More Clarity on the Social Cost of Carbon

Panel Calls for More Rigorous, Transparent, Defensible Approach to Estimate Benefits of Reducing Emissions

By Scott Sowers

Drawing on EPRI research, a new study from the National Academy of Sciences (NAS) recommends that government agencies and other stakeholders take a completely different approach for calculating the social cost of carbon (SCC)—a metric used in dozens of federal regulations to estimate the benefits of reducing CO₂ emissions.

EPRI Senior Research Economist Steven Rose and EPRI colleagues laid the groundwork for the NAS study in an EPRI report on the design and inner workings of SCC models. Rose is a member of the scientific committee that produced the NAS study.

“EPRI’s research was a key resource for the committee for understanding the state of the science and modeling that underlies social cost of carbon estimates,” said Rose.

The current federal approach for estimating the SCC involves combining 150,000 values from three separate models, known as FUND, PAGE, and DICE. The models’ different structures and calculation idiosyncrasies affect results in ways that are not apparent or well understood.

The models’ key assumptions relate to future economic and demographic conditions, climate system behavior, potential societal risks if the world warms, and discount rates. EPRI’s study, along with a recent scientific journal article expanding on that work, reveal internal variations in structure and intermediate results that contribute to significant differences in the SCC estimates from the three models. With these insights, EPRI identified opportunities for improvement.

Instead of the current approach and models, the NAS study recommends developing the steps associated with SCC calculations as separate, but integrated, modules—each drawing from the most up-to-date scientific research:

• A socioeconomic module that projects greenhouse gas emissions based on population and economic output estimates
• A climate module that calculates future temperature and sea level changes based on projected emissions
• A damages module that estimates the potential impact of temperature and sea level changes in dollars
• A discounting module that adjusts the projected dollars based on an appropriate discount rate

“Developing the modules separately and using the scientific expertise from relevant disciplines can result in a more rigorous, transparent, and defensible estimate of the social cost of carbon and clarify the associated uncertainty,” said Rose.

The NAS study recommends using this approach to develop new estimates in the next 2–3 years. Rose and his NAS panel colleagues presented the results to U.S. executive branch offices (including the Office of Management and Budget and Council of Economic Advisors), federal agencies (including the U.S. Department of Energy and U.S. Environmental Protection Agency), and committees in the U.S. Senate and House of Representatives.

“For policy and regulatory discussions, it’s important to quantify the potential benefits of reducing greenhouse gas emissions in dollar terms,” said Rose.

Federal agencies are required to use the SCC to estimate CO₂ reduction benefits of regulations, such as fuel economy standards for vehicles, emissions standards for power plants, and appliance energy efficiency standards. In addition, several state public utility commissions are using or considering using the federal SCC estimates in zero-carbon technology subsidies and to incorporate in resource planning the impacts of utility emissions on public health and the environment. Canada is using the U.S.-developed SCC estimates to value emissions changes in regulatory matters.

“U.S. climate policy is uncertain right now, but the social cost of carbon is unlikely to go away,” said Rose. “Decision makers across the country and the world are asking about the potential consequences of CO₂ and other greenhouse gases and the benefits of avoiding emissions.”

EPRI’s research on the social cost of carbon and other greenhouse gases continues. Areas of focus include enhancing public understanding; identifying, communicating, and evaluating technical issues; assessing prospects for better SCC estimation; and informing SCC use in estimating the potential benefits of emissions reductions.

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