2020). Future updates to the SC-GHGs estimates will need to reflect the best available evidence from the time series of risk-free rate data and expectations of these rates into the future.
As described in Section 3.3 uncertainty in the discount rate over time yields a declining certainty-equivalent discount rate schedule and can have a dramatic effect on the size of the SC-GHG. While this is not a new theoretical result, new literature has proposed methods for how to incorporate discount rate uncertainty (e.g., Arrow et al., 2013; Cropper et al., 2014) and other nations have implemented declining discount rate schedules for policy analysis (e.g., United Kingdom, France, and Germany). Recent recommendations by the National Academies (2017) and EPA’s Science Advisory Board (2021) have encouraged the development and use of a declining certainty-equivalent discount rate schedule as theoretically appropriate and as a method of introducing consistency into analyses that have both near-term and long-term impacts.
In light of new science and evidence, including many of those highlighted in the paragraphs above, other jurisdictions are already considering or have implemented some of the scientific and economic advances discussed above. For example, some states that use SC-GHG estimates in policy analysis have recently updated their approach to discounting based on the increasing evidence that a 3% discount rate is too high for intergenerational analysis. In December 2020, New York issued guidance recommending state agencies use SC-GHG estimates based the same IWG modeling and input decisions as presented in this TSD but with lower discount rates: 2 percent in central scenarios ($125/mtCO2 for 2020 emissions (2020 dollars), along with sensitivity analysis at 1 percent and 3 percent (New York Department of Environmental Conservation 2020). Similarly, in Washington state an April 2019 law required utilities to use estimates based on the IWG methodology with a 2.5% discount rate when developing “lowest-cost analyses” for its integrated resource planning and clean energy plans.[1]
Canada is also in the process of updating the SC-GHG estimates used in their regulatory analyses. While the update is underway, they are continuing to use the estimates they adopted in 2016 (which are an adaptation of the IWG global SC-GHG estimates presented in this TSD) as well as a side analysis based on more recent estimates from the academic literature. Based on their review of the literature and latest climatological and economic evidence, they present their current estimates as a “likely underestimate [of] climate-related damages to society” and the side analysis as a way “to illustrate a range of plausible values if the Department were to update its [social cost of carbon] estimate based on new versions of the models currently used.”[2] Specifically, the side analysis includes SC-CO2 estimates based on DICE2016 and PAGE-ICE ($135 and $440/mtCO2 for 2020 emissions (2019 Canadian dollars)).[3]
The IWG will consider the new science and evidence as it works towards a more comprehensive update, including the new research and information described in this section.
- ↑ Wash. Sen. Bill. 5116 (signed by Gov. Inslee on May 7, 2019). More information on Washington and other states’ use of SC-GHG estimates is compiled by the Institute for Policy Integrity at NYU School of Law (see http://www.costofcarbon.org/states) and discussed in U.S. GAO (2020).
- ↑ Proposed Clean Fuel Regulations (published for public comment on 12/20/20) http://www.gazette.gc.ca/rp-pr/p1/2020/2020-12-19/pdf/g1-15451.pdf.
- ↑ Proposed Clean Fuel Regulations (published for public comment on 12/20/20) http://www.gazette.gc.ca/rp-pr/p1/2020/2020-12-19/pdf/g1-15451.pdf.
