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New Report Highlights Inherent Uncertainties in Cost-Benefit Analysis of Climate Change

July 2011

“Social Cost of Carbon” carries significant implications for climate policies and carbon regulation.

(Washington, DC) — A new report identifies significant weaknesses in the analysis that federal agencies use to conduct cost-benefit analysis of regulations involving climate change. The new report, More than Meets the Eye: The Social Cost of Carbon in U.S. Climate Policy, in Plain English, released by the World Resources Institute and the Environmental Law Institute, examines how estimating the social cost of carbon often includes numerous judgment calls of factors hidden in complex economic models and largely invisible to policymakers and the public.

“Cost-benefit analysis can be an important tool to assist government decision making, but thorny issues arise when you apply this approach to climate change,” said Ruth Greenspan Bell, a senior fellow at WRI and co-author of the report. “Given the complexities and uncertainties of climate change, modelers need to take care to accurately reflect climate science in their estimations. Until modelers can better incorporate these complexities and make their assumptions more explicit, policymakers should take any single value for the social cost of carbon with a grain of salt.”

The social cost of carbon estimates the benefit society will gain, expressed in monetary value, by avoiding the damage caused by each additional metric ton of carbon dioxide (CO2) released into the atmosphere. It is part of an exercise required by a long-standing Executive Order (EO 12866) that requires federal agencies to engage in a cost-benefit analysis of government regulations. The social cost of carbon represents the benefits part of the analysis for regulations that would control carbon dioxide emissions. In other words, for a regulation that decreases emissions, the social cost of carbon represents the damage avoided costs, or the benefit, of the regulation, on a dollar per-ton basis.

“Our significant concern is the lack of transparency inherent in the models used to estimate the social cost of carbon. Some of the models are opaque, and few policymakers are likely to understand the dramatic simplifications and assumptions embedded within them. There is much room for debate whether these tools are ready for use in policymaking,” said Scott Schang, ELI, Vice President for Climate and Sustainability.

Following are some of the concerns with the current methodology behind measuring the social cost of carbon:

  • When it comes to climate change, economic modeling can intentionally or unintentionally oversimplify key assumptions. For example, many models minimize or do not even consider the possibility of abrupt, irreversible catastrophic climate changes, or the dynamic processes of carbon-cycle feedbacks. Others ignore regional temperature effects and instead assume the earth is warming uniformly.
  • The discount rate that is selected has a profound impact on policy recommendations. Modelers often use discount rates that effectively shift the burden of action to future generations, supported by an underlying belief that these “richer” future citizens will better afford the investment in mitigation. This decision incorporates a risky wager — allowing greenhouse gases to continue built on the assumption that future engineers and technicians will know how to fix their impacts.
  • Far from being transparent to the policymakers, some of the models are black boxes when it comes to understanding the component parts because of their complexity and obscure programming language. This acts to further obscure the assumptions contained in the model. One model, for example, assumes that agriculture can tolerate huge temperature changes in the range of 30.6 degrees Fahrenheit above and below historical levels.

To illustrate these challenges, the report compares government estimates of the social cost of carbon in the United States and the United Kingdom. In the United States, government estimates find the value of a metric ton of carbon range from $5 to $65 per ton of carbon, with a central value of $21. Meanwhile, the United Kingdom finds a range from $41 to $124 per ton of carbon dioxide, with a central value of $83. In other words, the U.K. numbers support regulation four times as stringent as the U.S. central value.

A related report being released