Technical guidance: how do we apply the SC-GHG in our analyses?
The IWG SCC estimates are not a single number, but instead a range of four estimates, based on three discount rates, plus a 95th percentile estimate that represents catastrophic, low-probability outcomes. 1 The IWG estimates are considered lower bounds, so policymakers applying these estimates should consider applying valuations toward the top end of the IWG’s range.
Discount rates allow economists to measure the value of money over time. 2 Higher discount rates result in a lower SCC; if future climate damages are discounted at a high rate, we would be placing less value on avoiding those damages today. The IWG uses discount rates of 5, 3, and 2.5 percent. 3 The fourth IWG value is taken from the 95th percentile of the SC-GHG estimates corresponding to the 3-percent discount rate, which represents the potential for catastrophic climate impacts. 4 The 95th percentile value serves as a methodological attempt to approximate the uncertainties around low-probability but high-damage, catastrophic, or irreversible outcomes that are currently omitted or undercounted in the economic models.
Frequently, agencies will conduct their economic analyses using a range of SC-GHG values. 5 Often, other analyses focus on a “central” estimate of the SCC. 6 The IWG recommends using a 3% discount rate. However, Washington State, for example, selected the 2.5% discount rate as its “central” estimate, for reasons discussed above. And New York State has adopted an additional value that otherwise uses the IWG’s methodology but applies a 2 percent discount rate.
Choosing the most appropriate discount rate is crucial to obtaining the best SCC estimate. Leading economists widely agree that discount rates of 2 percent or lower are appropriate for climate impacts. Accordingly, , as noted above, the federal SC-GHG estimate associated with a 3-percent discount rate should be interpreted as an absolute lower bound. 9 Policymakers should consider adopting higher estimates, such as the IWG estimates at a 2.5 percent discount rate; the IWG “high damages” estimate; or New York’s estimate using a 2 percent discount rate.
Additionally, in November 2022, EPA released a draft SC-GHG update that applies a near-term central discount rate of 2 percent. Those valuations are currently undergoing peer review and are expected to be finalized in 2023 or 2024. Non-federal policymakers may wish to consider adopting these estimates while they undergo peer review. In early 2023, for instance, Canada adopted EPA’s draft updated estimates as its official SC-GHG valuations.
This is suboptimal and will likely lead to an underestimate of climate damages. SC-GHG values are calculated by adding up the streams of future effects from a ton of emissions in the year of anticipated release, with discount rates reflecting the passage of time between the anticipated release and the future effects. It is necessary to include in the analysis emissions for each year that a plan, action or project is in place, to the extent feasible, because the SC-GHG increases over time.
The IWG’s SCC values represent the damages associated with each additional ton of carbon dioxide emissions released from the perspective of the year of emission. It is necessary when conducting a policy analysis at the present time about policies that affect greenhouse gas releases in the future to make sure that the SC-GHG values are translated into the perspective of the year of the policy decision. The proper way to accomplish this translation is by using the discount rate to convert the effects of emissions from the year of release into the present value.
Imagine a policy has costs today and would decrease emissions in the year 2025. The IWG estimates for 2030 are how much those reductions are worth to people in year 2030, looking at cumulative effects over a 300-year period and discounting back to the year 2030. But because we prefer present consumption over future consumption, how we'd value that today isn't the same as how people in year 2030 would value it. Still, we need to discount from year 2030 back to today.
Separate from the discounting considerations, which reflect the resource tradeoffs facing the actors in the relevant year of action, currency tends to inflate over time. The IWG’s calculations for the SCC are based upon 2020 dollars, but the purchasing power of the dollar has gone down since then. It is important to ensure that the analysis is consistent across time frames and makes sense to decisionmakers. Thus, before any calculations are done, the analysts should account for inflation by converting all of the SC-GHG values from 2020 dollars into dollars for the year the analysis is taking place.
Not quite. It is still best to include a qualitative description of omitted damages. Best practices for regulatory analysis require including all costs and benefits, even the hard-to-monetize ones. Include a qualitative description to emphasize that the SC-GHG is a lower bound on damages.
To make the calculation, the SC-GHG figure should be multiplied by the projected avoided emissions to provide a figure for the monetized benefits of an action’s or project’s avoided greenhouse gas emissions. Specifically, you should:
- Convert the SC-GHG values from 2020 dollars to the year of analysis, using a consumer price index inflation calculator 11 (if the values have not yet been converted);
- Determine the avoided emissions for each year affected by the policy;
- Multiply the quantity of avoided emissions in each year by the corresponding SC-GHG in that year.12 , Do this for each year of the analysis.13
- Apply the same discount rate used to calculate the SC-GHG to calculate the present value of future effects of emissions; 14
- Sum these values for all relevant years between the effective date and the end date to arrive at the total monetized climate benefits of the plan’s avoided emissions; 15 and
- Qualitatively describe in the final discussion of the climate benefits all of the other damages that have been omitted from the SC-GHG.
Because the SC-GHG has been used in a number of federal regulatory impact analyses and environmental impact statements, there are a number of examples from which states can learn how to conduct their own SC-GHG analysis. 16
In a 2016 report, the National Academies of Sciences recommended that the SC-GHG be used with a “consistent” discount rate in cost-benefit analysis. 17 “Consistent” should be interpreted to mean “compatible” and based on the same theoretically-sound methodology (i.e., theoretically consistent): for example, applying a higher discount rate (say 3%) to other costs and benefits may be “consistent” with a lower discount rate (say 2.5%) for the SC-GHG, to account for the greater uncertainty with respect to climate change relative to more short-run benefits and costs. This approach is appropriate when climate uncertainty exceeds the short-run uncertainty captured by most benefit-cost analysis in which the SC-GHG is applied.