Climate Cost-Benefit Analysis in an Unequal World

David Anthoff

Energy and Resources GroupUniversity of California, Berkeley

Outline

• Use of cost-benefit analysis in climate policy

• Issues with standard cost-benefit analysis

• Equity weighting

UK history

• 2002 – early phase• Social Cost of Carbon: £70/tC or $29/tCO2

• Multiple revisions (including Stern Review)

• Uses include RIA of fluorinated gases regulation, road transport infrastructure appraisal, building regulations, energy investment appraisal, water sector asset management programs

• 2008 – Climate Change Act• Long-term climate policy (60% reduction from 1990 levels)

• No cost-benefit analysis in setting the target

• Ex post check with PAGE model

• 2009 – Major shift to marginal abatement cost estimates• ETS covered sectors: $32/tCO2

• Other sectors from in-house energy modeling: $77/tCO2

Watkiss and Hope (2011)

US

• 2007: Supreme Court ruling Massachusetts v. EPA

• 2009: EPA Endangerment Finding

• Executive Order 12866

• 2010: Interagency Report sets Social Cost of Carbon to $21/tCO2

• 2013: Social Cost of Carbon updated to $39/tCO2

• Used three integrated assessment models• One of them FUND, which I co-develop (www.fund-model.org)

Greenstone et al. (2013)

Hahn and Ritz (forthcoming)

0

5

10

15

20

25

30

35

40

45

Option 1 - state Option 1 - regional Option 2 - state Option 2 - regional

bill

ion

20

11

$

Proposed rule for existing power plants - benefits and cost in 2020

Complience Cost Health benefits Climate benefits (5% dr)

Climate benefits (3% dr) Climate benefits (2.5% dr)

Source: US EPA (2014), Table ES-8

Outline

• Use of cost-benefit analysis in climate policy

• Issues with standard cost-benefit analysis

• Equity weighting

Standing or “who’s welfare?”

vs.

Gayer and Viscusi (2014)Pizer et al. (2014)Kopp and Mignone (2013)

Social Cost of Carbon by Region

RICE – SCC 2015 high discounting FUND – SCC 2010 middle discountingANZ1%

CAM1%

CAN1%

CHI31%

EEU1%

FSU8%JPK

0%LAM2%

MDE3%

NAF5%

SAS3%

SEA5%

SIS1%

SSA5%

USA13%

WEU21%

US7%

EU8%

Japan2%Russia

1%Eurasia

1%

China21%

India16%

Middle East7%

Africa16%

Latin America5%

OHI3%

Other developing

13%

Source: Nordhaus (2011) and Anthoff et al. (2011)

Anthoff et al. (2009)

Global1.3%

Outline

• Use of cost-benefit analysis in climate policy

• Issues with standard cost-benefit analysis

• Equity weighting

5000 10000 15000 20000 25000 30000

7

8

9

10

Δ𝑐 Δ𝑐

Δ𝑤𝑟

Δ𝑤𝑝

rich

poor

consumption

wel

fare

For same Δ𝑐:Δ𝑤𝑝 > Δ𝑤𝑟

Optimal taxes in 2005

2 2 4 5 8 8 9 11 12 12 13

80

96

119

137

179

0

20

40

60

80

100

120

140

160

180

200

SSA SAS SIS NAF FSU SEA MDE CAM CHI EEU LAM ANZ CAN WEU USA JPK

$/t

C

Transfers

No transfers

FUND 3.4; η=1; ρ=1%; USD 1995

Anthoff (2011)

Equity Weights - Caveats

• All costs and benefits need to be equity weighted consistently• UK didn’t do that…

• Based on one very specific and strong ethical position

• “You are trying to address world inequality via climate policy”

• Difficult to agree on specifics (degree of inequality aversion)

Anthoff et al. (2009a)Anthoff et al. (2009b)Anthoff and Tol (2010)

Conclusion

• Pragmatic point of view• Great success that carbon pricing is incorporated into federal regulatory

analysis

• Pushing for equity weighting in the regulatory process probably too ambitious at this point

• Academic view• A standard cost-benefit analysis really runs into major conceptual problems

with climate change related to equity

• Talk about it (“ideas matter”)

Thank you!http://www.david-anthoff.com

anthoff@berkeley.edu

Literature

• Anthoff, D., J. Ketterer and J. Lippelt (2009). "Klimaschäden und Klimaverhandlungen." ifo Schnelldienst 62(22): 52-54.

• Anthoff, D., C. Hepburn and R. S. J. Tol (2009a). "Equity weighting and the marginal damage costs of climate change." Ecological Economics 68(3): 836-849.

• Anthoff, D., R. S. J. Tol and G. W. Yohe (2009). "Discounting for Climate Change." Economics: The Open-Access, Open-Assessment E-Journal 3(2009-24).

• Anthoff (2011). „Optimal Global Dynamic Carbon Abatement.“ http://www.david-anthoff.com/AnthoffJobmarketPaper.pdf

• Anthoff, D., S. Rose, R. S. J. Tol and S. Waldhoff (2011). Regional and Sectoral Estimates of the Social Cost of Carbon: An Application of FUND. ESRI Working Paper. Dublin, Ireland, Economic and Social Research Institute.

• Gayer and Viscusi (2014) Determining the Proper Scope of Climate Change Benefits. http://www.brookings.edu/~/media/Research/Files/Papers/2014/06/04-determining-proper-scope-climate-change-benefits-gayer/04_determining_proper_scope_climate_change_benefits.pdf?la=en

• Greenstone, M., E. Kopits and A. Wolverton (2013). "Developing a Social Cost of Carbon for US Regulatory Analysis: A Methodology and Interpretation." Review of Environmental Economics and Policy 7(1): 23-46.

• Kopp, R. and B. Mignone (2013). "Circumspection, reciprocity, and optimal carbon prices." Climatic Change: 1-13.

• Nordhaus, W. (2011). Estimates of the Social Cost of Carbon: Background and Results from the RICE-2011 Model. Cowles Foundation Discussion Paper.

• Watkiss, P. and C. Hope (2011). "Using the social cost of carbon in regulatory deliberations." Wiley Interdisciplinary Reviews: Climate Change 2(6): 886-901.

• Hahn and Ritz (forthcoming). “Does the social cost of carbon matter? Evidence from US policy.” Journal of Legal Studies

• Pizer, W., M. Adler, J. Aldy, D. Anthoff, M. Cropper, K. Gillingham, M. Greenstone, B. Murray, R. Newell, R. Richels, A. Rowell, S. Waldhoff and J. Wiener (2014). "Using and improving the social cost of carbon." Science 346(6214): 1189-1190.