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New study more than triples estimated costs of climate change damages

Posted on 12 September 2022 by dana1981

This is a re-post from Yale Climate Connections

A peer-reviewed analysis by two dozen experts more than triples – from $51 per ton of carbon dioxide to $185 per ton – the federal government’s estimate of the “social cost of carbon” (SCC).

The climate science, economics, and statistics experts’ paper in the prestigious journal Nature updates the best estimate of how much each ton of carbon dioxide costs society as a result of climate change damages. Their conservative best estimate is 3.6 times higher than the $51 value currently used by the federal government, and roughly 30 times more than the value previously adopted by the Trump administration.

It’s a critically important number because federal agencies by law are to consider the costs and benefits of proposed regulations. For climate pollutant regulations, the benefits of future climate damages avoided are estimated via the SCC. A higher value would result in larger benefit-to-cost ratios, justifying more aggressive federal climate regulations.

“It suggests there are many more actions we can take to curb carbon emissions that are going to be on the table that were not on the table before,” Stanford University economist Marshall Burke, not involved in the study, told the Associated Press.

Choosing the right discount rate is critical

The single largest factor contributing to the increase in the estimated SCC is the “discount rate.” This concept is premised on the premise that wages, the economy, and wealth grow over time – a trend that is expected to continue. Having an extra dollar today that can accumulate interest over time may thus be considered more valuable than a dollar received in the future. But in the case of an intergenerational problem like climate change, a high discount rate can also effectively discount the welfare of people born in the future.

Previous best estimates of the SCC – including the current federal value of $51, originally set by the Obama administration – have tended to use a discount rate of 3%. In 2017, the National Academy of Sciences published a report recommending how estimates of the SCC should be improved, including revisiting the question of discount rates.

As three of the new Nature study’s co-authors wrote in 2021, the prior 3% choice was based on the average interest rates of U.S. treasury bonds from 1973 to 2003, and is thus outdated. A 2017 brief from the White House Council of Economic Advisors found that based on lower interest rates in recent decades, the discount rate should be revised to about 2%. A 2018 study also found “a surprising degree of consensus” for a 2% discount rate in a survey of more than 200 publishing academics.

This one change – revising the discount rate from 3% to 2% – by itself more than doubles the estimated SCC. How so? Because the bulk of climate damages occur decades in the future, and so discounting the value of future climate damages can significantly suppress estimates of the SCC. Using a 2% discount rate, the study finds with 90% confidence that the SCC is between $44 and $413, with the best estimate pegged at $185 per ton.

The Trump administration had moved in the opposite direction, using discount rates of 3% and a whopping 7% in its efforts to dramatically lower the estimated SCC to near-zero.

Updated climate change damage estimates

As recommended by the 2017 National Academy of Sciences report, the authors of the new Nature study also incorporated updated research regarding damages from four categories of climate change impacts: premature deaths caused by extreme heat, impacts on agricultural yields, energy use in response to temperature changes, and sea-level rise encroaching on coastlines. The former two impacts dominated the climate damage estimates, with heat-related mortality and reduced crop yields each accounting for nearly half of the total climate costs.

Contributions by categoryContributions by category to the updated SCC estimate, from Rennert et al. (2022), Nature.

The Nature study authors projected that net building energy use changes would result in relatively low costs based on a 2018 study. The explanation: While summer cooling demand increases in response to rising extreme heat, demands for in-door warming decrease as the world warms.

The authors also projected sea-level rise damages to be relatively small, based on a 2016 study that evaluated the most cost-effective way each region could adapt to rising seas through a combination of coastal retreat and investments in coastal defenses like sea walls. But that calculation assumes every country will adapt optimally, and does not account for the psychological and cultural losses associated with abandoning homes and other resources that are swallowed by the sea. The study found that a lack of optimal adaptation would increase sea-level rise costs by as much as a factor of seven.

The Nature study based agricultural costs on a 2017 study that incorporated more than 1,000 recently published estimates of staple crop yield responses to changing temperature, rainfall, and carbon dioxide levels. The authors found that corn, wheat, soy, and rice yields are all projected to decline in hotter global temperature scenarios.

Finally, they based heat mortality costs on a 2022 study that evaluated recent research on a broad set of heat-related health outcomes, including cardiovascular, respiratory, and infectious disease categories. One complication in this category involves having to translate an avoided premature death into a monetary value. Researchers approach this question by evaluating how much people would be willing to pay to reduce their risks of premature death in a given year. Heat mortality costs are thus not direct impacts on the economy, but rather the monetary value people place on living longer, healthier lives as a result of their being subjected to fewer punishing extreme heatwaves.

The Nature study authors report that these updated climate damage assessments would increase the SCC by almost 60%, although the revised discount rate is the primary factor behind its more than tripling to $185 per ton.

Why this is still a conservative SCC estimate

The study authors did not incorporate numerous other extreme climate damages such as worsening wildfires, droughts, inland floods, hurricanes, food and water insecurity, the mass migrations that such disasters could trigger, or the resulting suffering and trauma that are difficult to quantify in monetary terms. Even the costly crop yield loss estimates include just four major staple crops that account for 20% of global agricultural production. As study co-author Frances Moore noted on Twitter, “There is still a lot missing from that list” of modeled climate damages.

Additionally, a lower discount rate could be justified, for example if climate damages slow economic growth. Or perhaps future generations would prefer to sacrifice some monetary wealth in exchange for a world with less extreme weather disasters and a stabler climate. The Nature study estimated that applying a 1.5% discount rate would raise the SCC to more than $300 per ton.

What happens next?

The Biden administration’s updating of the federal SCC was temporarily derailed in February by a lawsuit brought by several Republican attorneys general, but their challenge was thrown out a month later by a federal appeals court. The interagency working group performing the update may take the results of the new Nature study into account.

The revised federal SCC, which is expected to be published soon, is anticipated to significantly increase the value from the current $51 per ton, and may yield an estimate similar to that in the Nature study. As the new paper’s authors wrote, such an action would justify stronger federal regulations on climate pollutants:

“Our higher [SCC] values, compared to estimates currently used in policy evaluation, substantially increase the estimated benefits of greenhouse gas mitigation and thereby increase the expected net benefits of more stringent climate policies.”

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Comments

Comments 1 to 5:

  1. Arguably (meaning a reasoned justification exists - as opposed to claiming an argument based on unreasonable rationalizations) the 2% discount rate used by the evaluation should be considered to be an upper limit on the discount rate.

    The following World Bank ... Blogs post provides reasons why "Zero" is a more appropriate basis for these type of evaluations.

    Using a zero-discount rate could help choose better projects and help get to net zero carbon

    My MBA education and life experience supports this. The discount rate should only be used when the same people who benefit now will "exclusively" face the full future consequences. It is used to compare alternative "Investment Options" for an investing group, a group that wants to chose the option that maximizes their net-present-value (the evaluation of full life-cycle value of the investment converted to current day dollars by 'discounting' the future revenue and costs). It is meant to differentiate the magnitude of the future increased value compared to the required initial investment. It is not a concept that should be used to evaluate and compare how much will be lost by investment choices.

    Applying a discount rate to compare the magnitude of negative impact options, like the increasing of climate change harm, would result in the selection of 'biggest losing options'. Using the higher rate results in evaluations justifying more climate change harm done.

    It is simply and clearly unethical to use a discount rate to justify how much harm can be done to Others. And all of the future generations of humanity, as well as many members of currently living humanity, are being harmed by the actions that a portion of current day humanity inequitably benefit from.

    Most rapidly ending the harm done is the ethical requirement. Using a discount rate to justify doing less than could be done to limit harm, to justify doing more harm, is part of what Peter Singer referred to as the 'Era of Excuses' in his book Animal Liberation (an ethical argument that is interesting to re-read by replacing "limiting harm done to other life" with "climate change harm done to other life").

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  2. The following comments contain interesting examples of the discount rate concept applied to various environmental issues, and discusses some of the dilemmas involved, expanding on those OPOF mentions:

    www.sfu.ca/~heaps/483/discounting.htm

     

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  3. Considering that our escape hatch from the climate change problem we've created is composed of money more than it is hardware, a matter of economics rather than technological capacity, it's sad to see that NOAA's page on discounting appears now to be a relic made available only by the kindness of an SFU faculty member. 

    Thanks for the link, Nigel. 

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  4. That link from nigelj looks like it is part of some course material for an Economics prof at Simon Fraser University. Undoubtedly saved from NOAA to use as teaching material.

    Click on the menu drop-down on this link, choose "Courses", and choose Econ 483.

    http://www.sfu.ca/~heaps/

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  5. The NOAA document regarding the use of discount rates for Coastal System Restoration that nigelj linked to may be a good case study for an Economics course. It contains examples of potentially incorrect thinking (excuse making in the Era of Excuses) like the following:

    "The social rate of time preference is the rate at which society is willing to substitute present for future consumption of natural resources. The federal opportunity cost of capital and the rate of productivity growth are commonly used as proxies for the social rate of time preference. The argument for using the federal opportunity cost of capital as a proxy for the social rate of time preference is that in the absence of the public project, the federal government could put the funds to productive use reducing the national debt. When using the federal cost of capital, the generally accepted practice is to apply the effective yield on comparable-term Treasury securities (e.g., 20-year Treasury bonds for a study with a 20-year analysis timeframe). During the decade of the 1990s, the average 10-year Treasury bond rate was 6.01 percent whereas inflation averaged 2.88 percent. Thus, the real rate of interest on Treasury bonds was roughly 3.13 percent during the 1990s (Bellas and Zerbe 2003).

    Social policy is also concerned with an equitable distribution of consumption over time. Based on this premise, the rate of productivity growth can be used as a proxy for the social rate of time preference. This policy reflects the opportunity cost argument that the incremental or marginal benefit to the country generated by the public project should grow as fast as the productive capacity of industry. From 1990 to 2003, real Gross Domestic Product (GDP) grew by 2.96 percent (BEA 2004). Thus, using productivity over that period as the basis of the discount rate generates a roughly 3.0 percent rate. The National Oceanic and Atmospheric Administration (NOAA) recommends using the social, or consumer, rate of time preference for discounting interim service losses and restoration gains when scaling compensatory restoration (NOAA 1999).

    NOAA has adopted a 3.0 percent discount rate as a proxy for the social rate of time preference. When discounting restoration and assessment costs, NOAA recommends that trustees use the rates on U.S. Treasury securities issued for a comparable term relative to the analysis period."

    The fundamental flaw is using past economic statistics to evaluate a 'never before faced situation' - the need to evaluate the acceptability of a portion of global humanity benefiting in ways that are unsustainable and harmful to Other Humans (especially the future generations) and Other life. The understanding that GDP is a poor measure of progress is a growth industry producing a diversity of corrections to the flawed GDP (and other financial measures) way of evaluating progress.

    Ethically it is simply unacceptable for a person to benefit from actions that harm another person. A person can personally benefit from an action where they are the only potentially harmed person. And a group can benefit in a similar fashion as long as all members of the group equitably benefit and suffer consequences. But it is not acceptable for some members of the group to inequitably benefit from harm done to other members of the group. That is pretty fundamental to Legal Judgments. But the ways that pursuits of increased GDP can make up excuses for more harm being done are understandably unethical, yet likely Legal (really think about that).

    The case of climate change impacts is an evaluation of the harm done by human actions that a portion of the current global population inequitably benefit from. And any indications of GDP (or poverty and misery reduction, the real measure of progress) based on the harmful burning up of non-renewable resources are not sustainable. So it is a 'poor excuse' to use past measures of economic growth to discount future costs that are imposed on Others.

    In addition, it is flawed 'excusing' to use a discount rate for this 'global novel' developed problem. And climate change impacts due developed human activity are a global novel problem. Never before has such an extensive integral part of developed human activity needed to be stopped because it was learned, well after the activity was very popular and profitable, that it was globally unsustainable and threatened the future of humanity. Damage to the Ozone layer was addressed, sort of, because it was understood to be a near term threat to even the rich people. And nuclear weaponry was a similar global humanity threat, but it was not as pervasive in global human activity as harmful unsustainable fossil fuel use (at least above ground nuclear weapons testing was stopped). Fossil fuel use needs massive excusing to evade the harm to the rich and powerful (and their faithful fans) that is undeniably required by the undeniably understood need to limit the harm done to the future of humanity.

    And all of that is without accounting for the additional misery and suffering caused by fossil fuel use, the climate change harm that Others experience due to fossil fuel use as well as other harms due to fossil fuel use.

    And all of that is said without adding the 'ethical externalities' of impacts on other life that currently do not economically get accounted for but are harmed by fossil fuel activity. Those impacts to other life include, but are not limited to, climate change impacts.

    A narrow-minded view of economics can produce tragic consequences for the future of humanity as a sustainable part of the robust diversity of life on this amazing planet. A comprehensive concern for limiting harm done and developing sustainable improvements for humanity exposes how 'harmfully incorrect the current developed ways of living of most of the supposedly most advanced, most superior, humans are' rather than excusing those unsustainable ways of living.

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