Due to “recent scientific advances,” the EPA has proposed a new approach to estimating the social cost of greenhouse gases (SC GHGs). SC GHGs are the estimated social harms from each incremental ton of GHG emissions released into the atmosphere.
The proposal came packaged as part of a proposed rule to cut methane and other harmful emissions. In this case, the SC GHG is being applied to methane in the Agency’s benefit-cost analysis.
In the docket for the proposed rule, the EPA is soliciting public comment on the sensitivity analysis and the external review draft of the accompanying technical report, “Report on the Social Cost of Greenhouse Gases: Estimates Incorporating Recent Scientific Advances,” which explains the methodology underlying the new set of SC GHG estimates.
The proposed use of a new SC GHG analysis method marks the first time a government agency has suggested a new approach in estimating SC GHGs.
“For EPA’s central analysis of the proposed methane rule, the agency does two things: It applies the interim estimates of the social cost of methane that were established under Executive Order 13990, which has its foundation in the [Social Cost of Carbon (SCC)] estimation process that was developed by the original Interagency Working Group on the [SC GHG] in 2010,” says Resources magazine. “EPA also includes a new sensitivity analysis that incorporates a comprehensive update to the way the agency estimates the SCC, including for carbon dioxide, methane, and nitrous oxide. This updated estimate allows for EPA to receive public comment on the new methodology, inform potential future modifications to the SCC estimation process, and support the potential usage of the SCC in the final rule.”
The proposed new analysis approach includes updates to each of the four major steps in conducting SCC estimations:
- Socioeconomic projections
- Climate modeling
- Translation to economic damages
- Economic discounting
Socioeconomic projections
Previously, to represent the uncertainty involved in predicting future socioeconomic factors, the Agency utilized a methodology of analyzing five different scenarios in which each scenario was treated as equally likely.
“This approach has been criticized—for example, by a landmark 2017 panel of the National Academies of Science, Engineering, and Medicine (NASEM)—for not incorporating the uncertainties in the full set of relevant socioeconomic variables and for not reflecting the recent research on the full range of future climate scenarios,” Resources continues.
In the new methodology, the Agency proposes utilizing RFF Socioeconomic Projections, which include projections of population; per-capita economic growth; and emissions of carbon dioxide, methane, and nitrous oxide generated from expert input and statistical modeling.
Incorporating this methodology is in line with the NASEM’s recommendations.
Climate modeling
This estimation looks at predictions of what the climate will look like in response to changed emissions levels.
“For its new analysis, EPA follows the recommendation from NASEM to use a state-of-the-science representation of the climate system,” Resources adds. “Though simplified in comparison to more comprehensive models, this update represents the range of results provided by more complex models for variables such as global temperature.”
Economic damages
These estimations look at the monetary impact from global temperature changes and include damages to agriculture and human health and rises in sea levels.
“To update the damage functions, EPA uses three independent lines of evidence: the RFF-Berkeley GIVE model, the Climate Impact Lab’s Data-driven Spatial Climate Impact Model (DSCIM), and a recent meta-analysis by Peter Howard and Thomas Sterner. EPA averages the results from these three models to produce an SCC estimate for a given range of discount rates,” notes Resources. “EPA’s SCC estimate therefore aligns with recent research and reflects the global nature of greenhouse gases. The estimate includes climate impacts, regardless of which country is affected or in which country those impacts originate.”
Economic discounting
This estimation applies discount rates to measure the future monetary value of impacts against current dollar values.
The new approach suggests two changes to this part of the estimations:
First, the discount rate has been changed from 3 percent to 2 percent, with additional sensitivity analyses at both 1.5 percent and 2.5 percent. This change “reflects the decades-long decline in market rates of interest that has occurred in the nearly 20 years since the 3 percent benchmark was devised,” according to Resources.
Additionally, the way the Agency applies discount rates has been changed. The EPA is utilizing an approach that is applied to risky financial assets known as the “Ramsey Framework,” named for economist Frank Ramsey, who developed the methodology.
“The Ramsey framework captures the intuitive idea that an investment—whether the investment is a financial asset or an investment in mitigating climate change—is more valuable if it ‘pays off’ particularly well in potential futures that experience bad outcomes (e.g., weak economic growth),” Resources says. “Conversely, an investment is less valuable if the reverse is true (i.e., if the investment primarily pays off when the benefit is needed less).”
Other benefits
“EPA’s move to make its analysis fully open source and freely available represents an important step forward for transparency and open science.”