September 16, 2013 U.S. Department of Energy, Building Technologies Program Mailstop EE-2J, Room 1J-018 1000 Independence Avenue SW Washington, DC 20585-0121 EERE-BT-PET-0043 Re: The Social Cost of Carbon Kathleen B. Hogan, Deputy Assistant Secretary for Energy Efficiency, Energy Efficiency and Renewable Energy. Dear Ms. Hogan: The Social Cost of Carbon (SCC) is used by the Environmental Protection Agency (EPA) and other federal agencies to quantify the economic damages associated with a small increase in carbon dioxide (CO2) emissions over the course of a particular year.

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 At Heritage, we believe that the calculations of SCC deserve thorough vetting, as they can have a significant impact on many environmental regulations. The integrated assessment models (IAMs) used for estimating SCC have several serious shortcomings. In particular, the loss functions of these models are often arbitrarily chosen, and we have yet to see any legitimate justification of these functions themselves. As the statistics estimated from these models are dependent on the models’ loss functions, such justification is important, as different loss functions will almost surely yield different results. There are also several other assumptions in these IAMs that demand rigorous examination:

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Discount rates.

 From a theoretical perspective, the discount rate quantifies how much a society is willing to pay to prevent future damages. Thus, lower discount rates signify that future damages become more costly. The Office of Management and Budget (OMB) stipulates that any analysis should use a 7 percent discount rate as a base case, and a 3 percent discount rate could be used to show sensitivity to results.

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 The Obama Administration, however, computed SCC based on 2.5 percent, 3 percent, and 5 percent

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󰁔󰁨󰁥 󰁯󰁦󰁦󰁩󰁣󰁩󰁡󰁬 󰁤󰁥󰁦󰁩󰁮󰁩󰁴󰁩󰁯󰁮 󰁯󰁦 󰁴󰁨󰁥 󰁓󰁯󰁣󰁩󰁡󰁬 󰁃󰁯󰁳󰁴 󰁯󰁦 󰁃󰁡󰁲󰁢󰁯󰁮 󰀨󰁓󰁃󰁃󰀩 󰁩󰁳 󲀜󰁡󰁮 󰁥󰁳󰁴󰁩󰁭󰁡󰁴󰁥 󰁯󰁦 󰁴󰁨󰁥 󰁥󰁣󰁯󰁮󰁯󰁭󰁩󰁣 󰁤󰁡󰁭󰁡󰁧󰁥󰁳 󰁡󰁳󰁳󰁯󰁣󰁩󰁡󰁴󰁥󰁤 󰁷󰁩󰁴󰁨 󰁡 󰁳󰁭󰁡󰁬󰁬 󰁩󰁮󰁣󰁲󰁥󰁡󰁳󰁥 󰁩󰁮 󰁣󰁡󰁲󰁢󰁯󰁮 󰁤󰁩󰁯󰁸󰁩󰁤󰁥 󰀨󰁃󰁏󰀲󰀩 󰁥󰁭󰁩󰁳󰁳󰁩󰁯󰁮󰁳󰀬 󰁣󰁯󰁮󰁶󰁥󰁮󰁴󰁩󰁯󰁮󰁡󰁬󰁬󰁹 󰁯󰁮󰁥 󰁭󰁥󰁴󰁲󰁩󰁣 󰁴󰁯󰁮󰀬 󰁩󰁮 󰁡 󰁧󰁩󰁶󰁥󰁮 󰁹󰁥󰁡󰁲󰀬󲀝 󰁡󰁮󰁤 󰁩󰁳 󰁤󰁩󰁳󰁣󰁵󰁳󰁳󰁥󰁤 󰁦󰁵󰁲󰁴󰁨󰁥󰁲 󰁩󰁮

U.S. Environmental Protection Agency, “The Social Cost of Carbon,” http://www.epa.gov/climatechange/EPAactivities/economics/scc.html (accessed September 16, 2013).

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U.S. Office of Management and Budget, “Circular A4,” September 17, 2003, http://www.whitehouse.gov/omb/circulars_a004_a-4/ (accessed September 16, 2013); Paul C. Knappenberger, “An Example of the Abuse of the Social Cost of Carbon,” Cato Institute, August 23, 2013, http://www.cato.org/blog/example-abuse-social-cost-carbon (accessed September 16, 2013).

 

discount rates. We believe that it would be worthwhile to estimate SCC assuming a 7 percent discount rate as well.

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Time horizon.

The time horizon on which these IAMs are based is also an issue. Right now, SCC is calculated summing up damages up to the year 2300. Projecting accurate economic impacts decades into the future is difficult enough; it is sheer hubris to purport that the government can make meaningful projections centuries into the future. We therefore believe it would be far more realistic to estimate the model over a significantly shorter time horizon.

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Equilibrium climate sensitivity.

Finally, although the Administration has updated its underlying economic/climate change models, it has not included any updates regarding the characteristics of equilibrium climate sensitivity (ECS). ECS is an important driver in determining the amount of climate change that will result from a particular amount of anthropogenic carbon dioxide emissions. Recent research has provided new distributional estimates of ECS that are important to use in IAMs. We have begun to analyze the sensitivity of IAMs to the aforementioned assumptions by using the DICE model used by the U.S. Government Interagency Working Group to compute SCC in February 2013.

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 Below are some preliminary results from one of five scenarios based on certain forecasts regarding economic growth, population growth, CO2 emissions, and non-CO2 forcings. A more comprehensive statistical analysis will be published shortly.

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Discount Rates

 We estimated SCC using the DICE model. We re-estimated SCC for the 2.5 percent, 3 percent, and 5 percent rates the EPA has reported, as well as for the 7 percent discount rate suggested by OMB. Our results are below:

Average SCC: Baseline, End Year 2300 Year Discount Rate: 2.50% Discount Rate: 3% Discount Rate: 5% Discount Rate: 7% 2010

$58.85 $37.74 $10.60 $4.79

2015

$66.23 $43.18 $12.79 $6.01

2020

$72.34 $47.78 $14.66 $7.04

2025

$78.44 $52.37 $16.53 $8.06

2030

$85.16 $57.52 $18.71 $9.28

2035

$91.89 $62.67 $20.88 $10.50

2040

$99.36 $68.48 $23.42 $11.94

2045

$106.84 $74.28 $25.96 $13.39

2050

$114.84 $80.47 $28.78 $15.03

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W. Nordhaus, “The ‘DICE’ Model: Background and Structure of a Dynamic Integrated Climate-Economy Model of the Economics of Global Warming,” Cowles Foundation for Research in Economics, 1992. The EPA provided us with the MATLAB code to run the recent version of DICE used in this analysis but is not responsible for our results.

 

  Not surprisingly, we see a markedly lower estimate of SCC assuming a 7 percent discount rate.

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Time Horizon

We also altered the end year of the DICE model in computing SCC. SCC calculations are based on summing damages over a particular time horizon. In particular, the EPA’s estimates are based on summing damages up to the year 2300. Below is our estimation of SCC based on summing damages up to 2150 instead of 2300:

Average SCC: End Year 2150 Year Discount Rate: 2.50% Discount Rate: 3% Discount Rate: 5% Discount Rate: 7% 2010

$45.16 $32.02 $10.39 $4.78

2015

$50.73 $36.56 $12.52 $6.00

2020

$54.86 $40.10 $14.30 $7.01

2025

$58.98 $43.64 $16.09 $8.03

2030

$63.21 $47.39 $18.13 $9.24

2035

$67.45 $51.15 $20.18 $10.44

2040

$71.70 $55.05 $22.50 $11.86

2045

$75.95 $58.96 $24.82 $13.28

2050

$79.85 $62.66 $27.29 $14.86 And below are the resulting percent changes:

SCC Percentage Changes as a Result of Changing End Year from 2300 to 2150 Year Discount Rate: 2.50% Discount Rate: 3% Discount Rate: 5% Discount Rate: 7% 2010

 –23.26% –15.16% –1.98% –0.21%

2015

 –23.40% –15.33% –2.11% –0.17%

2020

 –24.16% –16.07% –2.46% –0.43%

2025

 –24.81% –16.67% –2.66% –0.37%

2030

 –25.78% –17.61% –3.10% –0.43%

2035

 –26.60% –18.38% –3.35% –0.57%

2040

 –27.84% –19.61% –3.93% –0.67%

2045

 –28.91% –20.62% –4.39% –0.82%

2050

 –30.47% –22.13% –5.18% –1.13% As the above results indicate, changing the end year results in lower estimates of SCC, especially for lower discount rates.