Estimating the ‘social cost of carbon’ to reduce US emissions and improve energy efficiency
Submitting InstitutionUniversity of Sussex
Unit of AssessmentEconomics and Econometrics
Summary Impact TypeEnvironmental
Research Subject Area(s)
Environmental Sciences: Environmental Science and Management
Economics: Applied Economics, Econometrics
Summary of the impact
The US government's announcement of an increase in the `social cost of
carbon' (SCC) from $24 to $38 a tonne has been made on the basis of
research by Richard Tol, of the University of Sussex. Regulation based on
the new SCC (a measure of the damage of releasing an additional tonne of
carbon into the atmosphere) initially applies to microwave ovens, where it
is anticipated to save US consumers billions on their energy bills over
coming decades and prevent 38 million tonnes of CO2 emissions.
From June 2013, the new SCC applies to any new or revised regulation by
any branch of the US government and will eventually affect a wide range of
products and investments, including cars, white goods and power plants.
Tol, who works as an adviser to the US Environmental Protection Agency
(EPA), has been instrumental in helping the agency to understand the
economic impacts of climate change and the methods and assumptions that
underpin SCC estimates. The US government's estimates of the SCC are
widely used by other decision-makers in the private sector, banks and NGOs
and in other countries.
The social cost of carbon (SCC) is estimated using integrated assessment
models (IAMs), which combine models of demography, the economy, energy
use, emissions, greenhouse gas cycles, climate and impacts of climate
change. The `Climate Framework for Uncertainty, Negotiation and
Distribution' (FUND) is an IAM developed by Richard Tol and his
students, notably David Anthoff (UC, Berkeley). FUND is a dynamic computer
model that continually updates in the light of changing assumptions and
new estimates of key parameters. Modelled impacts include agriculture,
forestry, sea levels, a range of diseases, energy use, water resources,
unmanaged ecosystems, and tropical and extra-tropical storm impacts.
The source code, data and a technical description of the model are
available at http://www.fund-model.org.
The most recent version (FUND 3.7) was developed on the basis of Tol's
research in 2012-13. The research papers in Section 3, R1-R6, have all
informed the development of the FUND 3.7 software in terms of providing
improved estimates and sensitivity analysis with respect to key parameters
of the model. R3 describes the model (an earlier version was published as
a working paper in September 2011; the published article uses a later
version of the model, developed in 2012).
FUND is considerably more complex than other IAMs and is able to assess
the relative importance of parameters not included in other models, such
as the sensitivity of different sectors and regions to climate change and
changes in vulnerability and relative prices with development. FUND 3.7 is
the first sophisticated version of this software to investigate the
relative contribution of all uncertain parameters on the SCC, when all
parameters are varied simultaneously. It is this version that has been
instrumental in producing the new estimates of the SCC adopted by the US
There is large uncertainty about the SCC. R3 analyses the structure of
that uncertainty using FUND 3.7 by providing a decomposition of the
relative contribution of key parameters to the variation in the estimates
of the SCC. This also sets the priorities for further research. For
example, increased demand for air-conditioning in response to climate
change and economic growth emerge as important yet poorly understood
R5 and R2 provide the first estimates of the economic impact of ocean
acidification, a problem closely related to climate change and also caused
by CO2 emissions. R1 uses FUND to investigate the `Schelling
conjecture', which asserts that economic development provides the best
defence against the impact of climate change. Thus, under this notion,
poverty implies vulnerability to climate change, and accelerated economic
growth may therefore be more cost-effective than emission abatement in
reducing the impact of climate change. The study shows that this holds
only for the least-developed countries.
R6 estimates the SCC as a function of the uncertainty about climate
change and demonstrates that emission reduction puts an upper bound on the
expected value of the SCC — extending Weitzman's `Dismal Theorem',
which states that society faces an arbitrarily large expected loss from
`fat tails' or high-consequence, low-probability scenarios. The research
shows that this only holds without climate policy. Greenhouse
gas-emission reduction rapidly thins the undesirable tail.
R4 considers alternative criteria for decision-making under fat-tailed
uncertainty, such as minimax regret, minimum tail risk and thinnest tail.
The authors find that the implied carbon prices corresponding to these
different criteria do not differ much from the SCC now advocated by the US
government on the basis of Tol's research.
References to the research
R1 Anthoff, D. and Tol, R.S.J. (2012) `Schelling's conjecture on
climate and development: a test', in Hahn, R.W. and Ulph, A. (eds) Climate
Change and Common Sense. Essays in Honour of Tom Schelling. Oxford:
Oxford University Press, 260-73.
R2 Narita, D., Rehdanz, K. and Tol, R.S.J. (2012) `Economic costs
of ocean acidification: a look into the impact on shellfish production', Climatic
Change, 113(3-4): 1049—63.
R3 Anthoff, D. and Tol, R.S.J. (2013a) `The uncertainty about the
social cost of carbon: a decomposition analysis using FUND', Climatic
Change, 117(3): 515-30.
R4 Anthoff, D. and Tol, R.S.J. (2013) `Climate policy under
fat-tailed risk: an application of FUND', Annals of Operations
Research, DOI 10.1007/s10479-013-1343-2.
R5 Brander, U.M., Rehdanz, K., Tol, R.S.J. and van Beukering,
P.J.M. (2012) `The economic impact of ocean acidification on coral reefs',
Climate Change Economics, 3(1): 1-29.
R6 Hwang, I.C., Reynes, F. and Tol, R.S.J. (2013) `Climate policy
under fat-tailed risk: an application of DICE', Environmental and
Resource Economics, 56(3): 415-36.
Outputs can be supplied by the University on request.
Details of the impact
The `social cost of carbon' (SCC) is an estimate of the monetary value of
the damages associated with a small increase in CO2 emissions.
The figure is meant to approximate losses from incremental climate change,
such as flood damage, disease, diminished crop production, etc.
Conversely, this monetary figure also represents the value of damages
avoided for a given emissions reduction.
In the United States, the SCC is incorporated into the cost-benefit
analyses of measures to reduce CO2 emissions. Until 2010,
different federal agencies used, if at all, a range of estimates for the
SCC. Since then a dozen agencies, from the EPA to the Department of
Transportation, decided to standardise their estimates of the SCC. The
original estimate was set at $21 per tonne of CO2 in 2010 by a
working group of experts from several government agencies, led by the
Council of Economic Advisers and the Office of Management and Budget.
These initial estimates of the SCC in 2010 derive from estimates provided
by an earlier version of the FUND model and two other Integrated
Assessment Models: DICE (Yale University) and PAGE (Cambridge University).
These estimates have been used to justify more stringent fuel efficiency
standards for new motor vehicles (EPA and Department of Transportation
2010) [see Section 5, C5] and energy efficiency standards for many
appliances (Department of Energy 2012) [C4]. The Federal Register reveals
that the SCC has been cited in 31 rules.
Richard Tol has worked as a consultant and adviser to the EPA since 2007.
In this role, he has been instrumental in helping the EPA to understand
the economic impacts of climate change and the methods and assumptions
that underpin estimates of the SCC. The FUND model has been developed by
Tol to study climate policy. Improvements and modifications to the model
are conducted by Tol with Anthoff and their collaborators. EPA staff have
been trained in the use of the FUND model. The application of the latest
peer-reviewed version of the model is performed by EPA staff under the
guidance of Tol and Anthoff.
In May 2013, the Obama administration increased the SCC to be used by
federal agencies to $38 per tonne of carbon. The new SCC recommendations
of the InterAgency Working Group draw on the revised version of the FUND
(FUND 3.7) model along with estimates from the other two IAMs. This model,
and the associated revisions, derive from Tol's research.
The new SCC currently applies only to energy-efficiency regulations for
microwave ovens (Department of Energy 2013) [C1]. However, the
standardisation of rates in 2010 means that it will apply to any
new or revised regulation by any branch of the US government from
June 2013 onwards. Consequently, the potential reach of this impact is
large as, over time, the new SCC will be extended to energy-efficiency
regulations covering all appliances, vehicles, machinery and buildings.
Proposed rules have been issued for metal halide lamp fixtures, commercial
refrigeration equipment, walk-in coolers and freezers, and residential
However, even the impact of the new microwave legislation alone on both
consumers and the environment is substantial. The higher cost of carbon
implies that the estimated environmental damage from inefficient microwave
ovens is much higher than previously calculated. The legislation applies
to their energy use when in standby mode. Consequently, producers will be
forced to withdraw inefficient microwave ovens from the marketplace,
resulting in significant energy savings for consumers and a reduction in
greenhouse gas emissions. Estimates suggest $2.3 billion of savings for
consumers over coming decades and a reduction of 38 million tonnes in CO2
emissions (Department of Energy 2013) [C1].
The revised SCC is already being used in draft legislation in a number of
key areas. The SCC is used to underpin the draft rules for methane leaking
from shale oil and gas extraction, and for CO2 emissions from
new power plants (the final rule is in preparation http://epa.gov/carbonpollutionstandard/index.html
— see EPA (2012) [C6] for the regulatory impact analysis of the proposed
rule). The latter rules aim to make coal-fired electricity less
The new SCC estimates are also feeding into proposed effluent regulations
for power plants (EPA 2013) [C2]. The EPA is proposing regulation that
would strengthen the controls on discharges from certain steam electric
power plants. These plants currently contribute 50-60 per cent of all
toxic pollutants discharged into US surface waters. The EPA is considering
four possible options for legislation, which have a large potential for
The revised SCC has already had direct impact on legislation for
microwave ovens. It is being used in draft legislation for power plants.
Any change in legislation from June 2013 will adopt the revised SCC. On 25
June 2013, President Obama outlined his `Climate Action Plan' (Obama 2013)
[C8]. This includes a raft of proposed legislation to cut US CO2
emissions over the coming decades. Implicit in these regulations is the
newly adopted SCC. Consequently, the current impact of Tol's work will
expand across a wide range of policy areas in the United States in future
Sources to corroborate the impact
C1 Department of Energy (2013) `Energy conservation program:
energy conservation standards for standby mode and off mode for microwave
ovens', Federal Register, 78(116): 36315—68.
C2 Environmental Protection Agency (2013) `Effluent limitations
guidelines and standards for the steam electric power generating point
source category', Federal Register, 78(100): 34432-543.
C3 Interagency Working Group on the Social Cost of Carbon (2013) Technical
Update of the Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866, Technical Support Document:
C4 Department of Energy (2012) `Energy conservation program:
energy conservation standards for dishwashers', Federal Register,
C5 Environmental Protection Agency and Department of
Transportation (2010) `Light-duty vehicle greenhouse gas emission
standards and corporate average fuel economy standards: final rule', Federal
Register, 75(88): 25324-728.
C6 Environmental Protection Agency (2012) Regulatory Impact
Analysis for the Proposed Standards of Performance for Greenhouse Gas
Emissions for New Stationary Sources: Electric Utility Generating Units.
Washington, DC: Environmental Protection Agency (EPA-452/R-12-001).
C7 Interagency Working Group on the Social Cost of Carbon (2010) Social
Cost of Carbon for Regulatory Impact Analysis Under Executive Order
12866.Technical Support Document:
C8 Obama, B.H. (2013) The President's Climate Action Plan.
Washington, DC: White House:
- Economist at the US Environmental Protection Agency:
The estimates of carbon mitigation benefits supported by Professor Tol's
educational outreach and training have thus far been used in the analysis
of over 20 significant regulations within the United States. The estimates
have also been used by other nations and organizations to assess decisions
that affect carbon pollution. Professor Tol's research and educational
outreach has been highly valuable in ensuring that policy makers have had
access to the scientific information required to understand and support
- Director, National Center for Environmental Economics, US
Environmental Protection Agency:
While the SCC allows us to make sure decision-makers account for the
climate implications of our regulations, perhaps equally important, many
NGOs, private-sector firms, development banks, and other countries are
also using our SCC to quantify the climate impacts of their carbon-related
decisions. For example, the Environmental Defense Fund submitted our
Technical Support Document on the SCC into a public utility commission
hearing examining new electric power generation. Many states and local
governments are also using the SCC in their policy analyses.'