Should the Federal Social Cost of Carbon be Used in Site-Specific Resource Planning?

Posted on June 1, 2016 by Andrew Brown

Since 2010, EPA and other federal agencies have used the Federal Social Cost of Carbon (“FSCC”) to estimate the climate benefits of federal rulemakings. The FSCC is an estimate of the monetized damages associated with an incremental increase in carbon dioxide (“CO2”), conventionally one metric ton, in a given year. The FSCC was developed by a group of federal agency representatives known as the Interagency Working Group on Social Cost of Carbon (“IWG”). In developing the FSCC, the IWG relied on three Integrated Assessments Models – the DICE model (“Dynamic Integrated Climate and Economy”) developed in 1990 by William Nordhaus, the PAGE model (“Policy Analysis of Greenhouse Effect”) developed in 1992 by Chris Hope, and the FUND model (“Climate Framework for Uncertainty, Negotiation and Distribution) developed by Richard Tol in the early 1990s. The primary virtue of the DICE, PAGE, and FUND integrated assessment models is that all contain simplified representations of economic models, climate models, and impact models that allow integration of climate processes, economic growth, and interaction between climate and economy.

The IWG has described the purpose of the FSCC as allowing federal agencies to incorporate the social benefits of reducing CO2 emission into cost-benefit analyses of regulatory actions that have small or marginal impacts on cumulative global emissions. The purpose of the FSCC process is to ensure that federal agencies are using the best available information and to promote consistency in the way agencies quantify the benefits of reducing CO2 emissions, or costs from increasing emissions, in federal regulatory impact analyses. The issue that is now coming up before some regulatory agencies is whether the FSCC can be employed in site-specific policy decision-making, such as state utility integrated resource planning.

In Responses to Comments issued in 2015, the IWG stated that it has not addressed the use of FSCC outside the federal regulatory context, such as in NEPA analysis, state-leveling resource planning, or “pricing” carbon in the marketplace. The IWG itself has acknowledged the large degree of uncertainty and imprecision in the estimates derived from the use of the integrated assessment models, especially as the time horizon for damage estimates reaches out to the year 2300. The IWG has observed that any such assessment will suffer from uncertainty, speculation, and lack of information about (1) future emissions of greenhouse gases, (2) the effects of past and future emissions on the climate system, (3) the impact of changes in climate on the physical and biological environment, and (4) the translation of these environmental impacts into economic damages. As a result, the IWG has stressed that decision makers should be very cautious in their reliance on the integrated assessment models. The proponents of the FSCC do not dispute the uncertainty and imprecision of the integrated assessment model process but they contend that there is no viable alternative.

Regardless of whether the FSCC is appropriate for federal regulatory impact analysis, it is simply too uncertain and speculative to be used in site-specific resource planning, including in NEPA analysis or utility resource planning. The values generated by the FSCC are highly uncertain and have serious weaknesses. These weaknesses are likely to be more significant in site-specific resource planning where the use of damage estimates demands greater precision than in regulatory impact analysis. This issue has been raised before the Minnesota Public Utilities Commission (“MPUC”) in a proceeding to establish environmental cost values for carbon dioxide emissions from electric generating units. As Nicholas F. Martin, environmental policy manager for the public utility Xcel Energy, testified, “whether the ‘correct’ value is $12 or $120 matters a great deal in integrated resource planning[, because] these two values could point to dramatically different resource mixes ….”

The Administrative Law Judge hearing the Minnesota case recently recommended the MPUC adopt a modified version of the FSCC. The two modifications involved (1) re-calculating the FSCC to reflect a shortened time horizon extending to the year 2200 (rather than 2300, as set by the IWG), and (2) excluding the value derived from the 95th percentile at a 3 percent discount rate (a value intended by the IWG to account for the high-end of the potential damage range). Both of these modifications were intended to reduce the level of uncertainty and speculation associated with the FSCC estimates. The MPUC is expected hold a hearing to address the ALJ’s report later this year.

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