The Social Cost of Carbon SCC Review:

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The Social Cost of Carbon (SCC)
Review   Methods for Using the SCC Estimates in
Policy Assessment
Paul Watkiss and Study Team 13th Sep 2004
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Outline

• Background and study remit
• Findings of stakeholder consultation
• Recommendations

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Background to the SCC - UK

• Existing guidance use illustrative range of
  35/tC to 140/tC
• But with an illustrative central value of 70/tC
• Increasing at 1/tC per year
• SCC has been used in policy across Government
• Applications in Defra, DfT, DTI, ODPM, Ofgem, EA
• Used in project and policy appraisal,
  consideration economic instruments
• But use appears inconsistent
• Has not been applied to all relevant appraisals
• Where it has been used, has not followed
  consistent approach
• 70/tC only, range 35-140/tC, 140/tC only,
  range 0 to 35/tC

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Background SCC Other Countries

• UK has led adoption of SCC value ( long term
  2050 target)
• But note the two are currently not linked
• Review of SCC application in other organisations
• Early use of SCC in EC policy (47 to 110/tC)
  but dropped
• Use of SCC in Netherlands (6/tC) but dropped?
• Use of SCC in EIB (3/tC to 83/tC) still in use
• Many are considering abatement costs
• ECCP 12/tCO2 in 2010, 16/tCO2 in 2015 and
  20/tCO2 in 2020
• Broadly equivalent to 30/tC (2010), 40/tC
  (2015), and 50/tC (2020)

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Study Objectives (Original)

• How best to incorporate SCC values in relevant
  decision making contexts, given the uncertainty
  which affect monetisation of global damage from
  greenhouse gas emissions.
• Results from this study, in conjunction with the
  results of the modelling assessment, will be used
  to reflect upon and make recommendations on how
  SCC estimates could best be incorporated in
  policy decision-making and assessment.

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Project Tasks

• Review SCC use
• Identify approaches for use SCC and apply to case
  studies
• Consult stakeholders
• Experts, Users, Others (NGO, Industry), Public?
• Recommendations
• To organise follow-up to international workshop
  on SCC

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Applications Generic Types
A) GHG Mitigation/ Climate change policy
B) Other Policy, e.g. Transport, Energy
1) Project appraisal
2) Policy appraisal
3) Economic Instruments
4) Sustainability Goals
Can involve increase or decrease in GHG
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Existing Government Applications SCC
GHG Mitigation/ Climate change policy
Other Policy, e.g. Transport, Energy
Future Transport appraisal (DfT) Energy
Investment (Ofgem) APM4 (EA)
Project appraisal
Energy project appraisal (EIB)
Energy White Paper (DTI) Renewables Obligation II
(DTI) NTM/SP model (DfT)
F Gas RIA (Defra) CBA UK ETS
Policy appraisal (RIA)
Aviation Tax Consultation (Dft) RUC/DD analysis
(DfT) Waste taxes/charges (Defra) Building
regulations (ODPM)
Economic Instruments
State Aid of Renewables (EC)
Sustainability Goals
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Existing Guidance

• Cost-benefit analysis
• Designed to show whether the total benefits of a
  project or policy exceed the costs. It
  quantifies costs and benefits in monetary terms,
  including values not captured by markets
• Cost-effectiveness analysis
• Compares the costs of alternative ways of
  producing the same or similar outputs. Typically
  used in two ways it can be used to identify the
  highest level of benefits given available
  resources, or it can be used to assess the
  least-cost approach of reaching a given target
  (e.g. threshold level).
• UK Government favours cost-benefit analysis where
  feasible, but exceptions.
• CBA and cost-effectiveness are not necessarily
  exclusive

note we are unlikely ever to be able to value
all the important costs and benefits of a
particular project
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One Exception Long-Term Policy Goals

• Cost-benefit analysis rarely used in such
  applications
• and in context of climate change, widely
  criticised. Usually based on scientific
  evidence, precautionary principle
• RIA Guidance, Statement of Intent on
  Environmental Taxation
• UK is committed to using the precautionary
  principle. Invoked when There is good
  reason to believe that harmful effects may occur
  to human, animal or plant health or to the
  environment and Level of scientific uncertainty
  about the consequences or likelihood of the risk
  is such that the best available scientific advice
  cannot assess the risk with sufficient confidence
  to inform decision making.
• Treasury Statement of Intent on Environmental
  Taxation
• Some policy areas where target setting is not
  easily based on an objective assessment of the
  costs and benefits ..Some instances targets
  will be set through a process of negotiation,
  such as for the climate change targets agreed
  under the Kyoto Protocol..
• In these cases the process of target setting
  will help to reveal the weight which society puts
  on the costs and benefits, but unless all those
  involved have a good understanding of these there
  remains a danger that targets will be set at an
  inefficient level

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UK Long-Term Goal

• Recommendation Royal Commission on Environmental
  Pollution
• Consistent with the level of reduction likely to
  be needed by developed countries in order to move
  towards stabilisation of carbon dioxide
  concentrations in the atmosphere at no more than
  550 ppm, taking account of a realistic assessment
  of emissions growth in developing countries
• 550 ppm value is set on the current scientific
  knowledge about human impact on climate, and that
  this is an upper limit that should not be
  exceeded
• Adopted. UK should put itself on a path to
  reducing carbon dioxide emissions by some 60 by
  2050 from 1990 levels
• Published in UK Energy White Paper
• Energy White Paper provided the cost analysis
  (vs. 70/tC for SCC)
• Target raises issues about the relevance/applicabi
  lity of SCC

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Consultation Process

• Briefing Paper to outline Issues
• Not a consultation on 2050 target consultation
  on the SCC and use
• Key group of around 60 people targeted (gt20
  interviewed)
• Workshop
• Raised questions to seek stakeholder response

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Do you think it is appropriate to try to attach
a value to the social cost of carbon (SCC) in
order to inform decision-making?

• Yes - all recognised need for a value of carbon
  in some applications

• But(all)

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Do do you support using SCC estimates in 1)
Project appraisal? 2) Policy appraisal? 3) In
design of economic instruments? 4) In setting
longer-term (sustainability) goals? Both in
areas of a) GHG policy and b) Other policy
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Results

• All saw clear need for SCC (or alternative) in
• Project appraisal
• Policy appraisal
• Economic instruments
• Applies equally to GHG policy or other (where GHG
  not primary)
• Nearly all had reservations on using SCC in
  (longer-term) targets
• Nearly all felt that SCC was useful information,
  but needed to consider uncertainty, sensitivity,
  and consider impacts as well as costs. Not a
  single monetised value. SCC was one of many
  things at this level
• Comment (from many) that need also applies for
  major GHG policy (e.g. White Paper II, 10 year
  transport plan)

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Discussion (comments)

• Climate change ultimate test of how far can push
  CBA approach
• If cant determine SCC well enough, use is
  misleading.
• Valid to look explicitly at benefits, short and
  longer-term goals
• If you dont consider costs and benefits, targets
  (policy) will be set at an inefficient level
• Meaningless to apply SCC estimates to lower-level
  decision making if these are not also used to
  inform the setting of strategic targets

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• What are your views on the suggested approaches
  for addressing uncertainty in the use of the
• SCC values in policy applications?
• Use of an illustrative central value
• Use of a range
• Switching values (threshold values)
• Sequential sensitivity analysis
• Different values for different applications
• Marginal abatement costs
• Multi-criteria analysis
• Other (Dont)
• and whether approach vary with application

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Comments (not consistent)

• 1) Social Cost of Carbon vs. Marginal Abatement
  Costs

The use of abatement cost is bonkers
Not using abatement costs is madness
There is a need to reconcile the two camps
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Comments (not consistent)
2) Central value vs. a range
Must have a single central value for
consistency Not matter what the number is, as
long as its consistent
Single estimates remove uncertainty and are
inadequate in climate change policy A single
consistent estimate will just lead to
consistently bad decisions
There is a need to address the trade-off between
consistency and uncertainty
But nearly all agreed that whatever value/s,
should be applied consistently in all areas of
policy
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Results

• Although most people a favourite approach (e.g.
  MCA, MAC), Clear trend with application
• Users (project appraisal) would prefer a single
  value
• Users (GHG policy) prefer range as much
  information as possible (SSA)
• Others largely agree if GHG are not material
  then keep simple
• Most agreed need to look at benefits in long-term
  policy goals
• But separate economic winners and losers
• Undertake sensitivity and uncertainty analysis
  (economic variables)
• Some key impacts included in multi-attribute
  approach (deaths, ecosystem loss not lost in
  aggregation)

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Results

• Reconciling SCC and MAC
• Many felt that with existing 2050 goal, we should
  now move to a cost-effectiveness analysis
  efficiency (individual projects and policies not
  the place to reassess)
• Happy that process of target setting reveal the
  weight which society puts on the costs and
  benefits
• To ensure consistency with the 2050 goal, use of
  MAC instead of the SCC in project and policy
  appraisal
• Others unhappy that 2050 may not be optimal
  target. But would be happy to proceed with MAC
  IF 2050 was the optimal target or if benefitsgt
  costs
• Issue is there is significant uncertainty in MAC
• Answer is to consider costs (MAC) and benefits
  (MSCC) for the path toward long-term 2050 policy
  goals and policy test
• Everyone agree need to progress analysis of costs
  and benefits in future

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Key Parameters Affecting the SCC
values Choice of discount rate Distributional
weighting (equity) Trade-offs Time-scales

• Is Climate Change special?
• Or existing Green Book guidance

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Results

• Group that dont think climate change is special
• Use Green Book
• Group that do consider climate change to be
  special
• Irreversibility, non-linearity, non-marginal,
  strong sustainability, human rights/duty of care,
  precautionary principle, uncertainty, risk
• Issue if UK or global perspective

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Results

• Discount Rate
• Many recommended use of Treasury recommendations
  on declining rates
• Some recommended lower rates (0)
• Equity weighting
• Nearly everyone acknowledged need for
  consideration of equity weights
• Green Book recognises distributional weighting
• Different views on weighting approach
• Time-scale
• 25, 100, 200, 300 or more years, but most 200
  years or more

All groups aware that if rules were changed for
climate change, the implications for other areas
would need consideration
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Other Issues Raised

• Emergence of a real cost of carbon from trading
• Ensuring take account of in analysis
• Issue with whether traded price reflects UK
  domestic goal
• Ancillary benefits
• Air pollution
• Energy security/diversity
• Innovation
• Treat as a benefit, or a reduction in cost?
• Issues with declining discount rates and standard
  NPV analysis

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View of Way Forward ?

• All recognised the need for consideration of
  benefits (SCC) in setting longer-term goals for
  CC policy. Most considered
• Need to use a wider framework than just single
  monetary value
• Assessment of economic costs of winners and
  losers
• Need to consider uncertainty and risk of
  surprises
• Acceptable to undertake sensitivity analysis on
  some of the key issues
• Green book is the starting point, but valid to
  look at the options BUT implications for other
  areas would need to be considered
• Ancillary benefits included, but keep analysis
  separate
• Once long term goal policy set, lower level
  policies and appraisal follow from this

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View of Way Forward ?

• Many recognised the need for policy consistency
  with 2050 once goal set (and tested), then
  essentially cost-effectiveness
• Many considered that potentially attractive at
  level of individual policies or projects to apply
  MAC instead of SCC. But
• MAC are uncertain
• Cross checks with independent valuations of SCC
  are useful
• Consideration of uncertainty ranges may help
  reconciliation

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View of Way Forward ?

• All recognised that need for consistency in
  project and policy appraisal. A pragmatic
  approach is possible on information available
• Look at MAC path to 2050 goal over time
• Compare to SCC values over time, baseline and
  towards stabilisation
• Use to derive set consistent value(s) for project
  and policy appraisal
• Key debate remains on whether best served by a
  central value or range
• Central value or narrow range (consistency)
  probably all that need for analysis in areas
  where GHG not primary concern.
• Range reflecting uncertainty, with key variables
  set
• Want to allow consideration of uncertainty, but
  avoid inconsistencies in place
• Separate guidance according to application? Range
  and central estimate, consider more uncertainty
  as policy becomes more material

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View of Way Forward ?

• All recognised that this is not the end of the
  process
• Dynamic situation need to continually review
• Need for continued research in the SCC area,
  working to provide information that allow the
  informed analysis in big decisions
• Need to agree on cost estimates debate on the
  MAC
• Need to assess implementation (and review)
• Truth test what does value mean for decisions
  we have taken and are taking
• Need for guidance to be changed to reflect
  recommendations and ensure this is undertaken
  routinely and consistently
• Need to review the long-term policy as new
  information and evidence appears (not least
  because of the actions of other countries)

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Next Steps

• Capture responses from other stakeholders and
  workshop
• Request people email responses presentations on
  web site
• paul.watkiss_at_aeat.co.uk http//socialcostofca
  rbon.aeat.com
• Undertake case studies to demonstrate approaches
• Project NATA
• Policy RIA (F-gases)
• Economic instrument Transport tax (aviation,
  RUC, DD)
• Long-term goal 2050 60 target
• First cut at the values for MAC and MSCC (and
  policy test)