In the summer of 2019 Governor Cuomo and the New York State Legislature passed the Climate Leadership and Community Protection Act (Climate Act) and this summer the implementation process is in full swing. I have written a series of posts on the feasibility, implications and consequences of this aspect of the law based on evaluation of data, but those posts are generally technically oriented. A key component in this process is the Value of Carbon or Social Cost of Carbon which is supposed to place a price on emissions of greenhouse gases (GHG) relative to climate change impacts Because the concept is complicated and important for the implementation and justification of the Climate Act and I have prepared this is a non-technical summary to explain to those outside the bubble of this process what this means.
I am a retired electric utility meteorologist with nearly 40-years experience analyzing the effects of meteorology on electric operations. I believe that gives me a relatively unique background to consider the potential effects of energy policies related to doing “something” about climate change. The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.
The Climate Act establishes a Climate Action Council at §75-0103 that will develop a scoping plan to implement the requirements of the law. The Citizens Budget Commission developed an overview of the CLCPA targets in Green in Perspective: 6 Facts to Help New Yorkers Understand the Climate Leadership and Community Protection Act. The current emphasis is implementation of plans to meet the requirement to reduce GHG emissions from electricity production by 70% in 2030 and eliminate them altogether by 2040.
This post addresses section § 75-0113 in the law. In that section the Climate Act explicitly mandates how the value of carbon will be determined:
- No later than one year after the effective date of this article, the department, in consultation with the New York state energy research and development authority, shall establish a social cost of carbon for use by state agencies, expressed in terms of dollars per ton of carbon dioxide equivalent.
- The social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions. As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero.
- In developing the social cost of carbon, the department shall consider prior or existing estimates of the social cost of carbon issued or adopted by the federal government, appropriate international bodies, or other appropriate and reputable scientific organizations.
Value of Carbon
The law states that “The social cost of carbon shall serve as a monetary estimate of the value of not emitting a ton of greenhouse gas emissions”. The Social Cost of Carbon (SCC) is the present-day value of projected future net damages from emitting a ton of CO2 today. The idea is that New York will calculate the dollar-value of the Climate Act’s effect on climate change due to changes in greenhouse gas emissions.
What that means to the public is when the costs of the control strategies proposed to meet the Climate Act targets are announced they will be compared to the benefits calculated using this metric, and, presumably will show that the benefits out-weigh the costs. For example, a recent report contains this paragraph:
“NYSERDA estimates that the proposed Tier 1 procurements, as set out in Section II.c.1 below, – from 2021 to 2026 – would lead to a levelized impact on electricity bills of less than 0.5% (or $0.35 per month for the typical residential customer). Taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects.”
The net benefit of $7.7 billion is certainly impressive, however, it is important to understand how the value was calculated in order to determine whether the alleged benefits are valid. In the following I will interpret specific statements in the Climate Act.
According to the Climate Act: “As determined by the department, the social cost of carbon may be based on marginal greenhouse gas abatement costs or on the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere, utilizing a range of appropriate discount rates, including a rate of zero”. The department referred to is the New York State Department of Environmental Conservation.
The first SCC basis possibility would be “based on marginal GHG abatement costs”. In this application, the marginal cost measures the cost to reduce a ton of greenhouse gas. Presumably the goal is to develop a Marginal Abatement Cost Curve which is “a succinct and straightforward tool for presenting carbon emissions abatement options relative to a baseline (typically a business-as-usual pathway)”. This curve “permits an easy to read visualization of various mitigation options or measures organized by a single, understandable metric: economic cost of emissions abatement”. For each control option, a block with width equal to the amount of potential reductions and height equal to marginal cost of the option is prepared. An example, based on the widely cited 2007 McKinsey & Company study and reproduced for the King County Strategic Climate Action Plan, is shown below combining various measures from different sectors. Note that if there are sufficient savings from the energy efficiency measure, consider residential lighting in this example, then those benefits out-weigh the costs and the marginal abatement cost is negative.
The second Climate Act carbon value alternative is “the global economic, environmental, and social impacts of emitting a marginal ton of greenhouse gas emissions into the atmosphere and that refers to the SCC.
In order to estimate the SCC impact of today’s emissions it is necessary to estimate total CO2 emissions, model the purported impacts of those emissions and then assess the global economic damage from those impacts. The future projected global economic damage is then converted to present value. Finally, the future damage is allocated to present day emissions on a per ton basis to get the SCC value. The SCC is already used in New York to, for example, determine the value of “zero emission credits” which is a subsidy to generating nuclear facilities.
There are value-judgement choices in each step of the SCC calculation process. As shown below different choices in only two of the many parameters lead to an Obama-era SCC value of $50 in 2020 vs. the current SCC value of $7 in 2020. Needless to say the difference of over seven times in this value has an impact on cost benefit calculations.
To this point New York has used the Obama Administration’s SCC values developed by the Interagency Working Group on the Social Cost of Carbon (IWG). In 2017, President Trump signed Executive Order 13783 which, among other actions, disbanded the IWG and stated that the estimates generated by the Interagency Working Group were not representative of government policy. Currently Federal projects use SCC estimates based on the same approach as the IWG that differ in two aspects: the only damages that were considered were those in the United States and different values were used to convert to present costs.
Figure 1: Prior and Current Federal Estimates of the Social Cost of Carbon Dioxide in 2018 U.S. Dollars, 2020-2050 from the recent GAO report show that changing just those two variables results in very different damage estimates. As shown in the table below, at the common 3% discount rate, the prior federal estimate and the one currently used in New York was $50 but the current federal estimate is only $7.
Prior and Current Federal Estimates of the Social Cost of Carbon, per Metric Ton, at a 3 Percent Discount Rate in 2018 U.S. Dollars
|Year of emissions||Prior estimates (based on global climate change damages)||Current estimates (based on domestic climate change damages)|
Source: GAO analysis of data from the Interagency Working Group on Social Cost of Greenhouse Gases, EPA, and the United States Gross Domestic Product Price Index from the U.S. Department of Commerce, Bureau of Economic Analysis. | GAO-20-254
Initially, the social cost of carbon sounds like authoritative science. However, the differences boil down to the value judgements used to choose the parameters used to determine the benefits of the Climate Act. The previously mentioned NYSERDA claim that one particular aspect of the plan would lead to a levelized impact on electricity bills of less than 0.5% (or $0.35 per month for the typical residential customer) sounds great. In their words, “taking into account the value of the avoided carbon emissions, these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects”. However, the electric bill cost is real, everyone is going to pay that and the social cost of carbon “benefit” value depends on the judgement of those developing the numbers.
Consider whether New York should address global impacts, nation-wide impacts, or for the sake of argument, just the benefits that would accrue to New Yorkers if their emissions are reduced. There is no doubt that because there are global impacts that looking at global impacts should be considered but what value is that to a New Yorker already on the edge of energy poverty. If the cost of energy goes up significantly, and other jurisdictions that tried to implement less ambitious GHG emissions reductions programs has seen significant increases, then those New Yorkers least able to afford energy increases will be hit hard. Therefore, I think it is entirely appropriate to provide New Yorkers with benefits based on all three geographical coverages.
Another little recognized aspect of the SCC calculation methodology is that the costs are calculated far into the future. Proponents argue that because most of the warming caused by carbon dioxide emissions persists for many years, changes in carbon dioxide emissions today may affect economic outcomes for centuries to come. The GAO report notes: “To create a social cost of carbon estimate for emissions occurring in a given year, models use discounting to convert the projected monetized climate damages into a present value. This process involves reducing the damages in each future year by a percentage known as the discount rate”. As the graphs show, a higher discount rate reduces future values to a greater degree than applying a lower discount rate. If we use a higher discount rate, then we are weighting today’s costs as more important than impacts hundreds of years in the future. The emotional alternative is worded as leaving the world a better place for our grand-children by using a low discount rate. Note that the Climate Act specifies using a discount rate of zero that will surely show very high social costs of carbon. But remember that the impacts of climate change will become more evident much further in the future than our direct descendants so choosing a low discount rate that considers future impacts and current costs as equally significant not only means that our grandchildren will have to pay high prices now but won’t even see the benefits.
There is another aspect to paying now for potential damages far in the future. The money spent today is not available to spend on projects that could alleviate future damages. For example, if sea-level rise is a concern, then spending money today emulating the Dutch experience keeping the ocean out of their land would make more sense. Similar arguments for many of the damages included due to climate change can also be made but are routinely ignored by proponents of a high SCC value.
Finally, I want to point out that the SCC, as proposed for use in the Climate Act, has two basic flaws. In general, there is no consideration of benefits of GHG emissions and, particular to our situation, it does not consider NY’s actions relative to the world’s actions. The effect of the two items is related.
In most environmental impact assessments, a primary consideration is the direct consequence of the action. In this case, if New York reduces its GHG emissions how will global warming be affected. Prior to the passage of the Climate Act I calculated the potential change. If the Climate Act were to stop emitting 218.1 million metric tons (1990 emissions) the projected global temperature rise would be reduced approximately 0.0032°C by the year 2050 and 0.0067°C by the year 2100. In order to give you an idea of how small this temperature change consider changes with elevation and latitude. Generally, temperature decreases three (3) degrees Fahrenheit for every 1,000-foot increase in elevation above sea level. The projected temperature difference is the same as going down 27 inches. The general rule is that temperature changes three (3) degrees Fahrenheit for every 300-mile change in latitude at an elevation of sea level. The projected temperature change is the same as going south two thirds of a mile.
Another aspect of environmental impact assessment is a discussion of trade-offs. However, the social cost of carbon does not consider any of the benefits of carbon dioxide. The “CO2 fertilization effect” — the fact that rising emissions are making plants grow better, is not considered. The satellite data show that “there has been roughly a 14 per cent increase in the amount of green vegetation on the planet since 1982, that this has happened in all ecosystems, but especially in arid tropical areas, and that it is in large part due to man-made carbon dioxide emissions”. More importantly, Alex Epstein in the Moral Case for Fossil Fuels makes a compelling case for using fossil fuels use because: “the cheap, plentiful, reliable energy we get from fossil fuels and other forms of cheap, plentiful, reliable energy combined with human ingenuity, gives us the ability to transform the world around us into a place that is far safer from any health hazards (man-made or natural), far safer from any climate change (man-made or natural), and far richer in resources now and in the future.”
The International Energy Agency claimed that world population without access to electricity fell below 1 billion in 2017. In order to reduce that number further, improve access to more electricity, and reap the benefits of abundant, reliable of energy, developing countries are building fossil-fired power plants. According to the China Electricity Council, about 29.9 gigawatts of new coal power capacity was added in 2019 and a further 46 GW of coal-fired power plants are under construction. If you assume that the new coal plants are super-critical units with an efficiency of 44% and have a capacity factor of 80%, all the reductions provided by the Climate Act will be replaced by the added 2019 Chinese capacity in just over three years or less than an year and a quarter if the 2019 capacity and the units under construction are combined. If construction of all coal plants elsewhere were included, then the time to subsume New York reductions would be even less.
Up until this point the State of New York has thus far relied on a single value of the SCC. While that may be necessary for use in calculating credits for emissions reductions, elsewhere, and particularly in the case of claimed benefits relative to the costs of the program, it is more appropriate to consider a range of values because of the massive uncertainties associated with this metric.
The comments on the SCC prepared by Dr. Richard Tol in a Minnesota Public Utilities Commission hearing on that state’s use of the SCC provide a technical discussion of potential problems with the SCC. Dr. Tol is Professor of the Economics of Climate Change at Vrije Universiteit Amsterdam and a Professor of Economics at the University of Sussex and has direct experience estimating the social cost of carbon. He concludes: “In sum, the causal chain from carbon dioxide emission to social cost of carbon is long, complex and contingent on human decisions that are at least partly unrelated to climate policy. The social cost of carbon is, at least in part, also the social cost of underinvestment in infectious disease, the social cost of institutional failure in coastal countries, and so on.”
According to the National Academies, the present value of damages reflects society’s willingness to trade value in the future for value today. The Climate Act mandates that the carbon value consider a zero discount rate that means that value in the future equals value today. However, the fact that New York’s potential emission reductions will be subsumed by increases elsewhere means that the valuation arguments are theoretical and that in practice New York reductions are only symbolic.
The calculation and use of the SCC is complicated and subject to mis-interpretation. Such is the case with NYSERDA’s claim noted earlier that “these procurements are estimated to yield a net benefit of around $7.7 billion over the lifetime of the projects”. In response to my question about the calculation of lifetime benefits, Dr. Tol explained that the SCC should not be compared to lifetime savings or costs. Therefore, the $7.7 billion net benefit claim is incorrect.
In conclusion, New Yorkers should be aware of the back story of the social cost of carbon benefits claimed to date for Climate Act projects when compared to the costs. The costs to implement the Climate Act will be real changes to ratepayer bills. The benefits claimed are based on numerous value judgements, ignoring world-wide emission increases that will subsume New York’s reductions, and, if lifetime benefits are claimed, are much higher than appropriate. For all intents and purposes, today’s costs for the Climate Act will provide negligible benefits to those paying the bills.