Social Cost of Greenhouse Gases

On November 11th, 2022, U.S. EPA requested public input on its planned peer review of the draft new social cost of greenhouse gases (SC-GHG) estimation methodology that EPA released on the same day.

SC-GHGs are important metrics that are used in regulations and other federal decisions to assess policy proposals, justify actions, and set standards with significant financial and social implications. The U.S. Government SC-GHG estimates are also being considered by U.S. states and other countries. However, SC-GHG estimates are complex to calculate, requiring multi-century modeling of potential future global societies, climate change, sea level rise, and economic damages from climate change.

This publication represents the public comments EPRI submitted on December 1st, 2022, on EPA’s planned peer review process and peer review panel candidates. EPRI’s public comments are technical in nature and based on extensive EPRI SC-GHG related research and expertise covering SC-GHG estimation as well as application (i.e., use), including EPRI’s participation on the National Academies of Sciences, Engineering and Medicine (NASEM) Social Cost of Carbon committee, who’s recommendations EPA’s draft methodology was designed to address.

Overall, EPRI observes that EPA’s proposed peer review and overall scientific process is insufficient to develop scientifically robust and reliable estimates and insufficient for the public to have confidence in the outcome. Based on EPRI’s research and experience in this area, the process needs the following: a revised peer review candidate selection process and list to ensure full and unbiased coverage of the core scientific disciplines underpinning the SC-GHG, a peer review process that is expanded to a scientific review process appropriate for a regulatory methodology with significant implications, a substantial increase in opportunities for public engagement and input, and an improved overall scientific process for developing and using updated SC-GHG estimates. EPRI’s comments discuss each of these recommendations in detail.

Please also see EPRI’s public comments on EPA’s draft new SC-GHG methodology (3002026256), which finds that the methodology and estimates are not yet scientifically reliable and robust for policy use, with the methodology containing multiple significant technical issues and not satisfying the NASEM recommendations. The comments then provide specific recommendations for how to address these issues and move forward.

On November 11th 2022, the U.S. EPA released a proposed rule for regulating methane emissions from oil and gas operations (Standards of Performance for New, Reconstructed, and Modified Sources and Emissions Guidelines for Existing Sources: Oil and Natural Gas Sector Climate Review, Docket ID No. EPA–HQ–OAR–2021–0317). Along with the proposed rule, EPA introduced a draft new methodology for estimating the social costs of carbon and other greenhouse gases (SC-GHG).

The SC-GHGs are important metrics that are used in regulations and other federal decisions to assess policy proposals, justify actions, and set standards with significant financial and social implications. The U.S. Government SC-GHG estimates are also being considered by U.S. states and other countries. However, SC-GHG estimates are complex to calculate, requiring multi-century modeling of potential future global societies, climate change, sea level rise, and economic damages from climate change.

This publication represents the public comments EPRI submitted on February 13th, 2023, on EPA’s draft new SC-GHG methodology and use of SC-GHG estimates in the proposed rule. EPRI’s public comments are technical in nature and based on extensive EPRI SC-GHG related research and expertise covering SC-GHG estimation as well as application (i.e., use), including EPRI’s participation on the National Academies of Sciences, Engineering and Medicine (NASEM) Social Cost of Carbon committee, who’s recommendations EPA’s draft methodology was designed to address.

After thoroughly reviewing EPA’s draft new methodology, EPRI has found that the methodology and estimates are not yet scientifically reliable and robust for policy use. The methodology contains multiple significant technical issues and does not satisfy the NASEM recommendations. This should be addressed before the estimates are deployed to inform policy, for EPA’s methane rule and otherwise. In general, EPRI recommends an improved process, enhanced documentation, a revised methodology, and improved application of SC-GHGs. EPRI’s detailed comments include specific overall and module-specific and cross-module recommendations, as well as discussion of our technical observations that underpin each recommendation and insights that inform how to move forward.

On January 13, 2022, EPRI submitted public comments on the Biden Administration’s advance notice of proposed rulemaking (ANOPR) for consid­ering greenhouse gas (GHG) emissions and the social cost of carbon in federal procurement (Federal Acquisition Regulation: Minimizing the Risk of Climate Change in Federal Acquisitions, FAR Case 2021-016). The ANOPR was published by the Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA). This publication represents EPRI’s public comments.

EPRI’s comments discuss important technical issues associated with potential procurement consideration of GHGs, including the risk of pricing GHGs more than once and the economic inefficiency of procurement as an emissions reduction policy instrument. The public comments are grounded by EPRI’s research, including its social cost of greenhouse gases (SC-GHG) and climate-related risk research, and touch on a variety of critical issues for industry and society that are relevant beyond the context of the ANOPR, including technically grounded use of SC-GHG estimates, GHG accounting and decision consideration, climate-related risk assessment, and GHG goal setting.

What are the technical challenges that arise from integrating carbon pricing into wholesale electricity markets and what are current approaches to integrate them in the U.S.?

On February 26th, 2021, the Biden Administration published “interim” social cost of greenhouse gas (SC-GHG) estimates for carbon dioxide, methane, and nitrous oxide (link). In early May, the Administration requested public comment on the “interim” estimates and technical document, with comments due June 21st, 2021 (link). This publication represents the public comments EPRI submitted.

EPRI’s public comments are technical in nature and based on extensive EPRI SC-GHG related research and expertise covering SC-GHG estimation as well as application (i.e., use). The SC-GHGs are important metrics that are used in regulations and other federal decisions to assess policy proposals, justify actions, and set standards with significant financial and social implications. The U.S. Government SC-GHG estimates are also being considered by U.S. states and other countries. However, SC-GHG estimates are complex to calculate and use, requiring multi-century modeling of potential future global societies, climate change, sea level rise, and economic damages from climate change. EPRI’s public comments identify critical technical issues that need to be addressed for reliable, robust, and stable estimates and use in the near-term with the interim estimation methodology and policy applications, as well as in the longer-run in terms of scientific challenges that need to be overcome and the type of scientific review of future methodologies needed for public confidence in the estimates and the use of those estimates.

The Biden Administration has also requested “final” SC-GHG estimates by January 2022. EPRI’s comments identifying scientific challenges, and the opportunities for addressing them, inform that process as well. In general, EPRI’s comments stress the importance of putting science first and developing SC-GHG estimates as robust scientific metrics that can meaningfully inform decisions and instill public confidence in the insights generated.

On January 20th, 2021, President Biden issued an Executive Order which included requests for interim social cost of greenhouse gases (SC-GHG) estimates for carbon dioxide, methane, and nitrous oxide in 30 days, final SC-GHG estimates in a year, and recommendations on appropriate use of estimates. The SC-GHGs are important metrics that will be used in regulations and other federal decisions going forward in assessing proposals, justifying actions, and setting standards with significant financial and social implications. Estimates are also used by U.S. states and other countries. SC-GHG estimates are complex to calculate and use, requiring multi-century modeling of potential future global societies, climate change, sea level rise, and damages from climate change.

The SC-GHG modeling framework used by the Obama and Trump Administrations will likely be considered as the basis for the interim estimates. However, unique detailed EPRI analyses deconstructing and assessing that framework have found that it is not scientifically reliable, does not produce robust estimates, and therefore should be revised before it can be used. These analyses were a key input into the National Academy of Science, Engineering, and Medicine (NASEM) study noted in President Biden’s executive order, a study that recommended replacement of the modeling framework. Through analyses of past applications of SC-GHGs, EPRI has also found significant technical issues in how SC-GHG estimates have been applied in policy assessment that impact the scientific reliability of climate benefit and net benefit calculations.

For the Biden Administration to “capture the full costs of greenhouse gas emissions as accurately as possible,” the shortcomings in the current modeling framework and SC-GHG use need to be addressed. For interim SC-GHG estimates, this entails revising the framework to meet the minimum scientific standard for transparency, scientific basis, and plausibility, and using discount rates consistent with other federal decisions and the type of value estimated. For final SC-GHG estimates, this requires addressing critical scientific challenges and implementing a scientific and public review process appropriate for regulatory methodologies. It may also entail considering alternatives to the SC-GHGs, if robust estimates cannot be established. Finally, to ensure reliable climate benefits and net benefits calculations, guidance on SC-GHG use is needed that addresses known issues, such as avoiding pricing greenhouse gas emissions more than once.

In July 2020, Moody’s Investors Service requested public feedback on their “Proposed framework to assess carbon transition risks for electric power companies.” EPRI submitted detailed comments, which we are providing to the public via this publication. EPRI has been exploring the complex topic of climate-related risk for several years, particularly low-carbon transition risk, and completed two studies directly relevant to Moody’s efforts. EPRI also has extensive related scientific expertise and a long history of research community leadership and participation, including in the Intergovernmental Panel on Climate Change (IPCC) and the Task Force on Climate-Related Financial Disclosures (TCFD) Advisory Group for Scenario Guidance. Based on EPRI’s research and expertise, EPRI’s comments suggest that Moody’s proposed framework be reconsidered to more accurately inform investors, companies, and communities on a company’s risk. EPRI’s comments noted that Moody’s proposed framework did not assess an individual company’s actual carbon transition risk, and that EPRI had significant concerns about the ability of the framework as structured to effectively inform. EPRI’s full comments include high-level feedback, EPRI’s list of technical considerations for low-carbon transition risk analyses, general comments on Moody’s proposed framework, and detailed comments related to individual components of the framework. In addition, EPRI’s comments are relevant to other transition risk assessment frameworks proposed by Moody’s and can be helpful to informing and assessing risk assessment and greenhouse gas goal setting approaches proposed by other organizations. Note that, Moody’s has since revised their methodology and begun applying it to utilities in the United States. The revised methodology has many of the same elements as Moody's proposed framework. As such, EPRI’s comments can be helpful in interpreting Moody’s “scores” and engaging with stakeholders.

This publication includes EPRI’s public comments submitted to the New York State Department of Environmental Conservation (DEC) in November 2020 in response to DEC’s request for comment on their proposal Establishing a Value of Carbon: Guidelines for Use by State Agencies. Among other things, DEC proposed specific social cost of carbon (SCC) values, as well as values for other greenhouse gases (GHGs), as estimates that can be used to evaluate the economic climate benefits of reducing a unit of carbon dioxide and other emissions. The Electric Power Research Institute (EPRI) has produced an extensive body of research surrounding SCC estimation and its use, insights from which have directly informed recommendations by the National Academy of Science, Engineering and Medicine SCC Committee, and have contributed to the SCC academic literature base for over a decade. These analyses, including in-depth assessment of the inner workings of the modeling framework developed by the U.S. Government’s Interagency Working Group on Social Cost of Greenhouse Gases for valuing carbon dioxide and other GHGs, serve as the basis for EPRI’s comments on DEC’s proposal. EPRI’s comments outline concerns with the SCC modeling approach used by DEC, and with the discount rates proposed, as well as identifies technical carbon value application issues for DEC to consider. EPRI recommends that DEC reconsider their proposed SCC estimates, and offers DEC improved SCC estimates with greater scientific reliability, or EPRI recommends that DEC use marginal cost estimates as an alternative. EPRI also recommends that DEC provide guidance on carbon value application issues and recognize fundamental technical challenges in considering future updates to SCC estimates. In addition to the recommendations, EPRI’s detailed comments provide technical discussion of research supporting these recommendations.

There is increasing interest in analyzing company and financial climate-related low-carbon transition risk and/or setting greenhouse gas (GHG) goals, with third-party organizations offering recommendations and methodologies. These activities are technically challenging and there is an overall unfamiliarity with the science. This study and other EPRI research strive to enable grounded discussion and decisions by providing a scientific basis for company climate risk assessment and goal setting.

EPRI completed a study in October 2018 that evaluated scientific understanding of the relationship between a company and a global temperature goal (Rose and Scott, 2018). Among other things, that study found that the available scientific knowledge is vast and well beyond what is being considered in current third-party company climate risk assessment and GHG goal setting methodologies. The study evaluated global emissions scenario resources as one input that defines the company-global temperature relationship.

This research update assesses 1.5°C and other newer global GHG emissions scenarios from the Intergovernmental Panel on Climate Change (IPCC) and International Energy Agency (IEA) and derives insights for company low-carbon transition risk assessment and GHG goal setting. In particular, this assessment evaluates the robustness of the insights and guidance derived in EPRI’s previous study based on earlier scenarios, and explores the details of pathways for limiting global warming to 1.5°C.

This study finds that caution is merited regarding the use of 1.5°C pathways in risk assessment and goal setting, and that it is important to consider pathway attainability, uncertainty, and global scenario issues. In addition, to capture scientific understanding, the newer scenario data should be combined with previous scenario data and scenario attainability, including plausibility, should be considered. Overall, we find that this research update validates and strengthens the technical observations, insights, and methodological guidance from EPRI’s previous study, and the insights and guidance, therefore, represent a reliable basis for evaluating and developing company methodologies now and into the future.

The social cost of carbon (SCC) is one of the values of carbon being considered in international and domestic discussions regarding the pricing of carbon dioxide emissions. The SCC is conceptually the marginal damage to society from emitting carbon dioxide (CO2) and contributing to climate change. SCCs are regarded as an option for pricing carbon in that they represent a monetization of climate damage externalities from activities emitting CO2 that could be internalized into decisions. However, there are essential conceptual and practical issues to consider. This study distinguishes different types of SCCs—baseline, optimal, and policy, and discusses issues regarding the state of the art for SCC estimation, global damage modeling, and economically optimal carbon pricing. The study also briefly discusses SCC (and carbon tax) application issues that can compromise CO2 reduction benefit and net benefit estimates, as well as considers other options for developing a carbon tax.