Estimating The Social Cost Of Carbon: Robert Pindyck’s Critique

The US government’s new consensus estimate of the social cost of carbon (SCC)—around $43 per ton of CO2 from a 2020 baseline—has met with some approval in academic and other circles (as we discussed yesterday).  But some of the harshest criticisms, at least insofar as the blogosphere would interpret them, have come from MIT economist Robert Pindyck (short article and working paper). Pindyck’s critiques are important, though we do not agree with all the conclusions he draws from them—conclusions that have been misinterpreted by those opposed to climate policy based on the SCC.

Climate policy critics focus, not surprisingly, on the blunt title and first two words of the abstract of Pindyck’s working paper: Climate Change Policy, What Do the Models Tell Us….”Very little”. The models Pindyck references are integrated assessment models (IAMs), like Bill Nordhaus’ DICE model, on which the SCC is partly based. These models integrate a huge amount of information and science to estimate how much a change in CO2 emissions will affect global warming and the damages it causes. But Pindyck argues IAMs “have crucial flaws that make them close to useless as tools for policy analysis…[they] create a perception of knowledge and precision, but that perception is illusory and misleading.” This statement has been taken to imply that one should throw out the SCC estimates, as well as the models upon which they are based.

Critics, however, ignore Pindyck’s conclusion: “My criticism…of IAMs should not be taken to imply that because we know so little, nothing should be done about climate change right now. . . Quite the contrary.” In our belief, he then ends up basically (we hedge here because he says “some have argued” rather than “I argue”) endorsing the SCC estimate on precautionary grounds, imposing a carbon tax of that amount and revising this later as we learn more. Hardly a condemnation of the SCC! Indeed, a closer parsing of his statements suggests that his point is to stop overselling the precision of IAMs while pressing ahead with a SCC to get the process started. Beyond these broad points, is Pindyck providing something new here and, in particular, is he overselling the overselling of IAMs? Read More

Economics and Politics in California: Cap-and-Trade Allowance Allocation and Trade Exposure

This post originally appeared on Robert Stavins’s blog, An Economic View of the Environment.

In my previous essay at this blog – The Importance of Getting it Right in California – I wrote about the precedents and lessons that  California’s Global Warming Solutions Act (AB 32) and its greenhouse gas (GHG) cap-and-trade system will have for other jurisdictions around the world, including other states, provinces, countries, and regions.  This is particularly important, given the failure of the U.S. Senate in 2009 to pass companion legislation to the Waxman-Markey bill, passed by the U.S. House of Representatives, highlighting the absence of a national, economy-wide carbon pricing policy.

In my previous essay, I focused on three pending design issues in the emerging rules for the AB-32 cap-and-trade system:  (1) the GHG allowance reserve; (2) the role of offsets; and (3) proposals for allowance holding limits.  I drew upon a presentation I made on “Offsets, Holding Limits, and Market Liquidity (and Other Factors Affecting Market Performance)” at the 2013 Summer Issues Seminar of the California Council for Environmental and Economic Balance.

At the same conference, I made another presentation, which was on “Allowance Value Distribution and Trade Exposure,” a topic that is of great importance both economically and politically, not only in the context of the design of California’s AB-32 cap-and-trade system, but for the design of any cap-and-trade instrument in any jurisdiction.  It is to that topic that I turn today.  (For a much more detailed discussion, please see a white paper I wrote with Dr. Todd Schatzki of Analysis Group, “Using the Value of Allowances from California’s GHG Cap-and-Trade System,” August, 2012).

Why Does Anyone Care About the Allowance Value Distribution?

A cap-and-trade policy creates a valuable new commodity – emissions allowances.  In a well-functioning emissions trading market, the financial value of these allowances (per ton of emissions, for example) is approximately equivalent to their opportunity cost, which is the marginal cost of emissions reductions.  This is because of the existence of the overall cap, which – if binding – fosters scarcity of available allowances, and hence generates their economic value.

It should not be surprising, then, that the initial allocation of these allowances can have important consequences both for environmental and for economic outcomes.

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Towards an Agreed-Upon Social Cost of Carbon

Source: Interagency Working Group on Social Cost of Carbon

Source: Interagency Working Group on Social Cost of Carbon

The social cost of carbon (SCC) is a monetary estimate of the global external (i.e., non-market) costs from a ton of CO2 (or greenhouse gas equivalent) emissions. These costs include, among other things, damages related to sea level rise, more frequent storms, and higher temperatures. These effects will vary over time but the SCC is an attempt to account for long-term effects of each ton. Thus, how future external costs are discounted in order to arrive at their present value equivalent is an important element of such a metric.

The SCC is important because of the need to make efficient choices about carbon mitigation policy. If the last ton of CO2 reduced reduces damages by $40 but the costs to reduce that ton are only $30, we know that the net benefits of the policy can be increased by reducing even more CO2, and will continue to do so until the generally rising marginal costs of mitigation equal the constant or falling marginal benefits. From a policy perspective, this marginal benefit is thereby also an indication of the size of a carbon tax needed to efficiently mitigate climate-related damages.

Unanimous acceptance  of such an estimated number is nearly impossible – not only because of the enormity of quantitative information needed to obtain credible numbers but, as well because of  some fundamental disagreements among natural and social scientists. In light of these issues, the best that can be expected is a broad consensus of a range of SCC numbers that guide, but do not dictate, climate policy. Fortunately, many researchers are pursuing this elusive goal. A few months ago, a federal Interagency Task Force Working Group, updating a similar 2010 effort, issued an estimated range of dollar values for the SCC under different base years and discount rates..  The Task Force Working Group’s present-value estimate of that long-run impact from a 2020 perspective using a 3 percent discount rate– is $43 in 2007 dollars or about 65 percent greater than the magnitude calculated just two years earlier.

How has this Task Force Working Group analysis fared in the research and policy community? It is premature to try and convey a statistically meaningful sampling of responses. But some initial soundings are worth noting. Read More

This Week in the RFF Library Blog

Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy. Check out this week’s highlights below:


Beyond Renewable Portfolio Standards: An Assessment of Regional Supply and Demand Conditions Affecting the Future of Renewable Energy in the West
A new Energy Department study conducted by the National Renewable Energy Laboratory (NREL) indicates that by 2025 wind and solar power electricity generation could become cost-competitive without federal subsidies, if new renewable energy development occurs in the most productive locations. — via National Renewable Technology Laboratory

Engaging the Public in Critical Disaster Planning and Decision Making: Workshop Summary
Engaging the Public in Critical Disaster Planning and Decision Making is the summary of a workshop held in March 2013 to discuss the key principles of public engagement during the development of disaster plans, the response phase, and during the dissemination phase when interested community partners and the general public are informed of the policies that have been adopted. Presenters provided specific examples… – via National Academies Press

Carbon Farming in Hot, Dry Coastal Areas: an Option for Climate Change Mitigation
We present a comprehensive, interdisciplinary project which demonstrates that large-scale plantations of Jatropha curcas – if established in hot, dry coastal areas around the world – could capture 17–25 t of carbon dioxide per hectare per year from the atmosphere (over a 20 yr period). Based on recent farming results it is confirmed that the Jatropha curcas plant is well adapted to harsh environments and is capable of growing alone or in combination with other tree and shrub species with minimal irrigation… — via Earth System Science

Organizational and Institutional Issues in Climate Change Adaptation and Risk Management: Insights from Practitioners’ Survey in Bangladesh, Ethiopia, Kenya, and Mali
This report provides some reflections and insights on the level of awareness, practices, and organizational and institutional issues being faced by countries as they adapt to climate change, based on interviews with 87 practitioners working in government agencies, local organizations, international organizations, and think thanks reporting involvement in climate change adaptation. Data were collected in Bangladesh, Ethiopia, Kenya, and Mali using both an e-survey platform and face-to-face interviews… — via International Food Policy Research Institute

For more from the RFF Library blog, click here.

The UK, Fracking, and Mineral Rights

In an editorial, the Economist this week argues that “if Britain wants an American-style energy boom, it should import American-style local taxation.” In short, they argue that differences in public opinion toward fracking are driven by differences in how the benefits of development are distributed. In the UK (and most other European countries), subsurface mineral rights are held by the state, and taxes on production are generally collected at the national level. Local communities therefore don’t get or at least don’t easily see the economic benefits of development, only its environmental and other costs. The editorial argues that distributing revenues back to communities would increase local support, enabling greater development that would (it is implied) benefit the UK in general.

This argument is not new – private ownership of subsurface rights are a frequently cited structural advantage for oil and gas development in the US. The argument is also appealing, especially for me – as one of my professors loved to say, lawyers are “institutional engineers”. If policy outcomes can be explained by relatively small differences in legal institutions like the distribution of subsurface rights, then the application of some institutional engineering can probably improve things. Even if not, just being able to argue that law drives public opinion and policy is attractive, partly because it makes me look good in front of colleagues from other disciplines, like the economists I work with here at RFF.

Nevertheless, these institutional differences can’t be the only driver of differing attitudes toward fracking in the US and UK. As the editorial points out, attitudes toward development vary greatly within the US, despite universal state-level control over regulation and taxation. Even ownership of subsurface rights isn’t a good explanation for these differences, at least by itself. New York’s moratorium on fracking continues, driven by a highly skeptical public, while development generally has greater support in the West – this despite the fact that the federal government is by far the largest landowner in that part of the country. Severance taxes (taxes on gas production) also vary greatly across the country, making it difficult to draw any connections between public opinion and public (or at least government) benefit.

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Resources Magazine: Whither Markets for Environmental Regulation?

Over the past 60 years, regulators have implemented market-based programs for air pollution, water pollution, land management, and other environmental policy problems at local, state, federal, and—in the case of greenhouse gas regulation—international levels. Some applications hew more closely than others to ideal market-based policy design, as defined by economic theory, and programs have met with varying degrees of success. In this symposium, drawn from discussions at RFF’s December 2012 First Wednesday Seminar, four RFF scholars draw lessons from the successes—of which there have been few—and the many failures. They also consider the desirability, feasibility, and design of market-based environmental policy in the future.

Click here to read the full article.

How Energy Efficiency Features are Reflected in Home Prices

In a recent analysis of real estate data from Portland, OR; Austin, TX; and the Research Triangle region of North Carolina, we find, with colleague Todd Gerarden, that local “green” certifications appear to have a larger impact on sales prices for homes than the national Energy Star certification. We also find that Energy Star certification only affects sales prices of homes built between 1995 and 2006 but not newer homes.

Twenty two percent of US carbon dioxide emissions can be attributed to residential buildings, and investments in the energy efficiency of these homes can help reduce both energy bills for homeowners and emissions. But the uncertainty over whether investments in energy efficiency can be recouped upon the sale of a home can lead to underinvestment—buyers may not have full information or understanding of a home’s energy efficient features and sellers may not be able to reliably or accurately advertise those features in the marketplace.

The federal government’s Energy Star program has helped to address this information gap by certifying new homes that are 15 percent more energy efficient than other new homes on the market. And the US Green Building Council oversees the more rigorous LEED (Leadership in Energy & Environmental Design) certification program. Many local certification programs exist around the country as well. But how do these certifications affect home prices?

In a new RFF discussion paper, we assess the impact of Energy Star and two local “green” certifications on home sales prices. Using data from real estate multiple listing services in three independent housing markets, we find that the local certifications appear to have larger effects on sales prices than Energy Star, for newer homes as well as older ones.  The local certifications encompass green attributes beyond energy efficiency, including considerations for landscaping, building materials and water efficiency, among others. However, which of these different factors is most important is still a question. We also find that Energy Star certification only affects the sales prices of older homes, not new ones. We hypothesize that the reason for this finding is the improved energy efficiency of new homes, even uncertified ones.

Certification provides an information signal to the marketplace and can be a valuable way for homebuyers to learn about the energy efficiency and other “green” attributes of houses. However, it is an open question how homebuyers interpret these certifications and which of the attributes beyond energy efficiency that are included in local green certification schemes are of most value.

This Week in the RFF Library Blog

Each week, we review the papers, studies, reports, and briefings posted at the “indispensable” RFF Library Blog, curated by RFF Librarian Chris Clotworthy. Check out this week’s highlights below:


Reducing Carbon Black and Methane Emissions Provide Only Modest Benefits
Emissions reductions focused on anthropogenic climate-forcing agents with relatively short atmospheric lifetimes, such as methane (CH4) and black carbon, have been suggested as a strategy toreduce the rate of climate change over the next several decades. We find that reductions of methane and black carbon would likely have only a modest impact on near-term global climate warming. — via Proceedings of the National Academy of Sciences

Overwhelming Risk: Rethinking Flood Insurance in a World of Rising Seas
Subsidized insurance rates, the practice of passing through damage and loss costs to taxpayers, and the lack of accurate information on flood risks — all these factors have led to more coastal development, more exposure to climate risks, and less incentive to take measures that reduce these risks. To address this, UCS recommends the following…
— via Union of Concerned Scientists

Saving Oil and Gas in the Gulf
The systemic waste of oil and gas in the Gulf is eroding economic resilience to shocks and increasing security risks, including to citizens’ health. Success or failure in setting and meeting sustainable energy goals in the Gulf Cooperation Council (GCC) countries will have a global impact. — via Chatham House

Wildlife Fire Management: Improvements Needed in Information, Collaboration, and Planning to Enhance Federal Fire Aviation Program Success
…The Forest Service and Interior contract for aircraft to perform various firefighting functions, including airtankers that drop retardant. The Forest Service contracts for large airtankers and certain other aircraft, while Interior contracts for smaller airtankers and water scoopers. However, a decrease in the number of large airtankers, from 44 in 2002 to 8 in early 2013–due to aging planes and several fatal crashes–has led to concerns about the agencies’ ability to provide aerial firefighting support. — via U.S. Government Accountability Office

Lessons from Hurricane Isaac: Gulf Coast Coal & Petrochemical Facilities Still Not Storm Ready
Problems at coal, chemical and oil facilities, many of them preventable, resulted in extremely high levels of air and water pollution during and after Hurricane Isaac. The findings are released today in a new report – Lessons from Hurricane Isaac – researched and written by the Gulf Monitoring Consortium (GMC)… — via Gulf Monitoring Consortium Report

For more from the RFF Library blog, click here.

Realistic Expectations for Carbon Policy – A Response

This is a guest post by Brian Potts, a partner at law firm Foley & Lardner, LLP in Madison.  Yesterday I (Nathan) critiqued some arguments he’s made recently regarding prospects for EPA’s future carbon performance standards for power plants. I’m happy to offer Brian space here to respond to that critique. -Ed

First, I would like to thank Nathan for his comments. There has been a substantial amount of conversation in the press about what EPA might do with its climate rules, but there has been a striking lack of discussion about what EPA can do with those rules under the Clean Air Act. This is therefore an important dialog. Let’s start with the areas where Nathan and I agree. Nathan is right to point out that there is a range of risk that EPA can take with these rules. And we obviously agree that these rules are not going to achieve the President’s target of a 17% economy-wide emissions reduction by 2020 on their own. But he has a few facts wrong, and is making a mistake in assuming that the agency’s past BACT determinations won’t impact what EPA can do now (to be fair, Nathan’s comments were based only on my op-ed in The Hill, and not on my longer article that was just released yesterday in the Yale Journal on Regulation). Here are my problems with Nathan’s analysis:

  • Nathan seems to assume that BACT only applies to new power plants. However, EPA’s Tailoring Rule that went into effect in 2011 requires CO2 BACT to be conducted for both new plants and significantly modified existing plants. Most of the CO2 BACT determinations to date have been for existing sources (one of which I site in my article), and these determinations have only led to a few percentage point reductions in emissions. To my knowledge, they have also uniformly concluded that carbon capture and sequestration is either not commercially available or is too expensive, and fuel switching is not allowed (I’ll come back to this point below).
  • Nathan argues that EPA can set NSPS/ESPS standards that are more stringent than previous BACT limits, otherwise “EPA would have a hard time ever strengthening NSPS, or writing new ones.” But EPA has historically set NSPS standards first as the floor and then BACT determinations happen on a plant-by-plant basis later. The NSPS were created as part of the 1970 Clean Air Act, and BACT requirements were added to the Act later in 1977. I’m not aware of a situation where the agency has first set a bunch of BACT limits, and then tried to establish a new uniform NSPS/ESPS. And while EPA does revise NSPS standards from time to time, I’m also not aware of a situation where they revised the NSPS to be more stringent than the recent BACT determinations that were set for the same types of sources.
  • Perhaps more importantly, the technology tests under the Clean Air Act are the same in all material respects for the NSPS/ESPS and BACT. The chosen technology has to be both commercially available and cost-effective. So – even if the courts agree that the Act does not bar the EPA from adopting NSPS/ESPS that are more stringent than previous BACT determinations – the courts would almost certainly find that the EPA was arbitrary and capricious if the agency set an NSPS/ESPS at a significantly more stringent level than past BACT determinations that were recently set for the exact same types of sources.
  • Finally, the suggestion that EPA can regulate coal plants and gas plants together is tenuous. EPA’s proposed CO2 NSPS that it released last year did just that – and after receiving comments from industry that pointed out the unlawfulness of the approach, the word on the street is that EPA is going to re-propose separate NSPS for new coal and gas plants. This is because a natural gas plant is not a carbon control technology for coal plants. It’s a completely different kind of power plant. And it has long been EPA’s policy that technology-based limits should not “redefine the source.” This position has also been adopted by the courts, and is the reason why fuel switching is not BACT in any of the prior determinations.

EPA knows it will have an uphill battle regulating power plant emissions using the Clean Air Act. Amy Harder in the National Journal back in 2010 quoted now EPA Administrator Gina McCarthy as admitting at the time that “GHG permitting is not a process for reducing overall GHG emissions.” My position is that EPA should take a conservative approach with these rules, or it will end up with nothing at all.

Realistic Expectations for EPA Carbon Policy

Brian Potts says EPA existing-source performance standards (ESPS) for power plant carbon emissions won’t matter much since they can’t or won’t be very stringent. This is partly true, if a bit overstated. You’re certainly kidding yourself if you’re counting on ESPS to take care of US climate policy on their own – though I know of nobody making that claim. But if ESPS are modest it will be because of conservatism at EPA (and the states), not the legal or technological limitations Potts claims.

Potts argues that the Clean Air Act itself bars EPA from enacting stringent ESPS. EPA has already done a few case-by-case reviews of new power plants (NSR) and required those plants to reduce their emissions by only a few percent. Potts argues that the statute prevents EPA from issuing performance standards that are any tighter than this. I don’t think that’s true. When a new plant is built, the law requires it to use “best available control technology” or BACT, which must be at least as effective at reducing emissions as the prevailing performance standards for new or existing sources under §111. (This BACT review is what EPA has already done at a few new plants). But the reverse is not true – the law doesn’t require performance standards to be less stringent than all current BACT reviews. If it did, EPA would have a hard time ever strengthening new-source performance standards (NSPS), or writing new ones, as it is doing now. Once the agency does finalize NSPS, any future BACT reviews will have to be at least as strict. But I don’t see how one-off BACT analysis limits EPA’s authority to set sector-wide NSPS.

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