Institute for Policy Integrity New York University School of Law

Carol M. Browner, Assistant to the President Peter Orszag, Director Office of Energy and Climate Change Policy Office of Management and Budget

Dr. Steven Chu, Secretary Dr. Christina Romer, Chair Department of Energy Council of Economic Advisors

Dr. John Holdren, Director Kenneth Lee Salazar, Secretary Office of Science and Technology Policy Department of the Interior

Lisa Jackson, Administrator Cass Sunstein, Administrator Environmental Protection Agency Office of Information and Regulatory Affairs

Raymond H. LaHood, Secretary Lawrence H. Summers, Director Department of Transportation National Economic Council

Dr. Jane Lubchenco, Administrator Nancy Helen Sutley, Chair National Oceanic and Atmospheric Council on Environmental Quality Administration

September 11, 2009

Subject: Federal Interagency Review on the Social Cost of Carbon

Dear Senior U.S. Government Officials:

We were pleased to learn from a recent Department of Energy rulemaking that an interagency initiative has made significant progress in developing a more rigorous and consistent approach to valuing the benefits of reducing greenhouse gas emissions.1 We understand that the results of this review process are preliminary, and we support the continuation of efforts to refine these calculations.2 We offer the following comments to inform the process as it moves forward:

 While the social cost of carbon is a useful tool for evaluating policy, analysts must recognize the limitations of the integrated assessment models (IAMs) on which estimates are based, and they should clarify where areas of uncertainty in the models may obscure potential benefits of greenhouse gas reductions.

 The full range of environmental, social, and economic impacts of greenhouse gas emissions should be taken into account when calculating the social cost of carbon; where impacts

1 Energy Conservation Program: Energy Conservation Standards for Refrigerated Bottled or Canned Beverage Vending Machines, 74 Fed. Reg. 44913, 44947 (Aug. 31, 2009) (to be codified at 10 C.F.R. pt. 431) (hereinafter BVM Rule). 2 Id. at 44948 (“It should be emphasized that the analysis described below is preliminary. These complex issues are of course undergoing a process of continuing review. Relevant agencies will be evaluating and seeking comment on all of the scientific, economic, and ethical issues before establishing final estimates for use in future rulemakings.”).

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cannot be quantified, analysts should present a balanced qualitative analysis, along with a recognition that monetized benefits are likely to be underestimates. Any ancillary benefits of specific climate policies—such as health and ecological benefits from the reductions in conventional air pollutants that will likely accompany greenhouse gas controls—must also be incorporated in economic analysis.

 Future rulemakings must adopt some model for accounting for the potentially catastrophic and irreversible nature of climate change—otherwise, a core economic justification for reducing greenhouse gas emissions will be obscured.

 Because climate change mitigation is a prime example of a global public good, the most appropriate measure of the social cost of carbon is a global one. If a U.S.‐specific value of the social cost of carbon is to be estimated, it should reflect the full range of pathways through which international events can affect the United States, including increased risks to national security, the transnational spread of infectious diseases, and market disruptions.

 Discounting benefits to future generations raises important and controversial questions of ethics and fairness that are beyond the scope of economic analysis alone. In the context of the social cost of carbon, analysts should explicitly consider a range of discount rates, including very low ones, as well as alternative discounting methodologies (such as hyperbolic discounting and differential discount rates) in order to convey the sensitivity of results to assumptions on discounting. Alternative ethical frameworks should also be used to inform discussions of intergenerational discounting and equity.

To strengthen analytical rigor and transparency, we respectfully ask that these concerns be addressed in considering the social cost of carbon in future regulatory actions.

Background on the Social Cost of Carbon

The “social cost of carbon” (SCC) is a monetary measure of the incremental damage resulting from greenhouse gas (GHG) emissions. The SCC assigns a net present value to the marginal impact of one additional ton of carbon dioxide‐equivalent emissions released at a specific point in time. SCC estimates take into consideration such factors as net agricultural productivity loss, human health effects, property damages from sea level rise, and changes in ecosystem services.3

Until recently, the SCC has been estimated by federal agencies only on a rather ad hoc and inconsistent basis. Over the past few years, various federal agencies have selected a wide range of SCC estimates when calculating the benefits of proposed regulations. For example, in 2008, the Department of Transportation assumed a value of $7 per ton of carbon dioxide for emissions reductions achieved by a proposed vehicle efficiency standard.4 But by the following year, the agency was instead using a mean value of $33 for essentially the same regulation (and was also

3 See EPA, 420‐D‐09‐001, DRAFT REGULATORY IMPACT ANALYSIS: CHANGES TO RENEWABLE FUEL STANDARD PROGRAM 690 tbl. 5.3‐3 (2009) (listing the following areas as modeled by FUND: agricultural and forestry production; water resources; energy consumption for cooling and heating; sea level rise, dry land loss, wetland loss, and coastal protection costs; forced migration due to dry land loss; changes in human health associated with diarrhea incidence, vector‐borne diseases, cardiovascular disorders, and respiratory disorders; hurricane damage; and loss of ecosystems/biodiversity). 4 Average Fuel Economy Standards, Passenger Cars and Light Trucks; Model Years 2011‐2015, 73 Fed. Reg. 24351, 24414 (proposed May 2, 2008) (selecting $7 as the midpoint of a possible $0‐$14 range).

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analyzing possible values at $2 and $80).5 The Department of Energy has at times used a range of $0‐$20, while in other rulemakings has copied the Department of Transportation’s figures.6 Finally, in 2008, EPA developed a technical support document on the SCC. Using both a meta‐analysis of existing literature and a specific economic model, EPA calculated a wide range of possible SCC estimates from ‐$6 to $695.7 Even more troubling than this very wide range of valuations is the historic tendency of some federal agencies not to quantify the benefits of reducing GHG emissions.8

By remedying these inconsistencies and promoting use of a standard SCC range across the entire federal government, the interagency review process will help advance sound climate change policy, grounded in rigorous economic and scientific analysis. Such balanced analysis is an essential decisionmaking tool for regulators. To craft specific measures and approaches, to compare a proposal with competing policy alternatives, and ultimately to make a rational and educated decision, policymakers need to understand the full range of consequences—both positive and negative—that their rules will have on the economy, the environment, and public health. Reliable and transparent valuation of all costs and benefits is vital to this process, and the interagency review will help ensure that future rulemakings fully evaluate the effects of climate policies. Moreover, now that a range of SCC estimates has been calculated, peer‐reviewed, and published by a collection of federal agencies, policymakers can no longer choose to ignore the benefits of reducing GHG emissions.

The Department of Energy’s recent energy efficiency standards for refrigerated vending machines, required by the Energy Policy and Conservation Act as amended by the 2005 Energy Policy Act, represent the first regulatory action to utilize the results of the interagency SCC review.9 We are encouraged by the quality of analysis in that rulemaking, but we believe both the interagency review process and future rulemakings based on the interagency review should consider the following recommendations.

Recognizing the Limits of Integrated Assessment Models

A robust benefits analysis must be thorough, transparent, and anchored in science. The Department of Energy’s rulemaking acknowledges that the results of the SCC interagency process may be contestable because scientific knowledge about climate change’s speed and severity is imperfect, and because the economic models of climate change’s impacts are incomplete.10 While admitting these limitations is a valuable first step, any federal rulemaking that uses the SCC

5 Average Fuel Economy Standards, Passenger Cards and Light Trucks Model Year 2011, 74 Fed. Reg. 14195, 14350 (Mar. 30, 2009) (to be codified at 49 C.F.R. pts. 523, 531‐37) (revising SCC calculations, in light of substantial public comments). 6 Compare, e.g., Energy Conservation Program for Commercial and Industrial Equipment, 74 Fed. Reg. 1091, 1133 (Jan. 9, 2009) (to be codified at 10 C.F.R. pt. 431) (presenting independent SCC calculations by the Department of Energy), with, e.g., Energy Conservation Program for Certain Industrial Equipment: Energy Conservation Standards and Test Procedures for Commercial Heating, Air‐Conditioning, and Water‐Heating Equipment 74 Fed. Reg. 36312, 36342 (July 22, 2009) (to be codified at 10 C.F.R. pt. 431) (using Department of Transportation’s calculations in Department of Energy rulemaking). 7 EPA, TECHNICAL SUPPORT DOCUMENT ON BENEFITS OF REDUCING GHG EMISSIONS (2008) (developing a range of SCC estimates, for the agency’s own use and as possible guidance for other federal agencies). 8 See MARTHA G. ROBERTS & NANCY SPENCER, ENVIRONMENTAL DEFENSE FUND, CARBON COUNTS: INCORPORATING THE BENEFITS OF CLIMATE PROTECTION INTO FEDERAL RULEMAKING 12‐15 (2008) (detailing various federal rulemakings that omitted the benefits of GHG reductions); Ctr. for Biological Diversity v. NHTSA, 538 F.3d 1172 (9th Cir. 2008) (holding that the Department of Transportation’s failure to calculate the social cost of carbon when promulgating vehicle fuel efficiency standards was arbitrary and capricious and in violation of the Administrative Procedure Act). 9 BVM Rule, supra note 1, at 44947. 10 Id.

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estimates developed by the interagency process must go further in explaining how such limitations affect the weighing of costs and benefits.

Rulemakings should make it explicit that, given current methodological limitations of integrated assessment models, SCC estimates are likely to be underestimates, meaning that the calculated benefits from reducing GHG emissions are likely to represent a lower bound. For example, as EPA recently affirmed in a rulemaking, “the current trajectory for [global] GHG emissions is higher than typically modeled” and the “current regional population and income trajectories…are more asymmetric than typically modeled.”11 As a result, actual climate change and vulnerability to climate change is likely much greater than captured by current SCC estimates. Other potential limitations of integrated assessment models include inadequate accounting for catastrophic risk, failure to measure cumulative and cross‐sector impacts, assumptions that climate change will not impact economic productivity, and the difficulty of counting non‐market costs.12 In the past, EPA has stated that such significant omissions in the economic models suggest that current SCC estimates are “very likely” to be underestimates.13 Including similar language and discussions in rulemakings would help place SCC valuations in the appropriate framework for interpretation.

Underestimated, Un­Quantified, and Omitted Impacts

Listing only a few examples of omitted variables—as the Department of Energy’s recent rulemaking does14—undervalues significant benefits of climate policies simply because they are not quantifiable. All costs and benefits, whether or not they can be quantified and monetized, deserve equal attention in economic analysis. Rulemakings should provide a detailed list of all known impacts not accounted for in the economic models. A good example can be found in the table set out below, adapted from EPA’s proposed rulemaking on renewable fuel standards.

To whatever extent possible, those variables not included in the economic models should be quantified, even if they cannot be fully monetized. Executive Order 12,866 instructs federal agencies to quantify costs and benefits “to the extent feasible” when conducting economic analysis of significant regulatory actions.15 Quantification greatly facilitates the weighing of costs and benefits and improves the quality of the rulemaking. In its Circular A­4, the White House Office of Management and Budget admits that some costs and benefits will be difficult to monetize, but directs agencies to consider other means of quantification.16 Where quantification proves impossible, an in‐depth qualitative discussion is necessary to ensure that important impacts are not ignored by decisionmakers.

11 EPA, DRAFT REGULATORY IMPACT ANALYSIS, supra note 3, at 689. 12 See Jody Freeman & Andrew Guzman, Seawalls Are Not Enough: Climate Change and U.S. Interests 18 (U.C. Berkeley Pub. L. Res. Paper No. 1357690, 2009). 13 EPA, TECHNICAL SUPPORT DOCUMENT, supra note 7, at 15. 14 See BVM Rule, supra note 1, at 44947 (“[S]ome of the likely and potential damages from climate change—for example, the value society places on adverse impacts on endangered species—are not included in all of the existing economic analyses”); id. at 44979 (“The agency is keenly aware that the current IAMs fail to include all relevant information about the likely impacts from greenhouse gas emissions. For example, ecosystem impacts, including species loss, do not appear to be included in at least two of the models. Some human health impacts, including increases in food‐borne illnesses and in the quantity and toxicity of airborne allergens, also appear to be excluded.”). 15 Exec. Order No. 12,866 § 6(3)(C), 58 Fed. Reg. 51,735, 51,741 (Oct. 4, 1993) (codified at 45 C.F.R. pt. 88). 16 See OFFICE OF MGMT. & BUDGET, CIRCULAR A‐4, 26 (2003).

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List of Impacts Typically Omitted from SCC Models17

Reduction in growing season (e.g., in Sahel/southern Africa) Increase in growing season in moderate climates Agriculture Impact of precipitation changes on agriculture Impact of weather variability on crop production Reverse of carbon uptake, amplification of climate change Thresholds or “tipping points” associated with species loss, ecosystem collapse, and long‐term catastrophic risk (e.g., Antarctic ice sheet collapse) Species existence value and the value of having the option for future use Earlier timing of spring events; longer growing season Biomes/ Poleward and upward shift in habitats; species migration Ecosystems Shifts in ranges of ocean life Increases in algae and zooplankton Range changes/earlier migration of fish in rivers Impacts on coral reefs Ecosystem service disruption (e.g. loss of cold water fish habitat in the U.S.) Coral bleaching due to ocean warming Energy production/infrastructure Energy Water temperature/supply impacts on energy production Social and political unrest abroad that affects U.S. national security (e.g., violent Foreign conflict or humanitarian crisis) Affairs Damage to foreign economies that affects the U.S. economy Domestic valuation of international impacts Longer fire seasons, longer burning fires, and increased burn area Forest Disappearance of alpine habitat in the United States Tropical forest dieback in the Amazon Insurance costs with changes in extreme weather, flooding, sea level rise Global transportation and trade impacts from Arctic sea ice melt GDP/ Distributional effects within regions Economy Vulnerability of societies highly dependent on climate‐sensitive resources Infrastructure costs (roads, bridges) Extreme weather events (droughts, floods, fires, and heavy winds) Increased deaths, injuries, infectious diseases, stress‐related disorders with more frequent extreme weather (droughts, floods, fires, and heavy winds) Health Increases in malnutrition, food‐borne illnesses Air quality interactions (e.g., ozone effects, including premature mortality) Changes in Arctic/Antarctic ecosystems Snow/ Enlargement and increased numbers of glacial lakes; increased flooding Glacier Snow pack in southeastern United States Changes in tourism revenues due to ecosystems and weather events Tourism Arctic hunting/travel/mountain sports River flooding Infrastructure, water supply Water Precipitation changes on water supply; increased runoff in snow‐fed rivers Increasing ground instability and avalanches

17 Information and format for table based on EPA, TECHNICAL SUPPORT DOCUMENT, supra note 7, at 16‐17, and EPA, DRAFT REGULATORY IMPACT ANALYSIS, supra note 3, at 691 tbl. 5.3‐4.

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Finally, most climate policies will generate ancillary benefits, wholly apart from any effect tied to climate change. These ancillary benefits are definitely not captured in the social cost of carbon, but could be very large and will mostly accrue to current generations. For example, measures that increase energy efficiency or encourage clean energy generation will also lead to reductions in local air pollutants, with attendant benefits for human health and ecosystems. Other ancillary benefits include reduced ocean acidification and increased forest preservation.18

The magnitude of such ancillary benefits may be significant. For example, a forthcoming working paper estimates that representative federal climate legislation would result in health‐related co‐ benefits of $3 to $9 per ton of carbon dioxide avoided (due to reductions in conventional air pollutants).19 Other studies, using different methodologies, have found similarly large benefits.20 Because the ancillary benefits of greenhouse gas reductions could represent an important component of total benefits, it is essential for rulemakings that use the interagency SCC estimates not to omit significant ancillary benefits, but rather to identify and quantify them separately.

Accounting for Catastrophic Risk

Certain events, even though they carry a very low probability chance of occurring, would impose catastrophic costs if they come to pass. For example, there may be certain temperature “tipping points,” when the environmental consequences of global warming will themselves begin to reinforce the climatic changes. Polar ice currently reflects heat away from the planet’s surface; if that ice melts as temperatures rise, more heat will be absorbed by newly exposed land and water, thereby dramatically speeding up global warming.21 Similarly, if the oceanic heat and salinity dynamics change enough that entire ocean currents shift, the impact on worldwide weather patterns could be unprecedented and unpredictable.22 Many of these changes are irreversible, certainly over relevant time scales.

Because there is no consensus economic model for how to value such high‐impact/low‐probability damages, they have been excluded from past SCC calculations. But failure to account appropriately for irreversible catastrophic risk will skew social cost of carbon numbers, because some of the most economically relevant rationales for moving forward with greenhouse gas controls will be ignored. The same rationale that encourages individuals and firms to pay a premium to purchase insurance (i.e., risk aversion) justifies additional expenditures in the face of uncertainty, especially uncertainty about catastrophic losses.23 Furthermore, when choices are irreversible, there is a

18 For a more complete discussion of possible ancillary benefits, see ENV’T POL’Y COMM., ORG. FOR ECON. COOPERATION & DEV. (OECD), ENV/EPOC/GSP(2001)13/Final, ANCILLARY BENEFITS AND COSTS OF GHG MITIGATION: POLICY CONCLUSIONS 6 (2001), available at http://www.olis.oecd.org/olis/2001doc.nsf/LinkTo/NT00000ABA/$FILE/JT00124610.pdf 19 Britt Groosman, Nicholas Z. Muller, & Erin O’Neill, The Ancillary Benefits from Reductions of Greenhouse Gas Emissions from Mobile and Electric Power Sources in the United States (Middlebury College Dept. of Economics Working Paper, forthcoming 2009). 20 John Balbus, Ramya Chari, & Kristie L. Ebi, A Wedge­Based Approach to Estimating Health Co­Benefits of Climate Change Mitigation Activities in the United States: Health Co­Benefits of Specific US Climate Activities, (estimating co‐benefits for the year 2020 in the range of $29 and $68 per ton of carbon ($8 to $19 per ton of avoided CO2‐equivalent ton)). 21 See Timothy M. Lenton et al., Tipping Elements in the Earth’s Climate System, 105 PROC. OF THE NAT’L ACAD. OF SCI. 1786 (2008). 22 See id. 23 See Nicholas Stern, The Economics of Climate Change, AM. ECON. REV., May 2008, at 1, 17, available at http://www.atypon‐link.com/AEAP/doi/pdf/10.1257/aer.98.2.1 (explaining attitudes to risk).

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value to preserving options in the face of uncertainty, and rational actors are willing to pay a premium to preserve the option to avoid an irreversible mistake.24

Indeed, recent research in the economics literature has suggested that conventional welfare analysis ignoring these “fat‐tail risks” may be fundamentally inapplicable to the case of climate change, and has shown that the treatment of low‐probability but catastrophic events can have a greater impact on the outcome of analysis than even the choice of discount rate.25

There are methods to account for irreversibility, including the theory of real options,26 as well as approaches that emphasize risk management rather than consumption smoothing.27 Though uncertainty can complicate economic analysis, uncertainty does not justify ignoring a significant element of a regulatory issue. Courts have repeatedly declared that “[t]he agency’s job is to exercise its expertise to make tough choices about which of the competing estimates is most plausible, and to hazard a guess as to which is correct….Regulators by nature work under conditions of serious uncertainty, and regulation would be at an end if uncertainty alone were an excuse….”28 In future rulemakings, agencies must attempt to develop a model that best accounts for the potentially catastrophic aspects of climate change risks. Merely acknowledging the limitation, as the Department of Energy does in its recent rulemaking,29 is an insufficient response.

International versus Domestic Valuations

A central question in estimating the SCC is the geographic scope of climate change impacts to be considered. We strongly agree with the conclusion of the interagency review process that that the global SCC should be the “primary” and preferred figure for estimating the benefits of climate legislation.30 The Department of Energy’s recent rulemaking explained that the global SCC value is appropriate since climate change “involves a global public good in which the emissions of one nation may inflict significant damages on other nations and [where] the United States is actively engaged in promoting an international agreement to reduce worldwide emissions.”31 However, because of past confusion and inconsistency on this issue,32 future rulemakings should go into

24 See Letter from Michael Livermore, Executive Director of IPI, to Minerals Management Service, U.S. Dep’t of Interior (Apr. 6, 2009) (discussing the problems of irreversibility and uncertainty with respect to valuing offshore natural resources, and the need to incorporate an options value framework into the federal oil and gas leasing program). 25 See Martin L. Weitzman, On Modeling and Interpreting the Economics of Catastrophic Climate Change (Harvard Univ. Working Paper, Feb. 2008), available at http://www.economics.harvard.edu/faculty/weitzman/files/modeling.pdf; E. Nævdal & J. Vislie, Climate Change, Catastrophic Risk and the Relative Unimportance of Discounting (Univ. of Oslo Dept. of Econ. Memorandum 28, 2008). 26 See Jon Anda, Alexander Golub, & Elena Strukova, Economics of Climate change Under Uncertainty: Benefits of Flexibility, 37 ENERGY POL’Y 1345 (2009); Andrea Baranzini et al., The Impact of Possible Climate Catastrophes on Global Warming Policy, 31 ENERGY POL’Y 691 (2003) (applying an options approach to cost‐benefit analysis of climate policy, to account for uncertainty, irreversibility, and catastrophes); Livermore, supra note 24. 27 See e.g. Gary W. Yohe, Lessons for Mitigation from the Foundations of Monetary Policy in the United States in HUMAN INDUCED CLIMATE CHANGE: AN INTERDISCIPLINARY ASSESSMENT 294 (2007, Michael E. Schlensinger et al. eds.). 28 Pub. Citizen, Inc. v. Fed. Motor Carrier Safety Admin., 374 F.3d 1209, 1221 (D.C. Cir. 2004). 29 BVM Rule, supra note 1, at 44949 (“In addition, there has been considerable recent discussion of the risk of catastrophe and of how best to account for worst‐case scenarios. It is not clear whether the three IAMs take adequate account of these potential effects.”). 30 Id. at 44948. 31 Id. 32 For example, some federal agencies (such as the Department of Transportation) have at times decided to count only climate change costs imposed directly on the United States, excluding broader global effects. See Average Fuel Economy

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greater detail, explaining why the global SCC figures are the appropriate measurements and providing clear, strong guidance to agency staff.

At the same time, the interagency review process also concluded that a domestic SCC should be computed. In its recent rulemaking, the Department of Energy chooses to approximate the domestic SCC as 6 percent of the global SCC, based on citations in the literature that range from 2 to 11 percent.33 These low percentages appear to reflect the conclusions of some analysts that the United States’s share of climate effects will be comparatively small, because of the country’s “relatively temperate climate, [the] small dependence of its economy on climate, the positive amenity value of a warmer climate in many parts of the United States, its advanced health system, and [its] low vulnerability to catastrophic climate change.”34

Future rulemakings should cite the growing body of analysis that documents the profound impacts of climate change on the United States. For example, the U.S. Global Change Research Program recently released a report on the significant climate impacts already observed and projected in the United States.35 Perhaps as importantly, the impacts of global warming will not be limited to where specific changes in temperature or precipitation occur, but will be felt far beyond geographic and political boundaries. As EPA has observed, a decision to exclude global impacts would falsely assume that Americans are unwilling to pay to avoid international damages caused by U.S. emissions, and ignores the potential for international impacts to produce security risks or economic disruptions felt within U.S. borders.36 Foreign damages from climate change could have domestic economic “spillover effects”: consider the impacts on the United States of the worldwide disruption of agricultural production and water resources, the widespread loss of biodiversity, the spread of infectious disease, and the potential for social unrest.37 In deriving or applying any estimate of either the global or domestic SCC, analysts should explicitly consider these spillover effects.

National security is a particular concern. Analysts in government and academia have increasingly begun to realize that the United States has a deep stake in preventing the geopolitical instability associated with climatic disruptions in other regions of the world.38 Climate effects like droughts,

Standards, Passenger Cars and Light Trucks; Model Years 2011‐2015, 73 Fed. Reg. at 24414. The Department of Transportation contended this restriction was dictated by consistency, since no other non‐domestic costs or benefits were measured. Id. However, even the Office of Management and Budget (OMB)—the federal agency charged with overseeing cost‐benefit analyses—specifically permits consideration of significant international costs and benefits. CIRCULAR A‐4, supra note 17, at 15 (“When you choose to evaluate a regulation that is likely to have effects beyond the borders of the United States, these effects should be reported separately.”) (emphasis added). 33 BVM Rule, supra note 1, at 44948. 34 WILLIAM NORDHAUS & JOSEPH BOYER, WARMING THE WORLD 96‐97 (2000). 35 U.S. GLOBAL CHANGE RESEARCH PROGRAM, GLOBAL CLIMATE CHANGE IMPACTS IN THE UNITED STATES (2009), available at http://downloads.globalchange.gov/usimpacts/pdfs/climate‐impacts‐report.pdf. 36 See EPA, TECHNICAL SUPPORT DOCUMENT, supra note 7, at 11. 37 See e.g. Freeman & Guzman, supra note 13, at 7 (“We do not claim that all of these things will happen at catastrophic levels, or that the United States will necessarily be dragged into every climate‐related conflict around the world, but simply that the United States cannot sequester itself from all such spillovers.”). 38 See, e.g., John M. Broder, Climate Change Seen as Threat to U.S. Security, N.Y. TIMES, Aug. 8, 2009; Climate Change and Global Security: Challenges, Threats, and Global Opportunities: Hearing Before the S. Comm. on Foreign Relations, 111th Cong. (2009) (statement of Vice Admiral Dennis McGinn), available at http://foreign.senate.gov/testimony/2009/ McGinnTestimony090721p.pdf; U.S. GOV’T ACCOUNTABILITY OFFICE, KEY CHALLENGES REMAIN FOR DEVELOPING AND DEPLOYING ADVANCED ENERGY TECHNOLOGIES TO MEET FUTURE NEEDS (2006), available at http://www.gao.gov/new.items/d07106.pdf; GEN. CHARLES F. “CHUCK” WALD ET AL., CNA MILITARY ADVISORY BOARD, POWERING AMERICA’S DEFENSE: ENERGY AND THE RISKS TO NATIONAL SECURITY, at i, vii, x (2009), available at http://www.cna.org/documents/PoweringAmericasDefense.pdf; PETER SCHWARTZ & DOUG RANDALL, AN ABRUPT CLIMATE CHANGE SCENARIO AND ITS IMPLICATIONS FOR UNITED STATES NATIONAL SECURITY (2003).

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food shortages, and rising sea levels could trigger refugee crises and regional conflicts, both with the potential for violence. Additionally, U.S. dependence on foreign sources of oil carries very real security implications; climate policies may change these dynamics by shifting the nation’s fuel portfolio away from non‐renewable, imported sources. Though these national security effects are difficult to quantify and monetize, they are crucial to consider.

In addition, while it is true that any actions taken by the United States on climate change will produce some external benefits, the same is true for the policies of other nations. Greenhouse gases are global pollutants, meaning that emissions anywhere in the world generate damages everywhere. In other words, each ton of reduced emissions in the United States will generate benefits to every other nation, and each ton of our emissions will have global impacts. There is currently no mechanism for the United States to capture benefits exclusively for ourselves.39 But once other countries take reciprocal action on climate change, they will likewise generate global benefits that will in part be reaped by the United States. Analysts should bear in mind this reciprocal relationship when applying SCC estimates.

These considerations—particularly the far‐reaching national security benefits from domestic abatement measures—shed doubt on how accurate or useful the 6% figure is, especially since it seems to have been derived in an almost ad hoc manner without careful consideration of the underlying assumptions. At the very least, it seems potentially arbitrary for the Department of Energy only to calculate a domestic SCC based on a single preferred global SCC estimate (namely, picking $19 as the global SCC for year 2007 emissions and calculating a domestic SCC of $1.14),40 instead of looking at the full range of global SCC estimates. At a more fundamental level, if a domestic estimate of the SCC is to be estimated, analysts must conduct a rigorous assessment of the likely impacts of climate change on the United States, including not only the geographically localized changes in climatic patterns but also the spillover effects from changes that take place elsewhere.

Discounting

Embedded within the various SCC values calculated by the interagency review process are discount rates. Averting climate change will mostly produce benefits in the future, and discount rates are traditionally applied to account for a general preference for immediate benefits, so that a benefit accruing years from now is not worth as much as a benefit accruing today. In many contexts, discounting is an appropriate and necessary economic tool. However, in the context of climate change, benefits accrue not just in the future but to future generations of people. Such inter‐generational discounting requires us to compare risks faced by different individuals and choose to value one individual’s preferences more simply because he or she is alive first. These factors make discounting much more problematic and controversial than in the settings to which cost‐benefit analysis is conventionally applied.

The interagency review process acknowledges that “[t]he choice of a discount rate, especially over long periods of time, raises highly contested and exceedingly difficult questions of science, economics, philosophy, and law.”41 Nevertheless, the process draws on literature that uses 3% and

39 See Brian Copeland & M. Scott Taylor, Trade and Transboundary Pollution, 95 AM. ECON. REV. 716‐737 (1995); Hilary Sigman, International Spillovers and Water Quality in Rivers: Do Countries Free Ride?, 92 AM. ECON. REV. (1992). 40 BVM Rule, supra note 1, at 44948. 41 Id.

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5% discount rates, applied either constantly each year or via a “random walk” method that better accounts for uncertainty.42 There is a long literature on the appropriate rate of discounting in the context of climate change. In that literature, discount rates of 5% are toward the high end, while some analysts have advocated discount rates as low as 1.4%.43 Legal scholars have also called into question the basic tenets of intergenerational discounting. 44 Because there is no widely agreed‐upon appropriate rate of discounting for climate change, and because discounting is such a central determinant of the estimates of the SCC, at the very least future rulemakings should also look at previous SCC estimates by EPA that used a 2% discount rate.45 In its 2008 Technical Support Document, EPA stated that “[a] review of the literature indicates that rates of three percent or lower are more consistent with conditions associated with long‐run uncertainty in economic growth and interest rates, inter‐generational considerations, and the risk of high impact climate damages (which could reduce or reverse economic growth).”46 Alternative methodologies, including hyperbolic or differential discount rates, should also be explored.

Moreover, discounting is not the only tool available for defining our moral obligations to future generations. Sustainable development, utilitarianism, corrective‐justice, and other ethical theories all offer social decision‐makers a model for how to treat future costs and benefits. Choosing between these ethical theories remains a difficult task, but the key point is that our obligation to future generations is fundamentally an ethical question that cannot be resolved by economic analysis alone.

Selecting the Proper Range of Estimates

The Department of Energy’s recent rulemaking, based on the interagency review process, looked at a range of five global SCC estimates. Four estimates represented mean, model‐weighted values, calculated under four assumptions about discount rates. The fifth estimate is the Department of Energy’s own average of two of those previous estimates. We have two separate concerns with this approach.

First, the Department of Energy’s single preferred SCC estimate of $19 is the arithmetic mean of model‐weighted SCC values based on discount rates of 3% and 5%. Given the compelling arguments for choosing a lower discount rate, an equal weighting of these discount rates may not be justified, and analysts should consider putting more weight on SCC estimates that rely on lower discount rates. Even setting aside such judgments, however, the arithmetic mean is the wrong number to use. As we have emphasized (and as the rulemaking goes on to note47), there is considerable uncertainty over the proper choice of discount rate. As the economics literature on this subject has made clear, in the presence of uncertainty over discount rates, the correct approach is to average discount factors rather than discount rates.48 Thus the correct average of a 3% and 5% discount rate, for benefits accruing a century from now, is 3.6% — not 4%. By extension, it is incorrect to take the simple average of two SCC estimates based on different discount rates. Indeed,

42 Id. at 44949‐44951. 43 See NICHOLAS STERN, UNITED KINGDOM CABINET OFFICE, THE ECONOMICS OF CLIMATE CHANGE: THE STERN REVIEW (2006). 44 See RICHARD L. REVESZ & MICHAEL A. LIVERMORE, RETAKING RATIONALITY: HOW COST‐BENEFIT ANALYSIS CAN BETTER PROTECT THE ENVIRONMENT AND OUR HEALTH 107‐17 (2008). 45 EPA, TECHNICAL SUPPORT DOCUMENT, supra note 7, at 12. 46 Id. at 9 (emphasis added). 47 BVM Rule, supra note 1, at 44950 (“It is true that there is uncertainty about interest rates over long time horizons”). 48 See Martin Weitzman, Review of the Stern Review on the Economics of Climate Change, J. ECON. LIT. 45(2007), at 709.

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it is precisely this importance of uncertainty over long time horizons that motivates the Newell‐ Pizer analysis relied upon by the Department of Energy in calculating two of its SCC estimates.49 While that approach yields estimates of $10 and $55, those figures are ignored by the Department in computing the $19 figure.

Second, by focusing on means, the interagency process produces a relatively narrow and seemingly consistent range: from $5 to $55 for year 2007 emissions.50 The preferential use of the single value of $19 compounds the problem further. By comparison, EPA previously looked at the 5th percentile and 95th percentile figures as well as means, and found a possible range of ‐$6 to $695 for year 2007 emissions (with a mean of around $17 to $88).51 EPA’s figures suggest a very wide dispersion, with at least a few estimates falling significantly above the mean. By focusing only on the means, the Department of Energy’s rulemaking obscures the wide dispersion in estimates of the social cost of carbon, and overlooks the possibility that estimates could be much higher.

Given how uncertain the SCC estimates are, and given how likely the SCC estimates are to be understated, it is important for the interagency review process to consider whether a focus on model‐weighted means is most appropriate and useful. A more rigorous approach might consider conducting a sensitivity analysis to capture the implications of SCC values throughout a wider range, including much higher values. Another potentially useful technique is to calculate the “breakeven SCC” (the SCC at which estimated benefits of the policy would exactly equate with estimated costs) and analyze where that value falls compared to the interagency’s range of SCC estimates.52

Conclusion

We are greatly encouraged by the federal government’s efforts to ensure that the benefits of reducing greenhouse gas emissions are weighed accurately and consistently. The interagency review process on the social cost of carbon is a positive and significant step toward grounding the nation’s climate policies in sound economics and science. We hope that the interagency process— as well as individual agency analysts—will continue working to improve their estimates of the social cost of carbon, and will consider our recommendations for strengthening the analytical rigor and transparency of the calculations.

Sincerely,

Richard L. Revesz Nathaniel Keohane, Ph.D Dean, New York University School of Law Director, Economic Policy and Analysis Faculty Director, Institute for Policy Integrity Environmental Defense Fund

49 Richard Newell and William Pizer, Discounting the Distant Future: How Much Do Uncertain Discount Rates Increase Valuations?¸ J. ENVIRON. ECON. MANAGE. 46 (2003): 52‐71, cited in BVM Rule, supra note 1, at 44950. 50 BVM Rule, supra note 1, at 44949‐51. 51 EPA, TECHNICAL SUPPORT DOCUMENT, supra note 7, at 12. 52 See IPI, THE OTHER SIDE OF THE COIN: THE ECONOMIC BENEFITS OF CLIMATE LEGISLATION (2009), available at http://policyintegrity.org/documents/OtherSideoftheCoin.pdf (calculating the breakeven SCC for H.R. 2454, the American Clean Energy and Security Act of 2009).

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