VALUING CLIMATE DAMAGES: UPDATING ESTIMATION OF

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VALUING CLIMATE DAMAGES:UPDATINGTHETECHNOLOGYSOCIAL COST OF c Report Release: January 11, 2017Committee on Assessing Approaches to Updating the Social Cost of CarbonCo-ChairsMaureen Cropper, University of Maryland and Richard Newell, Resources for the FutureCommittee MembersHenry (Jake) Jacoby, MITRobert Kopp, Rutgers UniversitySteven Rose, Electric Power Research InstituteStudy DirectorJennifer Heimberg, Board on Environmental Change and Society,The National Academies of Sciences, Engineering, and MedicineTechnical ConsultantCasey J. Wichman, Resources for the FutureDivision of Behavioral and Social Sciences and EducationBoard on Environmental Change and Society

The National Academies of Sciences, Engineeringand MedicineIndependent Policy Advice Non-profit, 501 c(3) organizationDoes not receive direct federal appropriationsAbout 200 reports per year, majority federalVolunteers serve on committees and boards1300 staff – most are in DC

Board on Environmental Change and Society Builds understanding of human interactions with the biophysicalenvironment;Contributes to the development of a coherent field of scientificendeavor in this area;Integrates social and behavioral science research into environmentalscience and policy;Advances the behavioral, social, and decision sciences; andBenefits society through the application of these sciences to humanenvironment interactions.

Board On Environmental Change and SocietyRICHARD H. MOSS (Chair), Joint Global Change Research Institute, College Park, MDJOSEPH ARVAI, University of MichiganANTHONY J. BEBBINGTON, Higgins Professor of Environment and Society, Director of the Graduate School ofGeography, Clark UniversityWILLIAM U. CHANDLER, Transition Energy, Annapolis, MDF. STUART CHAPIN, III, University of Alaska–FairbanksRUTH DEFRIES, Columbia UniversityHALLIE C. EAKIN, Arizona State UniversityRICHARD NEWELL, Resources for the FutureJONATHAN OVERPECK, Co‐Director, Institute of the Environment, University of ArizonaSTEPHEN POLASKY, Fesler‐Lampert Professor of Ecological/Environmental Economics, Department of AppliedEconomics, University of MinnesotaJ. TIMMONS ROBERTS, Ittleson Professor of Sociology and Environmental Studies, Brown UniversityMAXINE L. SAVITZ, Retired, General Manager, Technology/Partnership Honeywell Inc.ROBYN S. WILSON, Associate Professor of Risk Analysis and Decision Science, School of Environment andNatural Resources, The Ohio State UniversityContact information:Toby Warden, Board [email protected]

Committee rosterMAUREEN L. CROPPER (Co‐chair)RICHARD G. NEWELL (Co‐chair)MYLES ALLENMAXIMILIAN AUFFHAMMERCHRIS E. FORESTINEZ Y. FUNGJAMES HAMMITTHENRY D. JACOBYROBERT KOPPWILLIAM PIZERSTEVEN K. ROSERICHARD SCHMALENSEEJOHN P. WEYANTUniversity of MarylandResources for the FutureUniversity of OxfordUniversity of California, BerkeleyThe Pennsylvania State UniversityUniversity of California, BerkeleyHarvard UniversityMassachusetts Institute of TechnologyRutgers UniversityDuke UniversityElectric Power Research InstituteMassachusetts Institute of TechnologyStanford UniversityJENNIFER HEIMBERG, Study DirectorCASEY J. WICHMAN, Technical Consultant, Resources for the FutureMARY GHITELMAN, Senior Program AssistantCOMMITTEE ON ASSESSING APPROACHES TO UPDATING THE SOCIAL COST OF CARBON5

Report reviewersReport review was overseen by: Elisabeth M. Drake (Massachusetts Institute of Technology) andCharles F. Manski (Northwestern University)Hadi DowlatabadiJames (Jae) EdmondsKaren Fisher‐VandenMichael GreenstoneAnthony C. JanetosPeter B. KelemenBryan K. MignoneRichard H. MossElisabeth MoyerRichard L. ReveszDavid A. WeisbachJonathan B. WienerGary W. YoheUniversity of British ColumbiaPacific Northwest National LaboratoryThe Pennsylvania State UniversityThe University of ChicagoBoston UniversityColumbia University and Lamont‐Doherty Earth ObservatoryExxonMobil Research and Engineering CompanyUniversity of MarylandThe University of ChicagoNew York University School of LawThe University of ChicagoDuke UniversityWesleyan University6

Study origin and descriptionThe Interagency Working Group (IWG) on the social cost ofcarbon (SC‐CO2) requested this study to assist in future revisionsof SC‐CO2 estimates.Phase 1 ‐ completed in January 2016 – focused narrowly onwhether to update the equilibrium climate sensitivity and thepresentation of uncertainty.Phase 2 ‐ committee examined potential approaches for a morecomprehensive update to SC‐CO2 estimates to ensure theestimates reflect the best available science.7

Phase 2 task specificsCommittee to focus on:1. Assessing the available science and how it impacts choice ofintegrated assessment models and damage functions;2. climate science modeling assumptions;3. socioeconomic and emissions scenarios;4. presentation of uncertainty; and5. discounting.Making recommendations on approaches to future updates of theSC‐CO2 estimates, as well as research recommendations*Committee was not asked to estimate a value for the SC‐CO28

Background Informationon the SC‐CO29

What is the social cost of carbon?Social cost of carbon (SC‐CO2): the cost to society of adding 1‐metric ton of CO2 to the atmosphere in a particular year (in USdollars)Measures the monetized value of the additional CO2 (includingboth negative and positive impacts).This includes, but is not limited to:–––––Changes in net agricultural productivityEnergy useHuman healthProperty damage from increased flood riskOther impacts10

What is the SC‐CO2 used for?The SC‐CO2 is used to quantify the benefits of CO2 emissionreductions in regulatory impact analysis of federal regulations– Executive Orders since 1981 have required quantifying thebenefits and costs of federal regulations.– A 2008 court ruling mandated the valuation of CO2 emissionreductions in federal regulations.– Since then the SC‐CO2 has been used in dozens of regulatoryimpact analyses.11

The 4 steps of SC‐CO2 estimationSource: Committee report.1.2.3.4.Projections of future population & GDP generate a CO2 emissions pathCO2 emissions path leads to predictions of mean global temperature changeTemperature change leads to damages, which are monetized and aggregatedDamages persist for many decades: discounting is used to sum them into asingle present valueThis 4‐step procedure is done with both baseline emissions and with a smalladditional amount (a pulse) of CO2 emissions in a particular year.SC‐CO2 is the per‐ton difference in present value of damages due to the pulse.12

IWG estimation of the SC-CO2 The IWG used three integrated assessment models (SC‐IAMs) from thepeer‐reviewed literature (DICE, FUND, and PAGE), five socioeconomic‐emissions scenarios, a probability distribution for the equilibrium climate sensitivity, and three different constant discount rates (2.5%, 3.0%, 5.0%).Source: 2016 IWGTechnical SupportDocument13

The Committee’s Conclusions andRecommendations14

Organization of the final Phase 2 reportCh. 1: IntroductionCh. 2: Overview of the proposed SC‐CO2 modeling frameworkCh. 3‐6: Specific recommendations for each of the 4 keymodeling steps in the near term (2‐3 years) and thelonger term Socioeconomic module Climate module Damages module Discounting moduleCh. 7:Directions for future research15

An integrated, modular framework(Conc. 2‐1, 2‐2, Rec. 2‐1)“Unbundle” the process of SC‐CO2 estimation into 4modular steps that are integrated with one another. Each module would be developed based on expertise within therelevant disciplines and to reflect the state of scientificknowledge relevant to that part of the analysis . Provides a transparent articulation of the inputs, outputs,uncertainties, and linkages among the different steps. Can improve control over characterization of uncertainty withinthe steps and through an integrated framework for propagatinguncertainty through the estimation process.16

Anintegrated,modularapproach forestimatingthe SC‐CO2(Fig 2‐1)17

Over‐arching criteria for SC‐CO2 estimation (Rec. 2‐2) Scientific basis: Modules should be consistent with scientificknowledge in the current, peer‐reviewed literature. Uncertainty characterization: Key uncertainties—includingfunctional form, parameter assumptions, and data inputs—should be adequately represented. Uncertainties notquantified should be identified. Transparency: Documentation should allow people tounderstand and assess the modules, including which featuresare evidence‐based or judgment‐based. Model code shouldbe available to researchers.18

Domestic and global SC‐CO2 IWG has focused on estimating a global SC‐CO2, as has the peer‐reviewed literature– CO2 impacts are global, regardless of where emissions occur.– Climate impacts in other countries may affect the United States (e.g.,global migration, economic and/or political destabilization).– US emission reductions encourage reciprocal actions by other countries. Difficulties in computing a US‐only estimate (Conc. 2‐4)– Important to consider what constitutes domestic impact in the context ofa global pollutant that has international implications that affect the US.– Need an SC‐CO2 framework that adequately captures these interactions.– Existing SC‐IAM methodologies do not model all relevant interactionsamong regions.– In estimating a domestic SC‐CO2 need to consider potential implications ofclimate impacts on other countries and actions by other countries.19

A regularized process to update SC‐CO2 estimates (Rec. 2‐4) An update cycle of roughly 5 years balances the need to respond toevolving research with the need for a thorough and predictable process. The IWG should establish a three‐step process for updating the SC‐CO2estimates.1. Estimates should be revised drawing on internal and external technicalexpertise and incorporating scientific peer review.2. Draft revisions to the SC‐CO2 methods and estimates should be subjectto public notice and comment.3. The government’s approach to estimating the SC‐CO2 should bereviewed by an independent scientific assessment panel to identifyimprovements in future updates and research needs.20

Regularized process for SC‐CO2 updates (Fig. 2‐2)21

Near‐term and Longer‐termUpdates22

Near‐term UpdatesRecommendations that would be feasible to implement in thenext 2 to 3 years: Socioeconomic module should use statistical methods andexpert elicitation for projecting distributions of GDP,population growth and emissions into the future Climate module should employ a simple Earth system modelthat satisfies well‐defined diagnostic tests Damages module should improve and update existingdamage functions drawing on recent scientific literature Discounting module should incorporate the relationshipbetween discount rates and economic growth to account foruncertainty over long time periods23

Longer‐term Updates Longer‐term steps for the development andimprovement of each module are outlined alongwith characteristics that each future moduleshould have. Feedbacks between the modules and interactionswithin each module should also be incorporated inthe longer term.24

Research priorities for SC‐CO2 estimationThe report outlines priorities for research to improve thesocioeconomic, climate, and damages modules, including: Studies of interactions and feedbacks within the human‐climate system. (Conc. 2‐3) Quantification of the importance of feedbacks fromdamages to socioeconomic projections. (Conc. 3‐1) Development of detailed structural economic modelssuitable for projections over long time horizons. (Conc. 3‐1) Incorporation of more comprehensive climate models inthe SC‐CO2 framework. (Conc. 4‐5) Expansion of research on climate damage estimation.(Conc. 5‐1)25

Summary A modular approach should be adopted to allow relevantdisciplinary expertise to shape each part of the SC‐CO2 analysis.– Output from each module should be presented in probabilistic form tofacilitate uncertainty analysis of results.– Explicit probability distributions should be derived for socioeconomicinputs (GDP, population, emissions).– The climate module should represent temperature change over time andinclude sea‐level rise and ocean pH components.– Damage functions should be updated to reflect recent literature.– The discounting approach should link discount rates to the uncertain rateof economic growth and, in turn, damages. Criteria regarding the scientific basis, characterization ofuncertainty, and transparency should be applied. A regularized 3‐step process should be established for updatingthe SC‐CO2 roughly every 5 years, informed by ongoing research.26