficient when the costs of regulatory compliance are less than the benefits to society resulting from the regulation.5 Under a pure cost-benefit analysis, all of the costs and all of the benefits would be assigned a dollar value. In the context of environmental regulation, however, regulators are often faced with imperfect information that makes it difficult to place a dollar value upon the benefits under consideration. For example, regulation of conventional air pollutants may require that federal agencies place monetary values upon benefits such as number of cases of asthma, avoidance of premature death, ecosystem health, and survival of plant or animal species. Though each of these certainly has some sort of a "value," reducing the value to a specific dollar figure is an exercise in abstraction. Recognizing this, many federal regulatory actions to protect public health and environmental quality eschew a full cost-benefit analysis, finding that some benefits are not quantifiable.7
The challenges of benefit quantification are amplified for GHGs where the specific harms averted by reducing GHG emissions are both uncertain and remote in time. For example, increased GHG concentrations may adversely affect agricultural productivity and human health, and may lead to increased property damages from flooding, economic dislocation, and the loss of ecosystem services.8 Because global climate models cannot predict with certainty where, when, and to what extent these impacts will be felt,9 precisely quantifying the benefits of avoiding them is difficult. The SCC attempts to capture these benefits in the cost-benefit equation by adding the SCC to the benefits side. The SCC is intended to serve as a shadow value,10 or the maximum price society would be willing to pay now, to avoid the set of future economic damages projected to arise from an incremental increase in GHGs. This shadow value is anything but clear. The initial attempts of several federal agencies to quantify SCC in recent years, as discussed below, illustrate this.
By Executive Order 12,866, federal agencies must "assess both the costs and the benefits of an 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."11 When that 1993 Executive Order was issued, however, costbenefit analysis for environmental issues was still in its infancy.
Indeed, much of the development and refinement in cost-benefit analyses for environmental resources has emerged in response to the unique challenges posed by environmental problems and environmental policy.12 Federal agencies, for example, did not routinely consider the costs or benefits of GHGs in regulations for years. That began to change around 2008. One important event was the Ninth Circuit's 2008 decision in Center for Biological Diversity v. National Highway Traffic Safety Administration.13 There, the plaintiffs challenged the Department of Transportation's costbenefit analysis supporting its corporate average fuel economy (CAFE) standards for light trucks. The Ninth Circuit disagreed with plaintiffs that a particular statute precluded the agency from conducting a cost-benefit analysis,14 but it agreed with plaintiffs that if the agency undertook a cost benefit analysis, it must consider the benefits that would result from a reduction in carbon emissions. Specifically, the court found that the Department had not tried, either quantitatively or qualitatively, to measure the benefits from a reduction in carbon emissions that would occur under the regulation, despite measuring the regulation's costs in the form of impacts to manufacturer employment and sales.15 The court held that if the agency did a cost-benefit analysis, it could not "put a thumb on the scale by undervaluing the benefits and overvaluing the costs of more stringent standards."16 The court found the agency's failure to evaluate benefits from carbon emission reductions arbitrary and capricious, and it remanded the matter to the agency to conduct the proper analysis.
Soon thereafter, a number of agency rulemaking proceedings sought to include "reasoned determinations" for SCC,18 but these early agency attempts at estimating the SCC were disjointed, uncoordinated, and inconsistent. Two examples are illustrative. A 2008 Department of Energy rule regarding air conditioner and heat pumps assigned a range of $0 to $20 per ton of CO2 emissions for effects within the United States.19 By contrast, the Department of Transportation's final rule in early 2009 for the 2011 Model Year CAFE regulations provided separate SCC values to measure domestic effects ($2) and global effects ($33), with a "high estimate" global value that was one standard deviation above the mean value ($80).20 In addition, agencies who considered SCC frequently declined to include their estimates as a line item on the cost-benefit balance sheet.21 In other words, they presented the possible estimates but left them as "non-monetized" benefits in the final calculation.
The Interagency Working Group on Social Cost of Carbon
In light of the inconsistencies in preliminary government agency attempts to quantify SCC, in 2009 the Obama Administration's Council of Economic Advisers and the Office of Management and Budget convened an Interagency Working Group on Social Cost of Carbon (IWG)22 to "develop a range of SCC values using a defensible set of input assumptions that are grounded in existing literature."23 In February 2010, the IWG released a final report providing four SCC values for a single ton of CO2 for each year from 2010 to 2050.24 The first three values are derived from SCC values calculated by three models employed by the IWG at discount rates of 2.5%, 3%, and 5%.25 The fourth value "represents the 95th percentile SCC estimate across all three models at a 3% discount rate," and was "included to represent higher-than-expected impacts from temperature change further out in the tails of the SCC distribution," i.e., a number to serve as a worst-case scenario.26 Table 1 presents the IWG's projected values for SCC for four selected discount rates.
The IWG calculated these estimates using three integrated assessment models, each of which was weighted equally.28 Each model "translates emissions into changes in atmospheric greenhouse concentrations, atmospheric concentrations into changes in temperature, and changes in temperature into economic damages."29 According to the IWG, the three models it considered are frequently cited in peer-reviewed literature and have been used in Intergovernmental Panel on Climate Change assessments.30 The IWG selected several data sets for four key input parameters to run in each model. The four input parameters are (1) equilibrium climate sensitivity,31 (2) projected trajectories of key socio-economic statistics, such as global gross domestic product and population, (3) projected CO2 emissions trajectories, and (4) discount rates. All other model assumptions and features were unchanged. Because both the input parameters selected by the IWG and components of the underlying models required certain subjective decisions, critics of the SCC have focused upon both the assumptions made by the IWG in selecting input parameters and those implicit in the underlying models.33
Moreover, the IWG forthrightly pointed out several additional key limitations of its estimates and "several areas in particular need of additional exploration and research."34 For example, none of the three models account for damages from ocean acidification from CO2 emissions or species and wildlife loss.35 None of the models consider damages in the event global temperature increases are significantly higher than current prevailing projections, and they are unable to completely predict how humans and human technology may adapt to warmer temperatures.36 Furthermore, the models do not consider the effects of theorized catastrophic impacts of climate change, such as the collapse of the Atlantic Meridional Overturning Circulation, the melting of the West Antarctic Ice Sheet, or large releases of the potent GHG methane from melting artic permafrost.37 Accordingly, the IWG stated that SCC estimates used for federal regulatory analysis should continue to evolve as knowledge is gained and the available models improve.38
Notably, the IWG did not attempt in its February 2010 report to estimate SCC values for GHGs other than CO2, such as methane.39 The IWG also opted not to convert the CO2 SCC values into values for other GHGs using a "CO2 equivalent" method based on the other GHGs' respective global warming potentials. According to the IWG, such a simple conversion would fail to account for key differences in the ways the various GHGs affect the climate. For example, CO2 has a much longer lifetime in the atmosphere than methane, and CO2 results in some positive impacts from plant fertilization, unlike the other GHGs. The IWG, however, stated that it "hopes to develop methods to value these other [GHGs]" as part of its ongoing work.40
Applying the Social Cost of Carbon in the Federal Rulemaking Process
Since the IWG released its report in February 2010, several federal agencies have used the group's CO2 SCC estimates in rulemaking cost-benefit analyses in some fashion. Two recent EPA final rules illustrate remaining limitations of the IWG estimates and potential problems with their use in rulemaking.
On February 16, 2012, EPA finalized its much anticipated and controversial National Emissions Standards for Hazardous Air Pollutants (NESHAPs) for coal- and oil-fired electric utility steam generating units, also known as the Mercury and Air Toxics Standards (MATS).41 As its name implies, the rule is aimed at reducing emissions of mercury and other air toxics from coal- and oil-fired electric generation plants, but EPA estimated that the controls required by the rule will also reduce CO2 emissions by 23 million metric tons per year.42 In the cost benefit analysis justifying the rule, EPA included monetized climate co-benefits from CO2 emissions reductions of $360 million, calculated based on the IWG SCC estimates.43 EPA noted, however, that the SCC estimates were subject to "[i]mportant limitations and uncertainties."44 For this particular rule, the estimated climate benefits were two orders of magnitude smaller than the estimated health benefits from reductions in particulate matter emissions, which were estimated at around $36 billion.45 Therefore, the climate co-benefits were not the deciding factor in the cost-benefit analysis. Several other recent federal rulemakings have similarly included estimates of monetized climate benefits from CO2 reductions where they were not dispositive in the cost-benefit analysis because they were substantially smaller than other estimated benefits.46 Although not the deciding factor in these instances, it is nevertheless remarkable that agencies are purporting to make policy decisions based, at least in part, on estimates that are admittedly speculative and constrained.
More recently, on April 17, 2012, EPA released final New Source Performance Standards and NESHAPs for air emissions from the oil and gas industry.47 These rules target volatile organic compound and air toxics emissions, but EPA projected that they will also result in a reduction of over one million tons of methane per year beginning in 2015 as a co-benefit.48 EPA used a global warming potential approach to convert the IWG's CO2 SCC values into SCC estimates per ton of methane. Using this approach, EPA estimated the 2015 climate co-benefits to range from about $100 million to approximately $1.3 billion, with a central value at the 3% discount rate of approximately $440 million.49 EPA, however, acknowledged "the uncertainties involved with" converting CO2 SCC values into methane SCC values using the global warming potential approach and, accordingly, chose "not to compare [the climate] co-benefit estimates to the costs of the rule for this proposal."50 In other words, EPA did not include the monetized climate co-benefits as a line item in its overall cost-benefit analysis, but nevertheless calculated numerical SCC values and vaguely asserted that the climate co-benefits provide additional justification for the regulations. Until the IWG is able to develop SCC estimates for additional GHGs, EPA and other agencies will likely employ similar tactics in their cost-benefit analyses for rules that will reduce emissions of non-CO2 GHGs.
Agency consideration of GHGs is a relatively recent phenomenon, and it is no surprise that given uncertainty about the interactions between GHG emissions, temperature changes, climate effects, and economic effects, estimation of the social cost of carbon remain difficult. Despite this uncertainty, agencies are likely to continue to adopt the IWG's suggested values in their rulemaking procedures.
1 See Exec. Order 12,291, 46 Fed. Reg. 13,193, 13,194 (Feb. 19, 1981).
2 Interagency Working Group on Social Cost of Carbon, U.S. Gov't, Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis Under Executive Order 12866, 2 (Feb. 2010), available at http://www.epa.gov/oms/climate/regulations/ scc-tsd.pdf [hereinafter IWG Report].
3 See National Center for Environmental Economics, Environmental Protection Agency, Guidelines for Preparing Economic Analyses at 4-17, 8-12 (Dec. 17, 2010), available at http://yosemite.epa.gov/ee/epa/eerm.nsf/vwAN/EE-0568-50.pdf/$file/EE- 0568-50.pdf .
4 See, e.g., Richard S. J. Tol, The Social Cost of Carbon: Trends, Outliers, and Catastrophes, Economics—the Open-Access, Open-Assessment E-Journal (2008), available at http://www.economics-ejournal.org/economics/journalarticles/2008-25/ version_1/count
5 See Exec. Order 13,563, 76 Fed. Reg. 3821, 3821 (Jan. 21, 2011); Exec. Order 12,866, 58 Fed. Reg. 51,735, 51,736 (Oct. 4, 1993).
6 A recent EPA periodic report on the benefits and costs of the Clean Air Act, as required under the statute, illustrates how the agency incorporates values for several of these benefits. The EPA calculated the benefits of avoided cases of health effects stemming from air pollution, including premature mortality, heart disease, and respiratory illness, primarily from reduced exposure to fine particulate matter and ozone. See generally EPA, The Benefits and Costs for the Clean Air Act from 1990 to 2010 at ch. 5 (March 2011), available at http://www.epa.gov/air/sect812/ feb11/fullreport.pdf . The EPA also calculated the benefits to ecological systems, such as plant growth, reduced exposure to corrosive air pollutants, and water body acidification. See generally id. at ch. 6.
7 See EPA, Guidelines for Preparing Economic Analyses, supra note 3, at 11-3
8 See IWG Report, supra note 2, at 2.
9 See Intergovernmental Panel on Climate Change, Climate Change 2007: Synthesis Report 72 (2007), available at http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ ar4_syr.pdf .
10 See Charles Griffiths et al. Estimating the "Social Cost of Carbon" for Regulatory Impact Analysis (Nov. 8, 2010), available at http://www.rff.org/Publications/WPC/ Pages/Estimating-the-Social-Cost-of-Carbon-for-Regulatory-Impact-Analysis.aspx .
11 Exec. Order 12,866, 58 Fed. Reg. at 51,736.
12 See generally, Organisation for Economic Co-operation and Development, Cost- Benefit Analysis and the Environment: Recent Developments (2006).
13 538 F.3d 1172 (9th Cir. 2008).
14 Id. at 1197.
16 Id. at 1198.
17 See id. at 1201-03.
18 See, e.g., Regulating Greenhouse Gas Emissions Under the Clean Air Act, 73 Fed. Reg. 44,354, 44,446 (July 30, 2008) (EPA notice of proposed rulemaking); Commercial Standard Sized Packed Terminal Air Conditioners and Packed Terminal Heat Pumps, 73 Fed. Reg. 58,772, 58,813-14 (Oct. 7, 2008) (Department of Energy final rule).
19 Commercial Standard Sized Packed Terminal Air Conditioners and Packed Terminal Heat Pumps, 73 Fed. Reg. 58,772, 58,814 (Oct. 7, 2008). The Department of Energy recognized that the "domestic effects" of CO2 reductions would be less than effects from the same reduction measured globally but opted to use only the domestic values in its analysis. Id. at 58,813.
20 Average Fuel Economy Standards Passenger Cars and Light Trucks Model Year 2011, 74 Fed. Reg. 14,196, 14,204, 14,346 (Mar. 30, 2009).
21 See Jonathan S. Masur & Eric A. Posner, Climate Regulation and the Limits of Cost- Benefit Analysis, 99 Cal. L. Rev. 1557, 1560-61 (2011).
22 IWG Report, supra note 2, at 3. The IWG Report made its debut as Appendix 15A to a Department of Energy final rule in March 2010 on energy conservation standards for small electric motors. See 75 Fed. Reg. 10,874, 10,909 (Mar. 9, 2010).
23 Id. at 3.
24 Id. at 39 (Table A-1).
25 Id. at 1. The discount rate affects the SCC because it reduces the value of future benefits; therefore, the higher this discount rate is, the lower the value that will be placed on avoided future harms from climate change. In some ways, the choice of discount rate dominates the analysis due to the very long time periods that the SCC analysis attempts to capture. The IWG chose to use three different discount rates, and not the 3% and 7% discount rates traditionally used by agencies, to address disagreement in the literature about intergenerational effects, uncertainty, and other challenges inherent in the SCC analysis. See id. at 23.
27 See id. at 28 (Table 4).
28 The three models are the FUND model, DICE model, and PAGE model. See IWG Report, supra note 2, at 5-8.
29 Id. at 5.
31 Equilibrium climate sensitivity is defined as "the long-term increase in the annual global average surface temperature from a doubling of atmospheric CO2 concentrations relative to preindustrial levels (or stabilization at a concentration of approximately 550 parts per million (ppm))." Id. at 12.
32 Id. at 6.
33 See, e.g., Masur & Posner, supra note 21, at 1580-87; Frank Ackerman & Elizabeth A. Stanton, The Social Cost of Carbon, 53 Real-World Economics Review 129, 134-41 (June 26, 2010).
34 IWG Report, supra note 2, at 29.
36 Id. at 30.
37 Id. at 29, 31-33.
38 Id. at 33.
39 Id. at 12.
41 77 Fed. Reg. 9,304 (Feb. 16, 2012).
42 Id. at 9,424.
43 Id. at 9,306, 9,431-32.
44 Id. at 9,431.
45 See id. at 9,432.
46 See, e.g., 75 Fed. Reg. 25,324, 25,345 (May 7, 2010) (estimating, for Department of Transportation CAFE standards for cars and light trucks, a monetized present value for climate benefits due to CO2 emission reductions of $14.5 billion, compared to $112 - $143 billion in benefits for fuel savings); 75 Fed. Reg. at 10,876-77 (estimating, for Department of Energy efficiency standards for small electric motors, climate benefits from reduced CO2 emissions ranging from $31.5 million to $352 million, compared to over $855 million in energy savings benefits, which alone outweighed the estimated costs).
47 Final Rule, Oil and Natural Gas Sector: New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants Reviews, Final Rule. EPAHQ- OAR-2010-0505 (Apr. 17, 2012), available at" http://epa.gov/airquality/oilandgas/ pdfs/20120417finalrule.pdf" .
48 Id. at 246.
49 Id. at 247-48.
50 Id. at 249-50.
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