Social Cost Of Carbon Estimates Research Articles

An economic analysis of policies for promoting economically efficient water heater systems operating under seasonal climatic conditions

This article reports on an economic cost-effective analysis of water heating systems including solar water heating systems. This study finds that in situations where there is a winter, or a rainy season, the choice of the source of energy for the solar water heating systems’ back-up during this period is critical for its overall cost-effectiveness. It is found that in the conditions of North Cyprus, an solar water heating systems with electricity back-up is far superior to using electricity alone; however, it is inferior to heating water with either a liquefied petroleum gas water heater alone or an solar water heating systems with an liquefied petroleum gas back-up. Policies to promote water heating systems that reduce the use of electricity should not encourage the installation of solar water heating systems with electricity back-up. An liquefied petroleum gas water heater or an solar water heating systems with an liquefied petroleum gas back-up are economically more cost-effective, with or without the inclusion of the social cost of carbon estimates.

Beyond the Social Cost of Carbon: The Real Economic Lessons About the Determinants of Harm from Changing Climate and Their Implications for Climate Policy

As a measure of the marginal benefits of EPA regulations mandating reductions in greenhouse gas emissions, the social cost of carbon (SCC) has been important in the regulatory process leading to the finalization of such regulations. In this paper, I explain and critique the Integrated Assessment Models from which the SCC is derived, and in particular the climate damage functions IAM’s assume and which are at the core of SCC estimates. Climate damage functions should be based on empirical evidence regarding the actual contribution of temperature, precipitation and other climate variables to various measures of human well-being, such as agricultural productivity, health, wildfires, and civil war among many others. Simple empirical studies that focus solely on climate measures tend to overestimate, sometimes vastly, the role of climate as a causal factor in such phenomena. More complex studies that look at the entire range of variables theoretically identified as important in explaining the phenomenon of interest show that climate is much less important as a causal factor than simple “climate and...” studies estimate. In addition, IAM damage estimates are based on estimates from computer and analytical models of climate sensitivity (the temperature increase to be expected from GHG increases), but such estimates are higher than newer, empirical estimates. Moreover, IAM damage estimates do not take account of the extremely long multi-centennial period over which climate sensitivity evolves to higher values. For all of these reasons, SCC estimates used in regulatory proceedings today are likely considerable overestimates of the actual SCC. Reasonable estimates of the SCC support only modest reductions in GHG emissions. Regardless of GHG emission reductions, climate commitment means that adaptation to future climate change will be a necessity, and the empirical literature suggests that climate change policy should focus on removing public policies that create perverse incentives not to adapt and on promoting policies that increase the incentive for the development of new ways of adapting to inevitably changing climate. Unfortunately, the promulgation of GHG emissions regulation under the Clean Air Act, a statute that does not mandate cost benefit analysis, makes it unlikely that a court will ever seriously question the methodology underlying flawed SCC estimates that have already been used to justify GHG emission regulation. While potentially a valuable tool for climate policy design, as employed in actual regulatory impact analysis in the United States, the SCC has been used to justify inefficient policies rather than to identify better ones.

Assessment of Health Impact Functions Used in Estimating Economic Damages of Climate Change

Background: Integrated assessment models (IAMs) are used to estimate economic damages of climate change. These estimates, called the social cost of carbon (SCC), are used extensively by policymakers to assess regulatory benefits. Here we evaluate the health based damage functions in IAMs in order to identify potential areas in which environmental epidemiologists can improve estimates of the SCC. Methods: Of the three models currently used by the US EPA to estimate the SCC, the FUND model was selected for this analysis due to its explicit modeling of health impacts and region-specific analysis. A sensitivity analysis for each health endpoint in FUND was completed in order to determine their relative impact on estimates of the SCC. Comparison of these health outcomes to the US Global Change Research Program 2014 prospectus was completed to assess whether additional health endpoints should be added to the FUND model. Results: The FUND model includes many of the health endpoints that have been identified as being responsive to changes in climate. Per unit changes in temperature are modeled to increase health risks proportionally regardless of baseline temperature or social factors that may modify these associations; this is especially apparent in estimates of infectious diseases such as malaria and dengue, but is also pertinent for estimates of cardiovascular and respiratory mortality. Overall, the contribution of health related impacts on estimates of SCC is small relative to other economic impacts. Conclusions: Region specific health functions that take into account baseline climate and social conditions are needed. Providing accurate inputs to IAMs broadens the impact of climate related environmental epidemiology research. Increased communication between epidemiologists and economists will improve estimates of the SCC by incorporating the best available health functions and by informing health scientists of areas needing further research.

Climate Impacts on Economic Growth as Drivers of Uncertainty in the Social Cost of Carbon

AbstractWe reexamine estimates of the social cost of carbon (SCC) used by agencies as the price of carbon emissions in cost-benefit analysis, focusing on those by the federal Interagency Working Group on SCC (IWG). We show that the models used by the IWG assume continued economic growth in the face of substantial temperature increases, which suggests that they may not capture the full range of possible consequences of climate change. Using the DICE integrated assessment model, we examine the possibility that climate change may directly affect productivity and find that even a modest impact of this type increases SCC estimates substantially. The SCC appears to be highly uncertain and sensitive to modeling assumptions. Understanding the impact of climate change therefore requires understanding how climate-related harms may affect productivity and economic growth. Furthermore, we suggest that misunderstandings about growth assumptions in the model may underlie the debate surrounding the proper discount rate.

Climate Impacts on Economic Growth as Drivers of Uncertainty in the Social Cost of Carbon

One of the central ways that the costs of global warming are incorporated into U.S. law is in cost-benefit analysis of federal regulations. In 2010, to standardize analyses, an Interagency Working Group (IAWG) established a central estimate of the social cost of carbon (SCC) of $21/tCO2 drawn from three commonly-used models of climate change and the global economy. These models produced a relatively narrow distribution of SCC values, consistent with previous studies. We use one of the IAWG models, DICE, to explore which assumptions produce this apparent robustness. SCC values are constrained by a shared feature of model behavior: though climate damages become large as a fraction of economic output, they do not significantly alter economic trajectories. This persistent growth is inconsistent with the widely held belief that climate change may have strongly detrimental effects to human society. The discrepancy suggests that the models may not capture the full range of possible consequences of climate change. We examine one possibility untested by any previous study, that climate change may directly affect productivity, and find that even a modest impact of this type increases SCC estimates by many orders of magnitude. Our results imply that the SCC is far more uncertain than shown in previous modeling exercises and highly sensitive to assumptions. Understanding the societal impact of climate change requires understanding not only the magnitude of losses at any given time but also how those losses may affect future economic growth.

Taxing Electricity Sector Carbon Emissions at Social Cost

Concerns about budget deficits, tax reform, and climate change are fueling discussions about taxing carbon emissions to generate revenue and reduce greenhouse gas emissions. Imposing a carbon tax on electricity production based on the social cost of carbon (SCC) could generate between $21 and $82 billion in revenues in 2020 and would have important effects on electricity markets. The sources of emissions reductions in the sector depend on the level of the tax. A carbon tax based on lower SCC estimates reduces emissions by reducing demand and through the substitution of gas for coal, whereas taxes based on higher SCC estimates induce switching to wind and nuclear generation. The slow rate of growth of the SCC estimates means that any SCC-based carbon tax trajectory provides weaker long-run incentives for expanded renewable and nuclear generation than a cap-and-trade program that achieves an equivalent level of cumulative carbon dioxide emissions reductions. Taxing carbon at the SCC is welfare enhancing, but the SCC may not be the optimal tax rate.

A Simple Formula for the Social Cost of Carbon

The social cost of carbon (SCC), commonly referred to as the carbon price, is the monetized damage from emitting one unit of CO2 to the atmosphere. The SCC is typically obtained from large‐scale computational Integrated Assessment Models (IAMs) that consolidate interdisciplinary climate research inputs to obtain a carbon price estimate relevant for policy‐making. However, the climate economy interactions of IAMs remain inaccessible to scientists in general. Here we develop a simple closed‐form formula that captures the key physical and economic determinants of the SCC in the IAMs. For a mainstream IAM, it explains over 99 percent of the within‐model variation originating from structural uncertainties; in an inter‐model comparison, the structural variation captured by the formula matches closely a SCC distribution of previous SCC estimates. The precise replication of the SCC estimates is strikingly free of details such as those on future policy and technology options, or even carbon concentration levels; the size of the current economy and the emissions‐temperature‐damage response are the dominant SCC determinants in the IAMs. The structural interpretation given allows decision‐makers to disentangle the subjective and structural determinants of the carbon price. Structural uncertainties alone lead to a strongly right‐skewed density with median 15 €/tCO2, mean 31 €/tCO2, and more than 5 percent probability for higher than 100 €/tCO2 for year 2015.

Improving the assessment and valuation of climate change impacts for policy and regulatory analysis

The social cost of carbon (SCC) is a monetized metric for evaluating the benefits associated with marginal reductions in carbon dioxide (CO2) emissions. It represents the expected welfare loss from the future damages caused by the release of one tonne of CO2 in a given year, expressed in consumption equivalent terms. It is intended to be a comprehensive measure, taking into account changes in agricultural productivity, human health risks, loss of ecosystem services and biodiversity, and the frequency and severity of flooding and storms, among other possible impacts. Estimating the SCC requires long-term modeling of global economic activity, the climate system, and the linkages between the two through anthropogenic greenhouse gas (GHG) emissions and the effects of changing climatic conditions on economic activity and human well-being. The United States government currently uses the SCC in regulatory benefit-cost analyses to assess the welfare effects of changes in CO2 emissions. Consistent application of the SCC to federal rulemaking analyses began in 2009-2010 with the development of a set of global SCC estimates that employed three prominent integrated assessment models (IAMs) -- DICE, FUND, and PAGE. The U.S. government report identified a number of limitations associated with SCC estimates in general and itsmore » own assumptions in particular: an incomplete treatment of damages, including potential “catastrophic” impacts; uncertainty regarding the extrapolation of damage functions to high temperatures; incomplete treatment of adaptation and technological change; and the evaluation of uncertain outcomes in a risk-neutral fashion. External experts have identified other potential issues, including how best to model long-term socio-economic and emissions pathways, oversimplified physical climate and carbon cycle modeling within the IAMs, and an inconsistency between non-constant economic growth scenarios and constant discount rates. The U.S. government has committed to updating the estimates regularly as modeling capabilities and scientific and economic knowledge improves. To help foster further improvements in estimating the SCC, the U.S. Environmental Protection Agency and the U.S. Department of Energy hosted a pair of workshops on “Improving the Assessment and Valuation of Climate Change Impacts for Policy and Regulatory Analysis.” The first focused on conceptual and methodological issues related to integrated assessment modeling and the second brought together natural and social scientists to explore methods for improving damage assessment for multiple sectors. These two workshops provide the basis for the 13 papers in this special issue.« less

The social cost of carbon in U.S. regulatory impact analyses: an introduction and critique

In 2010, as part of a rulemaking on efficiency standards, the U.S. government published its first estimates of the benefits of reducing CO2 emissions, referred to as the social cost of carbon (SCC). Using three climate economic models, an interagency task force concluded that regulatory impact analyses should use a central value of \$21 per metric ton of CO2 for the monetized benefits of emission reductions. In addition, it suggested that sensitivity analysis be carried out with values of \$5, \$35, and \$65. These estimates have been criticized for relying upon discount rates that are considered too high for intergenerational cost–benefit analysis, and for treating monetized damages equivalently between regions, without regard to income levels. We reestimate the values from the models (1) using a range of discount rates and methodologies considered more appropriate for the very long time horizons associated with climate change and (2) using a methodology that assigns “equity weights” to damages based upon relative income levels between regions—i.e., a dollar’s worth of damages occurring in a poor region is given more weight than one occurring in a wealthy region. Under our alternative discount rate specifications, we find an SCC 2.6 to over 12 times larger than the Working Group’s central estimate of \$21; results are similar when the government’s estimates are equity weighted. Our results suggest that regulatory impact analyses that use the government’s limited range of SCC estimates will significantly understate potential benefits of climate mitigation. This has important implications with respect to greenhouse gas standards, in which debates over their stringency focus critically on the benefits of regulations justifying the industry compliance costs.

The U.S. Government’s Social Cost of Carbon Estimates after Their First Two Years: Pathways for Improvement

AbstractIn 2010, the U.S. government adopted its first consistent estimates of the social cost of carbon (SCC) for government-wide use in regulatory cost-benefit analysis. Here, the authors examine a number of limitations of the estimates identified in the U.S. government report and elsewhere and review recent advances that could pave the way for improvements. The authors consider in turn socio-economic scenarios, treatment of physical climate response, damage estimates, ways of incorporating risk aversion, and consistency between SCC estimates and broader climate policy.

The Influence of the Specification of Climate Change Damages on the Social Cost of Carbon

Abstract Drawing upon climate change damage specifications previously proposed in the literature that the authors have calibrated to a common level of damages at 2.5°C, the authors examine the effect upon the social cost of carbon (SCC) of varying damage specifications in a DICE-like integrated assessment model. They find that SCC estimates are highly sensitive to uncertainty in extrapolating damages to high temperatures at moderate-to-high levels of risk aversion, but only modestly so at low levels of risk aversion. While in the absence of risk aversion, all of the SCC estimates but one agree within a factor of two, with a moderate level of risk aversion included, the differences among estimates grow greatly. For example, one composite damage specification, combining elements of different literature-derived specifications and roughly taking into account calibration uncertainty, yields SCC values 32% higher than the standard quadratic DICE damage function in the absence of risk aversion. With a coefficient of relative risk aversion of 1.4, however, the same uncertain specification yields SCC values almost triple those of the standard function. The authors conclude that failure to consider damages uncertainty and risk aversion jointly can lead to significant underestimation of the SCC.

The role of the social cost of carbon in policy

AbstractEstimates of the marginal value of carbon dioxide—the social cost of carbon (SCC)—were recently adopted by both the U.S. and U.K. Governments in order to satisfy requirements to value estimated greenhouse gas (GHG) changes of new federal regulations. However, the development and use of SCC estimates comes with significant challenges and controversial decisions. This paper summarizes the key issues and then derives guidance for developing, selecting, and applying the estimates that follows from the fundamental scientific nature and economic principles associated with GHGs and climate change, as well as an understanding of the state of the art for estimating the SCC. The paper evaluates recent estimates in light of the guidance and finds the estimates inconsistent with the guidance in a number of significant areas. The paper also differentiates SCC policy applications in terms of policies with incremental versus nonincremental implications for global GHGs, and identifies serious issues for application of the SCC in setting and evaluating climate policy targets. WIREs Clim Change 2012, 3:163–195. doi: 10.1002/wcc.163This article is categorized under: Climate Economics > Aggregation Techniques for Impacts and Mitigation Costs

Using the social cost of carbon in regulatory deliberations

AbstractThis paper reviews the use of social cost of carbon (SCC) values in regulatory deliberations, using practical examples to reveal potential insights. The paper reports on how the inferred choice of input assumptions, and the method used to pick SCC estimates, affects both the size of SCC values and the uncertainty ranges, and that these implicitly influence policy outcomes. The paper also reviews applications of the SCC in the UK. This reveals the following: (1) There is a potential trade‐off between the use of single SCC estimates to ensure consistency, versus use of a range to reflect uncertainty. (2) SCC values are more influential in some sectors than others, which can make it challenging to introduce consistent policies. (3) In some cases the SCC can act as a switching value on major (nonclimate) policy decisions. (4) SCC literature estimates have changed over time, often dramatically. These changes are difficult to implement and policy makers seem to prefer more stable values, even if this means changing input assumptions or methods. (5) For the analysis of climate policy, the decision framework in which SCC values are used makes a large difference to the outcome. (6) There are complex issues and potential inconsistencies involved in applying global SCC values to national decision frameworks comparing costs and benefits. All of these issues caution against a narrow and over‐simplistic application of SCC values in regulatory deliberations. Nonetheless, with appropriate caution and caveats, the paper reports that SCC values can have a role in helping to inform policy. WIREs Clim Change 2011, 2:886–901. doi: 10.1002/wcc.140This article is categorized under: Climate Economics > Economics and Climate Change

Transient Temperature Response Modeling in IAMs: The Effects of Over Simplification on the SCC

Abstract Integrated Assessment Models (IAMs) couple representations of the natural climate system with models of the global economy to evaluate climate and energy policies. Such models are currently used to derive the benefits of carbon mitigation policies through estimates of the social cost of carbon (SCC). To remain tractable these models often utilize highly simplified representations of complex natural, social, and economic systems. The authors consider three prominent IAMs, DICE, FUND, and PAGE, and compare their highly simplified temperature response models to two upwelling diffusion energy balance models that better reflect the progressive heat uptake of the deep ocean. They find that all three IAMs fail to fully capture important characteristics in the dynamics of temperature response, especially for high equilibrium climate sensitivities. This has serious implications given these models are often run with distributions for the equilibrium climate sensitivity which have a positive probability for such states of the world. The authors find that, all else equal, the temperature response model in FUND can lead to estimates of the expected SCC that are 10–75% lower than those derived using more realistic climate models, while the models in DICE and PAGE lead to expected SCC estimates that are 10–110% and 40–260% higher, respectively.

The US Government's Social Cost of Carbon Estimates after Their First Year: Pathways for Improvement

In 2010, the U.S. government adopted its first consistent estimates of the social cost of carbon (SCC) for government-wide use in regulatory cost-benefit analysis. Here, we examine a number of the limitations of the estimates identified in the U.S. government report and elsewhere and review recent advances that could pave the way for improvements. We consider in turn socioeconomic scenarios, treatment of physical climate response, damage estimates, ways of incorporating risk aversion, and consistency between SCC estimates and broader climate policy.

Transient Temperature Response Modeling in IAMs: The Effects of Over Simplification on the SCC

Integrated Assessment Models (IAMs) couple representations of the natural climate system with models of the global economy to capture interactions that are important for the evaluation of potential climate and energy policies. The U.S. federal government currently uses such models to derive the benefits of carbon mitigation policies through estimates of the social cost of carbon (SCC). To remain tractable these models often utilize highly simplified representations of complex natural, social, and economic systems. This makes IAMs susceptible to oversimplification by failing to capture key features of the underlying system that are important for policy analysis. In this paper we focus on one area in which these models appear to have fallen into such a trap. We consider three prominent IAMs, DICE, FUND, and PAGE, and examine the way in which these models represent the transient temperature response to increases in radiative forcing. We compare the highly simplified temperature response models in these IAMs to two upwelling diffusion energy balance models that better reflect the progressive uptake of heat by the deep ocean. We find that all three IAMs are unable to fully capture important characteristics in the temporal dynamics of temperature response, especially in the case of high equilibrium climate sensitivity. This has serious implications given that these models are often run with distributions for the equilibrium climate sensitivity that contain a positive probability for such states of the world. We find that all else equal the temperature response function utilized in the FUND model results in estimates of the expected SCC that are up to 25% lower than those derived with the more realistic climate models, while the functions used in DICE and PAGE lead to expected SCC estimates up to 40% and 50% higher, respectively.

The Influence of the Specification of Climate Change Damages on the Social Cost of Carbon

Drawing upon climate change damage functions previously proposed in the literature that we have calibrated to a common level of damages at 2.5 C, we examine the effect upon the social cost of carbon (SCC) of varying the specification of damages in a DICE-like integrated assessment model. In the absence of risk aversion, all of the SCC estimates but one agree within a factor of two. The effect of varying calibration damages is mildly sublinear. With a moderate level of risk aversion included, however, the differences among estimates grow greatly. By combining elements of different damage specifications and roughly taking into account uncertainty in calibration, we have constructed a composite damage function that attempts to approximate the range of uncertainty in climate change damages. In the absence of risk aversion, SCC values calculated with this function are in agreement with the standard quadratic DICE damage function; with a coefficient of relative risk aversion of 1.4, this damage function yields SCC values more than triple those of the standard function.

The Time Value of Carbon and Carbon Storage: Clarifying the Terms and the Policy Implications of the Debate

The question of whether there is any value to the temporary storage of carbon is fundamental to climate policy design across a number of arenas, including physical carbon discounting in greenhouse gas accounting, the relative value of temporary carbon offsets, and the value of other carbon mitigation efforts that are known to be impermanent, including deferred deforestation. Quantifying the value of temporary carbon storage depends on a number of assumptions about how the incremental impact (or social cost) of a given ton of carbon emissions is expected to change over time. In 2009, a U.S. government interagency working group was established and assigned the responsibility of calculating social cost of carbon estimates to be used in benefit/cost analysis of regulations impacting carbon dioxide emissions. Those estimates were released in March 2010. This working paper explores what those estimates imply about the value of temporary carbon storage, as well as the implications of those temporary storage values for several critical policy design questions relating to greenhouse gas accounting and biological offsets. This analysis suggests, for instance, that appropriate physical carbon discount rates for carbon accounting may be even lower than the social discount rates often used in intergenerational analyses. In the context of agricultural offsets, the social cost of carbon estimates are used to establish a definition of equivalence between permanent and temporary offsets; equivalence ratios are derived that vary between ~2 and 30, depending on the discount rate used and the length of the temporary offset contract period.

Equity Weighting and the Marginal Damage Costs of Climate Change

Climate change would impact different countries differently, and different countries have different levels of development. Equity-weighted estimates of the (marginal) impact of greenhouse gas emissions reflect these differences. Equity-weighted estimates of the marginal damage cost of carbon dioxide emissions are substantially higher than estimates without equity-weights; equity-weights may also change the sign of the social cost estimates. Equity weights need to be normalised. Our estimates differ by two orders of magnitude depending on the region of normalisation. A discounting error of equity weighted social cost of carbon estimates in earlier work (Tol, Energy Journal, 1999), led to an error of a factor two. Equity-weighted estimates are sensitive to the resolution of the impact estimates. Depending on the assumed intra-regional income distribution, estimates may be more than twice as high if national rather than regional impacts are aggregated. The assumed scenario is important too, not only because different scenarios have different emissions and hence warming, but also because different scenarios have different income differences, different growth rates, and different vulnerabilities. Because of this, variations in the assumed inequity aversion have little effect on the marginal damage cost in some scenarios, and a large effect in other scenarios.