Technical Elements

How is the social cost of greenhouse gases derived?

Experts have been valuing greenhouse gases emissions since the 1990s. EPA’s estimates incorporate dozens of expert, peer-reviewed studies on the pace and economic impact of climate change. These values involve four basic components, or modules, as recommended by the National Academies of Sciences in a 2017 report.

First, the socioeconomic and emissions module projects baseline population, income, and greenhouse gas emissions out to 2300 using probabilistic estimates developed by Resources for the Future. Second, the climate module projects future temperature increases and sea-level rise using the Finite Amplitude Impulse Response (FaIR) model. Third, the damages module estimates future monetized damages from climate change using three widely used expert damage models. Fourth, the discounting module discounts the stream of future climate damages back to present value using approaches developed by leading discounting experts.  

What damage models did EPA use?

EPA incorporated three damage models: 1) a sub-national, sectoral damage function developed by the Climate Impact Lab; 2) a country-scale, sectoral damage function developed by Resources for the Future; and 3) a meta-analysis damage function (that is, a damage function that incorporates results from many other damage functions) designed by Ph.D. economists Peter Howard (Policy Integrity’s economics director) and Thomas Sterner. Although they used different methodologies, the three models all derived similar climate-damage estimates, indicating robustness to EPA’s results.

What discount rates did EPA use, and why?

In economics, a discount rate translates impacts that occur at different times into a common present value. The higher the discount rate, the less that impacts farther into the future are valued. 

For its central SCC estimate, EPA applied a near-term discount rate of 2% that declines over time. This 2% rate reflects expert consensus and current guidance from the Office of Management and Budget (OMB). Specifically, in its Circular A-4 guidance for regulatory impact analysis, OMB expressly endorses a 2% discount rate that declines over long time horizons, noting that this rate reflects the average real return on U.S. Treasury yields. 

In addition to its central rate, EPA also developed climate-damage estimates using discount rates of 1.5% and 2.5%. The values at 1.5% reflect a higher estimate of climate damages; those at 2.5% reflect a lower estimate. Collectively, the three values provide a useful monetary range.

What climate damages does EPA include and omit, and are its values considered underestimates?

EPA’s valuations include some key damages from climate change such as impacts on human health, energy usage, labor productivity, agriculture, and coastal regions. But they also omit key damages including effects on water consumption, infectious diseases, biodiversity and wildlife, and national security. EPA’s valuations also do not include effects from extreme temperatures and large-scale Earth system changes such as climate tipping points.   

For these reasons, EPA’s climate-damage valuations are considered underestimates that should set a floor, not a ceiling, for climate policy.

Why does the social cost of greenhouse gases increase over time?

With each successive year, there is a greater stock of greenhouse gases in the atmosphere. This means that each additional ton of greenhouse gases emitted will have a greater impact on climate systems and cause greater damage.