Are the federal IWG numbers still the best?

The “central” SCC estimate of around $50 per ton of CO2 1 is the best currently available estimate for the external cost of carbon dioxide emitted in the year 2020. Of course, there is uncertainty over the science and economics of climate change. This uncertainty is due to the complexity of the climate system, the difficulty of placing a monetary value on environmental services, the long time horizon over which climate change occurs, and the unprecedented amount of carbon emissions that have entered the atmosphere since the industrial revolution. As science and economics improve and progress, this uncertainty will decline, but uncertainty can never be fully eliminated from future predictions. The fact that there is uncertainty does not mean that there is no social cost of carbon dioxide emissions. If anything, this uncertainty implies that we should take stronger action, as discussed in the below section on uncertainty. 2

We discuss at length below why the IWG estimates still represent the best methodology and are based on the best available science and economics. Recent executive orders do not change this fact.

How were the IWG numbers developed?

A federal court ruling spurred the development of the SCC.  A 2008 ruling by the U.S. Court of Appeals for the Ninth Circuit required the federal government to account for the economic effects of climate change in a regulatory impact analysis of fuel efficiency standards. 3 As a result, President Obama convened the Interagency Working Group on the Social Cost of Greenhouse Gases (IWG) in 2009 to develop an SCC value for use in federal regulatory analysis.

The SCC was developed through an academically rigorous, regularly-updated, and peer-reviewed process. The SCC values were developed using the three most widely cited climate economic impact models that link physical impacts to the economic damages of carbon dioxide emissions. All of these IAMs—DICE, FUND, and PAGE 4 —have been extensively peer reviewed in the economic literature. 5 The newest versions of the models were also published in peer-reviewed literature. 6 The IWG gives each model equal weight in developing the SCC values. 7 The IWG also used peer-reviewed inputs to run these models. 8 The IWG conducted an “extensive review of the literature . . . to select three sets of input parameters for these models: climate sensitivity, socio-economic and emissions trajectories, and discount rates.” 9 For each parameter, the IWG documented the inputs it used, all of which are based on peer-reviewed literature. 10 The analytical methods that the IWG applied to its inputs were also peer-reviewed, and the IWG’s methods have been extensively discussed in academic journals. 11

The IWG’s analytical process in developing the SCC was transparent and open, designed to solicit public comment and incorporate the most recent scientific analysis. Beginning in 2009, the Office of Management and Budget and the Council of Economic Advisers established the IWG, composed of scientific and economic experts from the White House, Environmental Protection Agency, and Departments of Agriculture, Commerce, Energy, Transportation, and Treasury, to develop a rigorous method of valuing carbon dioxide reductions resulting from regulations. 12  In February 2010, the IWG released estimated SCC values, and an accompanying Technical Support Document that discussed the IAMs, their inputs, and the assumptions used in generating the SCC estimates. 13 In May 2013, after all three IAMs had been updated and used in peer-reviewed literature, the IWG released revised SCC values, with another Technical Support Document. 14 The U.S. Government Accountability Office examined the IWG’s 2010 and 2013 processes, and found that these processes were consensus-based, relied on academic literature and modeling, disclosed relevant limitations, and incorporated new information via public comments and updated research. 15

To further enhance the academic rigor of the process, the IWG requested that the NAS undertake a review of the latest research on modeling the economic aspects of climate change to help the IWG assess the technical merits and challenges of potential approaches for future updates to the SCC. 16 In mid-2016, the NAS issued an interim report to the IWG that recommended against conducting an update to the SCC estimates in the near term, but that included recommendations about enhancing the presentation and discussion of uncertainty regarding particular estimates. 17 The IWG responded to these recommendations in its most recent Technical Support Document from 2016,18 which included an addendum on the social cost of methane and the social cost of nitrous oxide. 19 The NAS issued a report in January 2017 that contained a roadmap for how SCC estimates should be updated. 20  In the 2017 report, the NAS recommended future improvements to the IWG three-model methodology, but in the meantime, the NAS supported the continued near-term use of the existing social cost of greenhouse gas estimates based on the DICE, FUND, and PAGE models, as used by federal agencies to date. 21 The SCC estimates will need to be updated over time to reflect the best-available science and changing economic conditions, and, as we discuss below, a nongovernmental organization Resources for the Future plans to undertake this project based on the NAS 2016 and 2017 recommendations.

How have the IWG numbers been used to date?

The IWG numbers have been used extensively in federal regulatory analysis, on more than one hundred occasions since the first estimates were published in 2010. 22 In fact, the mandate for federal agencies to use the IWG SCC values was ended only recently, on March 28, 2017, with Executive Order 13,783. The SCC has, in fact, been used in a range of contexts aside from federal regulatory impact analysis, which we discuss above.

Who has endorsed the IWG numbers?

The IWG SCC numbers have been endorsed or otherwise supported by the NAS, the Government Accountability Office, and the federal courts. The NAS has supported the continued near-term use of the existing social cost of greenhouse gas estimates based on the DICE, FUND, and PAGE models, as federal agencies have done to date. 23 Additionally, the Government Accountability Office found in 2014 that the estimates derived from these models and used by federal agencies are consensus-based, rely on peer-reviewed academic literature, disclose relevant limitations, and are designed to incorporate new information via public comments and updated research. 24 In fact, the social cost of greenhouse gas estimates used in federal regulatory proposals and EISs have been subject to approximately 100 distinct public comment periods. 25 The economics literature confirms that estimates based on these three IAMs remain the best available estimates. 26 Finally, in 2016, the U.S. Court of Appeals for the Seventh Circuit held the estimates used to date by agencies are “reasonable,” and other courts have supported agencies’ use of these values. 27

Did a recent Trump Executive Order delegitimize the IWG numbers?

Absolutely not. While the IWG was disbanded and its guidance was withdrawn, which is unfortunate, the IWG still used the best data, the best models, and the best methodologies that are currently available. Accordingly, the IWG estimates are still the best numbers for states to use and still the only numbers endorsed by the NAS.

If the Trump administration comes out with a new number, should we use it?

Only if the number is consistent with best practices and reflects the best available literature and the recommendations of the NAS panel. If a new number uses a discount rate higher than 5-percent, selects only one of the three IAMs used by the IWG or an IAM that does not take into account nonmarket damages, if it only uses a domestic number, or if it dramatically shortens the time horizon, for example, that would be inconsistent with best practices and should not be followed by the states.

How will the numbers be updated?

In May 2017, the environmental economics think tank, Resources for the Future (RFF), launched a program to update the SCC based on the recommendations made by the NAS. 28 The new initiative contains several key elements. RFF will create a new integrated framework for the estimation process and revise some of the socioeconomic projections to better reflect uncertainty. RFF will also convene domestic and international actors and conduct educational outreach on how to use the SCC. States should consider looking to RFF for new SCC estimates in the coming years.

Are there other estimates of the SCC?

While states should be careful not to cherry-pick a single estimate from the literature, it is noteworthy that various estimates in the literature are consistent with the numbers derived from a weighted average of DICE, FUND, and PAGE—namely, with a central estimate of about $50 per ton of carbon dioxide, and a high-percentile estimate of about $148, for year 2020 emissions (in 2017 dollars, at a 3-percent discount rate). The latest central estimate from DICE’s developers is $104 (at a 3-percent discount rate);29 from FUND’s developers, $14;30 and from PAGE’s developers, $148, with a high-percentile estimate of $386. 31

Similarly, a comparison of international estimates of the social cost of greenhouse gases suggests that a central estimate of $50 per ton of carbon dioxide is a very conservative value. Sweden places the long-term valuation of carbon dioxide at $168 per ton; Germany calculates a “climate cost” of $171 per ton of carbon dioxide in the year 2030; the United Kingdom’s “shadow price of carbon” has a central value of $118 by 2030; Norway’s social cost of carbon is valued at $106 per ton for year 2030 emissions; and various corporations have adopted internal shadow prices as high as $82 per ton of carbon dioxide. 32

All of this—not to mention the damages that are not included in the SCC—suggests, again, that the IWG estimates, while still the most reliable and most endorsed numbers for federal and state-level U.S. policymaking, should be treated as a lower bound.

  1.  For 2020 emissions in 2017 dollars, from TSD 2016, Table 2, inflated with the Bureau of Labor Statistics Inflation Calculator, available here. ↩︎
  2.  William D. Nordhaus, Projections and Uncertainties about Climate Change in an Era of Minimal Climate Policies. National Bureau Of Economic Research (2016), available here. ↩︎
  3.  Ctr. for Biological Diversity v. Nat’l Highway Traffic and Safety Admin., 538 F.3d 1172 (9th Cir. 2008). ↩︎
  4.  More specifically: DICE (Dynamic Integrated Climate and Economy), developed by William D. Nordhaus (more information available here); PAGE (Policy Analysis of the Greenhouse Effect), developed by Chris Hope; and FUND (Climate Framework for Uncertainty, Negotiation, and Distribution), developed by Richard Tol (more information available here). See TSD 2010, supra note 3, at 5. ↩︎
  5.  See TSD 2010, supra note 3, at 4-5. ↩︎
  6.  See TSD 2016, supra note 2, at 6; see also William Nordhaus, Estimates of the Social Cost of Carbon: Concepts and Results from the DICE-2013R Model and Alternative Approaches, 1 J. Ass’n Envtl. & Resource Economists 273 (2014). ↩︎
  7.  See TSD 2016, supra note 2 ↩︎
  8.  Id at 5-29. ↩︎
  9.  Id at 6. ↩︎
  10.  See TSD 2010, supra note 3, at 12-23. ↩︎
  11.  See, e.g., Michael Greenstone et al., Developing a Social Cost of Carbon for U.S. Regulatory Analysis: A Methodology and Interpretation, 7 Rev. Envtl. Econ. & Pol’y 23 (2013); Frank Ackerman & Elizabeth Stanton, Climate Risks and Carbon Prices: Revising the Social Cost of Carbon, Econ.: The Open-Access, Open-Assessment E-Journal (Apr. 2012), at 6 (reviewing the IWG’s methods and stating, “[T]he Working Group analysis is impressively thorough.”) ↩︎
  12.  TSD 2010, supra note 3, at 2-3. ↩︎
  13.  See generally id. ↩︎
  14.  See Interagency Working Group On The Social Cost Of Carbon, Technical Support Document: Technical Update Of The Social Cost Of Carbon For Regulatory Impact Analysis Under Executive Order 12866 (2013) [hereinafter TSD 2013]. ↩︎
  15.  Gov’t Accountability Office, Regulatory Impact Analysis: Development of Social Cost of Carbon Estimates (2014) [hereinafter Gov’t Accountability Office]. ↩︎
  16.  See TSD 2016, supra note 2, at 2. ↩︎
  17.  National Academies of Sciences, Engineering and Medicine, Assessment of Approaches to Updating the Social Cost of Carbon: Phase 1 Report on a Near-Term Update (2016) [hereinafter NAS First Report]. ↩︎
  18.  TSD 2016, supra note 2. ↩︎
  19.  Interagency Working Group On Social Cost Of Greenhouse Gases, United States Government, Addendum To Technical Support Document On Social Cost Of Carbon For Regulatory Impact Analysis Under Executive Order 12866: Application Of The Methodology To Estimate The Social Cost Of Methane And The Social Cost Of Nitrous Oxide (2016) [hereinafter “TSD 2016 Addendum”], available here. ↩︎
  20.  The National Academy of Sciences accepted public comment during its review process. Policy Integrity submitted comments during that process. Institute for Policy Integrity, Recommendations for Changes to the Final Phase 1 Report on the Social Cost of Carbon, and Recommendations in Anticipation of the Phase 2 Report on the Social Cost of Carbon (Apr. 29, 2016) [hereinafter “Policy Integrity NAS comments”] available here. ↩︎
  21.  Specifically, NAS concluded that a near-term update was not necessary or appropriate and the current estimates should continue to be used while future improvements are developed over time. NAS First Report, supra note 65. ↩︎
  22.  Howard and Schwartz 2017, Appendix A; Jane A. Leggett. Federal Citations to the Social Cost of Greenhouse Gases, Congressional Research Service (Mar. 21, 2017), available here. ↩︎
  23.  Specifically, NAS concluded that a near-term update was not necessary or appropriate and the current estimates should continue to be used while future improvements are developed over time. NAS First Report, supra note 65. ↩︎
  24.  Gov’t Accountability Office, supra note 63. ↩︎
  25.  Howard & Schwartz 2017, supra note 7, at Appendix A. ↩︎
  26.  E.g., Richard G. Newell et al., Carbon Market Lessons and Global Policy Outlook, 343 Science 1316 (2014); Bonnie L. Keeler et al., The Social Costs of Nitrogen, 2 Science Advances e1600219 (2016); Richard L. Revesz et al., Global Warming: Improve Economic Models of Climate Change, 508 Nature 173 (2014) (co-authored with Nobel Laureate Kenneth Arrow, among others). ↩︎
  27.  See e.g. Zero Zone v. Dept. of Energy, No. 14-2147, at 44 (7th Cir., Aug. 8, 2016) (finding that the agency “acted reasonably” in using global estimates of the social cost of carbon, and that the estimates chosen were not arbitrary or capricious); High Country Conservation Advocates v. U.S. Forest Service (D. Colo., June 27, 2014); Western Organization of Resource Councils v. U.S. Bureau of Land Management (D. Mont., Jan. 25, 2017). ↩︎
  28.  Resources for the Future, “Updating and Improving the Social Cost of Carbon,” available here; Nat’l Acad. Sci., Eng. & Medicine, Valuing Climate Damages: Updating Estimates of the Social Cost of Carbon Dioxide 3 (2017) [hereinafter “NAS, Second Report”].          ↩︎
  29.  William Nordhaus, Revisiting the Social Cost of Carbon, Proc. Nat’l Acad. Sci. (2017) (estimate a range of $21 to $141). ↩︎
  30.  D. Anthoff & R. Tol, The Uncertainty about the Social Cost of Carbon: A Decomposition Analysis Using FUND, 177 Climatic Change 515 (2013). ↩︎
  31.  C. Hope, The social cost of CO2 from the PAGE09 model, 39 Economics (2011); C. Hope, Critical issues for the calculation of the social cost of CO2, 117 Climatic Change, 531 (2013). Values inflated to 2017 USD.  ↩︎
  32.  See Howard & Schwartz 2017, supra note 7, at Appendix B. All figures in 2017 USD. ↩︎