Social Cost of Greenhouse Gases: Issues for Congress

June 7, 2021

Social Cost of Greenhouse Gases: Issues for Congress

On January 20, 2021, President Biden issued Executive

Order (E.O.) 13990, “Protecting Public Health and the

Environment and Restoring Science to Tackle the Climate

Crisis.” It contains directives to update the social cost of

greenhouse gases (SC-GHG), a tool that agencies have

typically used to estimate the benefits of GHG reductions.

SC-GHG estimates have informed decisionmaking on

federal actions, including GHG-related rules, since 2008.

Members of Congress have taken divergent views on the

adequacy and use of the SC-GHG. Some Members of

Congress have questioned whether the SC-GHG

methodology was consistent with federal guidance. Others

have raised concerns that the SC-GHG estimates are

outdated and that they underestimated climate benefits. The

SC-GHG remains a topic of interest in the 117th Congress

as the Biden Administration updates the estimates and

implements its climate change directives.

What Is the Social Cost of Greenhouse

Gases (SC-GHG)?

The social cost of a specific GHG is a monetary estimate of

the economic impacts associated with emitting an

additional ton of that GHG in a given year. Conversely, this

dollar figure represents the benefit of a one-ton reduction.

The social cost of carbon dioxide (SCC) includes net

changes in agricultural productivity, property damage from

increased flood risk, and changes in energy system costs,

such as reduced costs for heating and increased costs for air

conditioning. Similarly, the social cost of methane (SCM)

and the social cost of nitrous oxide (SCN) estimate the

monetary value of impacts from marginal changes in

methane and nitrous oxide, respectively, in a given year.

Each SC-GHG is typically presented as dollars per metric

ton of a GHG in a given year. Hereinafter, “SC-GHG”

refers collectively to estimates of the SCC, SCM, and SCN.

How Is the SC-GHG Calculated?

SC-GHG values are calculated using models that translate

changes in emissions into economic impacts through a

multistep process. As with any scientific or economic

analysis, there are limitations and uncertainties associated

with the calculation of the SC-GHG estimates. One

limitation is that the underlying models do not include all

potentially significant climate change impacts.

The sources of uncertainty associated with the SC-GHG

estimates include the quantification of the physical effects

of GHG emissions (e.g., the way that the models estimate

changes in global average temperature), socioeconomic

factors (e.g., population and economic growth), projected

GHG emissions, translation of physical and climate impacts

into economic impacts, and the role of adaptation. Another

source of uncertainty is discounting, which occurs in the

last step of the SC-GHG calculation.

Discount Rate

Discounting, which is standard practice in benefit-cost

analysis, allows for apples-to-apples comparisons of

economic impacts that occur at different times. It helps

answer the question about how much future benefits and

costs are worth today (“present value”). It adjusts future

values based on the observation that people usually prefer a

value today compared with the same amount in the

future. Higher discount rates give less present value to

benefits or costs that accrue in the future, and lower

discount rates give more present value. Given the long time

horizons analyzed, SC-GHG estimates are highly sensitive

to the discount rate.

Discount rate selection is particularly challenging in climate

change analyses because GHG emissions remain in the

atmosphere for a long time—e.g., hundreds of years—

which means the GHG impacts span generations of people.

Observed market rates can inform this selection, but current

markets do not capture intergenerational rates. There is no

consensus on the appropriate discount rate to choose in

estimating the SC-GHG.

Geographic Scope

Another methodological consideration is whether the SCGHG should measure global or domestic impacts. While

most published estimates of the SC-GHG have measured

global impacts, some have called on federal agencies to use

domestic values in benefit-cost analysis. Those

recommending use of global SC-GHG values have

concluded that there is no clear distinction between

domestic and global climate change impacts and that a

domestic SC-GHG understates the benefits to the United

States because climate impacts that occur outside U.S.

borders may affect the welfare of U.S. citizens and

residents. Reciprocity—whether U.S. mitigation policies

motivate other countries to likewise reduce GHGs—may

also justify use of global values, given that reductions (or

increases) by other countries benefit (or harm) those within

U.S. borders. Others disagree with a focus on global values,

expressing skepticism about the likelihood of complete

reciprocity and a view that federal analyses should focus on

domestic impacts. These stakeholders also noted that while

federal guidance allows consideration of international

impacts, it requires consideration of a domestic perspective.

How Is the SC-GHG Used?

Federal agencies have primarily used the SC-GHG to

estimate the climate benefits of GHG reductions from

proposed rules. The social cost of each gas is applied to

changes in that gas (e.g., the SCC is applied to changes in

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Social Cost of Greenhouse Gases: Issues for Congress

carbon dioxide emissions with the proposed rule, and the

SCM is applied to changes in methane emissions). The SCGHG has been used to value climate impacts in other

federal actions, though to a much lesser extent than in

regulatory impact analysis. For example, the Obama

Administration used the SCC and SCM to value climate

change impacts in some assessments under the National

Environmental Policy Act. The General Services

Administration also used the SCC to value carbon

emissions associated with a delivery services contract. State

governments and other organizations have used the SCGHG in rulemakings and other applications.

The IWG announced a longer-term update of the SC-GHG

and plans to publish results by January 2022. The IWG

requested comment about how to incorporate the 2017

NASEM recommendations and other recent science and

economics into the SC-GHG (86 Federal Register 24669;

May 7, 2021), with comments due by June 21, 2021.

Table 1. IWG Interim SC-GHG Estimates

Dollars per metric ton for emissions in 2030

Discount Rate, Statistic

5%, Average

(Avg)

3%, Avg

2.5%, Avg

3%, 95th

percentile

SCC

$19

$62

$89

$187

SCM

$940

$2,000

$2,500

$5,200

SCN

$7,800

$23,000

$33,000

$60,000

Prior Federal Actions on SC-GHG

Federal agencies began to consider various published SCGHG estimates in regulatory analysis in the 2000s. By

2009, the Obama Administration convened an interagency

working group (IWG) to develop a consistent set of

estimates. The IWG developed a methodology and, in 2010,

published a set of four SCC estimates, which measured the

global value of carbon dioxide reductions, for use in

regulatory analysis. The first three values were based on the

average SCC from three integrated assessment models, at

discount rates of 5%, 3%, and 2.5%. The fourth value

corresponded to the 95th percentile of the frequency

distribution of SCC estimates based on a 3% discount rate.

The IWG updated the SCC estimates in 2013 and published

two technical corrections to the estimates in 2015. Agencies

began using the SCM in 2015 and the SCN in 2016.

Source: IWG Technical Support Document (February 2021).

Notes: Estimates are stated in 2020$/metric ton. SC-GHG estimates

vary depending on the year of GHG emissions.

E.O. 13990 specifies deadlines by which the IWG is to

develop recommendations in three areas:

 recommendations for SC-GHG use in decisionmaking,

budgeting, and procurement (by September 1, 2021);

 recommendations for a process to review and update

SC-GHG estimates (by June 1, 2022); and

The IWG also requested that the National Academies of

Sciences, Engineering, and Medicine (NASEM) provide

advice on future updates to SCC estimates. The NASEM’s

January 2017 report recommended a different modeling

framework, research needs for each calculation step, and

criteria for future SCC updates. It observed that advances

would “require significant investments in both economic

and climate modeling.” The NASEM also recommended

development of a new approach to calculate discount rates,

noting that Office of Management and Budget (OMB)

Circular A-4 guidance does not adequately address

discounting over long time periods or the effect of

uncertainty on discount rates.

 recommendations for the SC-GHG calculation to

In March 2017, the Trump Administration disbanded the

IWG and withdrew the IWG’s SC-GHG estimates. It

directed agencies to ensure that any new SC-GHG estimates

were consistent with guidance for regulatory analysis in

OMB Circular A-4. The Trump EPA developed a new set

of estimates using the same models and assumptions as the

IWG except they were domestic measures and included

estimates discounted at rates of 3% and 7%. The domestic

perspective and use of a 7% rate lowered the SCC estimates

of benefits related to GHG reductions. The Trump

Administration presented SCC and SCM estimates in

several regulatory analyses.

The Administration’s pending update of the SC-GHG and

consideration of additional uses raises questions, such as:

Current Federal Actions on SC-GHG

The Biden Administration reestablished the IWG and

reinstated the Obama Administration’s SC-GHG estimates,

adjusted for inflation. Table 1 presents the interim

estimates for 2030. The interim estimates replace the

Trump Administration’s estimates.

account for climate risk, environmental justice, and

intergenerational equity (by June 1, 2022).

EPA has estimated the social cost of hydrofluorocarbons

(HFCs), which are potent GHGs used in cooling and other

applications. EPA used a methodology consistent with the

IWG’s interim SC-GHG estimates. It estimated the social

cost of nine HFCs to inform a rulemaking that begins to

implement legislation phasing down HFCs. The average

social cost in 2030, discounted at 3%, ranged from $7,400

per ton of HFC-152a to $790,000 per ton of HFC-236f(a).

Issues for Congress

 What resources will be required to update the SC-GHG?

Should the federal government develop its own models

or partner with other researchers/model developers?

 How can the federal government ensure that, over time,

the SC-GHG accounts for advances in science and

economics while reducing the risk of political volatility

in decisions on SC-GHG estimates and uses?

 Should policy deliberations inform SC-GHG estimation

and its applications? Discount rate selection reflects

implicit policy judgments (e.g., the interests of future

generations). Equity considerations may also be relevant

within a generation.

Kate C. Shouse, Analyst in Environmental Policy

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IF11844

Social Cost of Greenhouse Gases: Issues for Congress

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