Cost-Benefit News

Link: http://d.repec.org/n?u=RePEc:nev:wpaper:wp201101&r=res

Abstract: Many estimates of the social cost of CO2 emissions (SCCO2) can be found in the climate economics literature. However, to date far fewer estimates of the social costs of other greenhouse gases have been published, and many of those that are available are not directly comparable to current estimates of the SCCO2. In this paper we use a simplified integrated assessment model that combines MAGICC and (elements of) DICE to estimate the social costs of the three most important greenhouse gases—CO2, CH4, and N2O—for the years 2010 through 2050. Insofar as possible, we base our model runs on the assumptions and input parameters of the recent U.S. government inter-agency SCC working group. We compare our estimates of the social costs of CH4 and N2O emissions to those that would be produced by using the SCCO2 to value the "CO2-equivalents" of each of these gases, as calculated using their global warming potentials (GWPs). We examine the estimation error induced by valuing non-CO2 greenhouse gas emission reductions using GWPs and the SCCO2 for single- and multi-gas abatement policies. In both cases the error can be large, so estimates of the social costs of these gases, rather than proxies based on GWPs, should be used whenever possible. However, if estimates of the social cost are not available the value of non-CO2 GHG reductions estimated using GWPs and the SCCO2 will typically have lower absolute errors than default estimates of zero.
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The social cost of carbon dioxide, SCCO2, represents the present value of the future damages that would arise from an incremental unit of CO2 (typically one metric ton) being emitted in a given year. In principle, the SCCO2 summarizes the impacts of climate change on all relevant market and non-market sectors, including agriculture, energy production, water availability, human health, coastal communities, biodiversity, and so on. As such, estimates of the SCCO2 play an important role in assessing the benefits of policies that result in reductions of CO2 emissions. SCCO2 estimates are typically calculated using integrated assessment models (IAMs), which combine simplified models of the climate system and the economy, including the key feedbacks between the two. Small and not-so-small differences in the structural assumptions and the underlying empirical studies used for parameter calibrations among IAMs have led to a wide range of published SCCO2 estimates, from roughly $0 to $100 per metric ton of CO2 [NAS, 2009].

In 2009 the U.S. government undertook an interagency process to establish consistency across federal agencies when valuing incremental CO2 emission changes in regulatory impact analyses (RIAs). Towards this end, the SCC working group used three widely known IAMs and imposed consistency across several key inputs, including the socioeconomic-emission scenarios, discount rate, and climate sensitivity probability distribution. To represent some of the uncertain model inputs, the SCC working group considered five socio-economic-emission scenarios and three discount rates. In the end, the SCC working group selected four estimates of the SCCO2 for use in upcoming RIAs: $5, $21, $35, and $65. These values are reported in 2007 dollars, apply to emission reductions in 2010, and grow over time at 1-4% per year ([USG, 2010] Table 4). The first three values are the average estimates across all IAMs and scenarios using discount rates of 5%, 3%, and 2.5% per year, respectively. The last estimate is the 95th percentile across all models and scenarios using a discount rate of 3% per year. These estimates are intended to be used in RIAs for all U.S. federal agency regulations that result in marginal changes in CO2 emissions. The SCC working group did not provide estimates of the social costs of non-CO2 GHGs, though they noted that such values will be important for future policy analyses.
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[With respect to] estimates of the expected social cost of marginal CO2, CH4, and N2O emissions in 2010 ... the average values of the SCCO2 of $9.4, $33, $52 for the three discount rates, and the 95th percentile value of $79 for the 3% discount rate (2007 U.S. dollars) are comparable to, though somewhat higher than, those produced by the SCC working group using DICE with the MiniCAM base scenario, which were $8.6, $29, $45, and $58 (USG [2010]). The differences between our estimates and those of the SCC working group are due to the slightly different behavior of MAGICC relative to the carbon cycle model in DICE. Specifically, in MAGICC 5.3 the CO2 emissions perturbation exhibits a more pronounced and longer lasting impact on radiative forcing than that of the simplified three-box carbon cycle model in DICE2007. The ranges of the social costs for the non-CO2 GHGs in 2010 are $370 to $2,000 for CH4 and $1,700 to $14,000 for N2O.

The significantly higher social cost estimates for an additional ton of CH4 or N2O in 2010 relative to CO2 are due to the significantly larger radiative forcing generated by these gases....

The N2O emission reductions are consistently around 0.0002% of CO2 reductions, while CH4 reductions are consistently around a 0.1% of CO2 emission reduction by mass. Ignoring the N2O reductions for the moment, this policy resembles the illustration above where CH4 emission reductions were a constant percentage of CO2 reductions over time. ... If GWPs were used to estimate the benefits of CH4 reductions in this case then the overall benefits would be underestimated by around 1-2%, depending on the discount rate. In fact, comparing the GWP approach and the use of the direct estimates we find that the error associated with valuing CO2-e eductions is approximately -1% when using a constant 3% discount rate.11 Using the estimates of SCCH4 and SCN2O presented in Section 4, the overall error from failing to quantifying the non-CO2 emission reductions from this rule is approximately 10.6 billion 2007$, which is a relative error of -4%. That is, by using GWPs the relative error could be reduced from -4% to approximately -1%. So this exercise suggests that if direct estimates of the marginal social costs of non-CO2 GHGs are not available, then the use of GWPs to value non-CO2 GHG reductions may be preferable to implicitly assuming a value of zero.
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By Alex L. Marten and Stephen C. Newbold
U.S. Environmental Protection Agency (EPA) National Center for Environmental Economics (NCEE) via Research Papers in Economics (REPEC) www.REPEC.org
Working Paper 11-01; February, 2011