Understanding the Shortfalls of the 2021 Interim Social Cost of Carbon

The Use of IAMs to Calculate the 2010 SCC

In formulating its SCC estimates, the IWG relied upon the use of integrated assessment models (IAMs). IAMs use simple climate and economic models to predict the effects of climate change under different scenarios. IAMs estimate the SCC using four different modules. The first is the socioeconomic module. This module forecasts how the global economy, global population, and global CO₂ emissions will grow over time. The second is the climate module, which calculates the effect of the projected increase of CO₂ emissions on the climate. The third module is the damage function, which translates changes in climate resulting from increased CO₂ emissions into projected economic damages. The fourth module is the discounting module. The purpose of this module is to translate the dollar value of climate damages that occur well in the future into a current dollar amount.

The 2010 SCC estimates were calculated using the following three IAMs: (1) the Dynamic Integrated Climate-Economy model (DICE); (2) the Framework for Uncertainty, Negotiation and Distribution model (FUND); and (3) the Policy Analysis of the Greenhouse Effect model (PAGE). DICE is an optimization model with the entire world analyzed as a single region. It utilizes a sea level rise (SLR) module that predicts different levels of sea rise and resulting damages. FUND is a disaggregated model that breaks the world into 16 different regions. FUND analyzes damages in the following 14 distinct sectors for each of its 16 regions: SLR, agriculture, forests, heating, cooling, water resources, tropical storms, extratropical storms, biodiversity, car­diovascular respiratory, vector-borne diseases, morbidity, diarrhea, and migration. PAGE calculates the temperature of its eight regions, taking into account differences in latitude and differences in warming over land as compared to warming over water. PAGE’s climate damages are calculated solely for the European Union (EU), and then those damages are scaled for the other seven regions of the world based upon varying dynamics. PAGE rationalizes using the EU as its reference region on the basis that the other regions are less susceptible to climate change because they have less coastline than does the EU.

Standardized Inputs Across all IAMs

Prior to running the IAMs, the IWG had to resolve and standardize the following three uncertainties across all models: (1) which socioeconomic scenarios would be used, (2) what value would be used for the equilibrium climate sensitivity parameter (ECS); and (3) what discount rate(s) would be used. The IWG ultimately came to a consensus on how each of these three inputs could be standardized.

The IWG decided to use socioeconomic scenarios from the Stanford Energy Modeling Forum exercise, EMF-22 (EMF-22). The EMF-22 utilizes 10 different models to predict future global economic growth, global population, and global CO₂ emissions. Out of the 10 EMF-22 models, the IWG only used the trajectories of the following four models: MiniCAM, MESSAGE, IMAGE, and the optimistic scenario from MERGE. The IWG also used a fifth scenario that represented a level of CO₂ emissions that would result in a stabilization of atmospheric CO₂ levels at 550 ppm in 2100. For this fifth scenario, the IWG averaged the emission trajectories, population growth, and economic growth of the other four models.

The ECS is the second standardized parameter that the IWG utilized. It is defined as “the long-term increase in the annual global-average surface temperature from a doubling of atmospheric CO₂ concentration relative to pre-industrial levels.” Interagency Working Group on Social Cost of Carbon United States Government. "Technical Support Document: Social Cost of Carbon for Regulatory Impact Analysis under Executive Order 128666," (2010). This parameter is used to estimate the degree to which CO₂ emissions affect the climate. To confirm that the IWG’s chosen ECS value was consistent with existing science, the IWG synchronized the ECS for the three IAMs, utilizing a probability distribution to account for the different potential climate outcomes at the end of the century.

Finally, when conducting a cost-benefit analysis, federal agencies are to use a discount range of 3 percent and 7 percent in accordance with OMB Circular A-4. Off. of Mgmt. & Budget, Circular A-4 (Sept. 17, 2003). OMB Circular A-4 recognizes that selecting a discount rate for intergenerational problems such as climate change poses significant challenges. Therefore, in the event that a proposed regulation involves intergenerational problems, Circular A-4 allows for the use of “a lower but positive discount rate in addition to calculating net benefits using discount rates of 3 and 7 percent.” Id. In calculating its 2010 SCC values, the IWG utilized discount rates of 2.5 percent, 3 percent, and 5 percent. The IWG group did not include the 7 percent discount rate required by OMB Circular A-4 in its selected range.

2017 Comprehensive Evaluation of the TSD

In January 2017, the NAS issued a comprehensive report, Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide, that made several general recommendations for updating the IWG’s SCC, as well as recommendations for each of the four IAM modules. Nat’l Acad. of Scis., Valuing Climate Damages: Updating Estimation of the Social Cost of Carbon Dioxide (2017).

The first general recommendation was that using a single model instead of multiple models would improve transparency and consistency of key assumptions and would improve control over the uncertainty representation. The second general recommendation was that the IWG begin using three specific criteria to evaluate its overall SCC methodology. The first criteria was “scientific basis.” Id. at 7. The NAS recommended that the methodology underlying any future calculations of the SCC be analyzed to confirm that it comports with contemporary peer-reviewed research. The second criteria was “uncertainty characterization.” Id. The NAS recommended that the IWG identify and explain all significant uncertainties in each of the four IAM modules. The final criteria was “transparency.” Id. The NAS recognized that the parameterization and calibration of future updates to the SCC should be thoroughly documented and transparent so as to be fully understood by the scientific community.

As part of its specific recommendations, the NAS recommended that the socioeconomic module’s population, GDP, and emissions projections utilize statistical methods and expert opinions. In addition, the socioeconomic model should properly account for the following four criteria: time horizon, future policies, disaggregation, and feedbacks. The NAS also recommended that the IWG use a totally new socioeconomic module that meets the aforementioned criteria of scientific basis, uncertainty characterization, and transparency and is “consistent with the best available judgment regarding the probability distributions of uncertain parameters.” Id. at 82.

The NAS suggested that the IWG update the climate module by incorporating an SLR element that (1) includes uncertainty in the conversion of global mean temperature to global mean SLR and (2) is consistent with SLR estimates for comparable forcing and temperature pathways. The NAS further recommended that the IWG implement a surface ocean pH element with the following three features: (1) it is consistent with carbon uptake in the climate module, (2) it includes uncertainty as part of the conversion of global mean surface air temperature and carbon uptake to surface ocean pH, and (3) it is consistent with estimates of surface ocean pH existing in the updated literature.

The NAS recommended that the damages module be updated to include the following four enhancements: (1) the individual sectoral damage functions should be updated, (2) calibrations of the damage function ought to be transparent and quantified, (3) correlations between damage formulations should be clearly identified, and (4) the disaggregated damage projections supporting the SCC calculations should be provided and explained. The NAS suggested that longer-term adjustments to the damages module should include these five features: (1) disaggregation of damages by region and sector, (2) inclusion of spillovers between regions and sectors and inclusion of feedbacks to the socioeconomic or climate modules, (3) recognition of damages affecting well-being through changes to consumption or capital stocks or by other means, (4) inclusion of adaptation costs, and (5) inclusion of rapidly occurring damages.

Finally, the NAS suggested that the discounting module account for the connection between fiscal growth and discounting. The NAS further recommended that the IWG create a discounting module that unambiguously identifies the uncertainty of discount rates over extended time periods.

Overall, the NAS made 37 recommendations on how the IWG could update its SCC estimates and underlying methodology in order to “bring the SCC closer to the frontier of climate science and economics.” Id. at 38.

The 2021 Interim SCC

On January 20, 2021, President Biden signed Executive Order No. 13990. The order required that the IWG publish the 2021 Interim SCC within 30 days of the date of the order. The IWG published the 2021 Interim SCC estimates on February 19, 2021.

In its 2021 TSD, the IWG acknowledged that the IAMs used to produce the previous SCC estimates failed to include many of the essential “physical, ecological, and economic impacts of climate change recognized in the climate change literature.” In particular, the IWG recognized that the ECS values and socioeconomic inputs supporting its prior SCC estimates were outdated.

Despite acknowledging all of the recent scientific advances, the IWG did not utilize new data or the updated versions of the IAMs in calculating the 2021 Interim SCC. Nor did the IWG adopt any of the 37 recommendations from the NAS. Instead, it relied upon the same versions of the IAMs, the same underlying data, the same methodology, and the same harmonized inputs for the socioeconomic emissions scenarios and ECS distributions that were used in calculating the SCC estimates in 2010. Accordingly, the 2021 TSD does not provide any updated calculations of the SCC. Instead, the IWG took its outdated SCC calculations and simply reported them in 2020 dollars.

When the IWG ultimately releases its final SCC figures as required by Executive Order No. 13390, it is critical that the figures be based on current data that is processed by the most current versions of the IAMs, utilizing an updated methodology as recommended by the NAS.

Nicholas S. Preservati is with Spilman Thomas & Battle in Charleston, West Virginia.

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