Wednesday, May 24, 2017

Arizona utility signs game-changing deal cutting solar power prices in half - Tucson Electric Power to buy new solar power at under 3 cents per kWh, a “historically low price.”

Remarkable drops in the cost of solar and wind power have effectively turned the global power market upside down in recent years.

We’ve seen prices for new solar farms below 3 cents per kilowatt hour (kwh) in other countries for over a year now, but before this week, not in the U.S. That changed on Monday when Tucson Electric Power (TEP), an Arizona utility company, announced that it had reached an agreement to buy solar power at the same game-changing price.

TEP says that this is a “historically low price” for a 100-megawatt system capable of powering 21,000 homes — and that the sub-3-cents price is “less than half as much as it agreed to pay under similar contracts in recent years.”

For context, the average U.S. residential price for electricity is nearly 13 cents per kwh, and the average commercial price is 10.5 cents.

NextEra Energy Resources will build and operate the system, which also includes “a long duration battery storage system” (whose price is not included in the 3 cents/kwh). Also worth noting: The sub-3-cents contracts that have been signed in other countries such as Chile, Dubai, and Mexico are unsubsidized, whereas U.S. prices include the 30 percent Investment Tax Credit. Arizona solar array. CREDIT: Tucson Electric Power

PV Magazine reports “this is the lowest price” they’ve seen for solar yet in this country. And Bloomberg New Energy Finance chair Michael Liebreich explained last month that thanks to recent price drops, “unsubsidized wind and solar can provide the lowest cost new electrical power in an increasing number of countries, even in the developing world — sometimes by a factor of two.”

by Dr. Joe Romm, Founding Editor of Climate Progress, “the indispensable blog,” as NY Times columnist Tom Friedman describes it.
May 23, 2017

Saturday, May 13, 2017

Putting a value on injuries to natural assets: The BP oil spill

When large-scale accidents cause catastrophic damage to natural or cultural resources, government and industry are faced with the challenge of assessing the extent of damages and the magnitude of restoration that is warranted. Although market transactions for privately owned assets provide information about how valuable they are to the people involved, the public services of natural assets are not exchanged on markets; thus, efforts to learn about people's values involve either untestable assumptions about how other things people do relate to these services or empirical estimates based on responses to stated-preference surveys. Valuation based on such surveys has been criticized because the respondents are not engaged in real transactions. Our research in the aftermath of the 2010 BP Deepwater Horizon oil spill addresses these criticisms using the first, nationally representative, stated-preference survey that tests whether responses are consistent with rational economic choices that are expected with real transactions. Our results confirm that the survey findings are consistent with economic decisions and would support investing at least $17.2 billion to prevent such injuries in the future to the Gulf of Mexico's natural resources.
The federal judge in an initial phase of the lawsuit involving BP determined that the best estimate of the amount of oil released was 134 million gallons, making it the largest maritime oil spill in U.S. history. On behalf of the trustees of the Gulf's natural resources and under the guidance of the lead agency for this process, the U.S. National Oceanic and Atmospheric Administration (NOAA), we estimated the monetary value of the natural resource damage from the spill, as specified by the Oil Pollution Act (OPA) of 1990. Such estimates can inform settlement negotiations between the government and the responsible parties, be entered as evidence at trial, and contribute to choosing projects to restore injured environmental resources (1). Trustees undertook a number of studies to quantify ecological impacts and economic damages caused by the spill, including what we describe here. The natural resource–damage case was settled in April 2016. The Consent Decree called for total payments of $20.8 billion, $8.8 billion of which was for natural resource damages. Decisions related to the settlement details are confidential.

Economic measures of the damages to natural resources consider the effects on use (or active use) and nonuse (or passive use) values (2). “Use values” arise when an individual derives satisfaction from using a resource (e.g., fishing or visiting a beach), either now or in the future. “Nonuse values” arise when an individual derives satisfaction from the existence of a resource, even though that individual would not visit or use it. The OPA regulation specifies that damage measures include both use and nonuse or the total economic value lost. Private claims by those engaged in commercial fishing or in operating hotels are handled separately.

After the 1989 Exxon Valdez oil spill and controversy over assessing monetary damages with stated-preference surveys, an expert panel (3) recommended criteria for conducting these studies. Research has since established ways to ask stated-choice questions that induce truthful responses and meet these proposed criteria. Subsequent criticism of stated-preference research has focused on how large the change in the average person's value should be with changes in the size of injuries to natural resources. The research we discuss here identified what can be expected on the basis of a conventional economic model of an individual's choices, with minimal assumptions. It also offers evidence that the average individual's likelihood to vote for a program to avoid injuries is causally linked to a consistent understanding of the severity of the injuries.
The study interviewed a large random sample of American adults who were told about (i) the state of the Gulf before the 2010 accident; (ii) what caused the accident; (iii) injuries to Gulf natural resources due to the spill; (iv) a proposed program for preventing a similar accident in the future; and (v) how much their household would pay in extra taxes if the program were implemented. The program can be seen as insurance, at a specified cost, that is completely effective against a specific set of future, spill-related injuries, with respondents told that another spill will take place in the next 15 years. They were then asked to vote for or against the program, which would impose a one-time tax on their household. Each respondent was randomly assigned to one of five different tax amounts: $15, $65, $135, $265, and $435.
The final questionnaire was administered to a random sample of households in the contiguous United States that included at least one English-speaking adult. Face-to-face interviews were completed between October 2013 and July 2014 by nearly 150 trained interviewers. A total of 3,656 people completed the survey for a weighted response rate of 48%. A nonresponse followup (NRFU) survey involved mailing paper questionnaires to households at which no main study interview had been completed. NRFU questionnaires were received from 1492 households, representing a NRFU household response rate of 51% (see SM for details of weighting and nonresponse)....

For each injury description, support for the program declines as the tax increases, consistent with the first test for consistent decisions. For each tax amount, support for the program increases as the set of injuries increases, consistent with the second test.
The estimate for the lower-bound mean WTP for the smaller set of injuries is $136 (standard error $6.34) and for the larger set is $153 (standard error $6.87). The aggregate estimate reported at the outset—$17.2 billion—uses the WTP lower-bound estimate for the larger set of injuries ($153) multiplied by the number of households (112,647,215) represented by the sample.
by Richard C. Bishop, Kevin J. Boyle, Richard T. Carson, David Chapman, W. Michael Hanemann, Barbara Kanninen, Raymond J. Kopp, Jon A. Krosnick, John List, Norman Meade, Robert Paterson, Stanley Presser, V. Kerry Smith, Roger Tourangeau, Michael Welsh, Jeffrey M. Wooldridge, Matthew DeBell, Colleen Donovan, Matthew Konopka, Nora Scherer
Volume 356, Issue 6335;  21 Apr 2017; pages 253-254

Methane Rule: unnecessary costs?

From Environmental Economics - Time Haab and John Whitehead's "Cromulent Economics Blog" at

Timothy Cama and Devin Henry via
Three Republicans joined Senate Democrats on Wednesday to reject an effort to overturn an Obama administration rule limiting methane emissions from oil and natural gas drilling.
Only 49 senators voted to move forward with debate on legislation to undo the Bureau of Land Management (BLM) rule, short of the 51 votes needed.  ...
The failure of the resolution is a loss for congressional Republicans, who had targeted the methane rule as one of the main Obama regulations they wanted to reverse. Opponents of the rule argue that it unnecessarily adds costs to oil and natural gas drilling on federal land. 
"Unnecessarily adds costs" suggests that the benefits are less than the costs, right? I hadn't been paying much attention to the methane rule ... so I wondered what the benefit-cost analysis concluded. I used ... Google and found all the anti-methane rule stuff. If you want to read one with the industry funded criticism..., go here: Here is an example: 
NERA Economic Consulting took a look at [social cost of methane] models to evaluate EPA’s methane rule. NERA corrected the flawed assumptions regarding the discount rate, radiative forcing rates, geographic inconsistencies in the analysis, and inappropriate extrapolations about future mitigation policy. ...
NERA's study can be found here [PDF]. [Don't try the link in the excerpt because it is broken.] NERA didn't really correct anything, because who says that NERA is correct? They're paid to say that they are correct, sure, but that payment sniffs of bias in their analysis.  The study was funded by the American Council for Capital Formation which has funding from Exxon and the Koch Brothers. Here is one thing that the ACCF says about the methane rule on their website right now:
The rule is expected to cost producers up to $297 million per year to comply, while BLM estimates it would reduce global greenhouse gas emissions by only 0.0092 percent.
Comparisons of benefits and costs are a red flag. For example, did you know that the benefits are $360 million per year and the costs are only 0.0018% of annual GDP? My bias radar is flashing (and why does this stuff play ... does it only play with already biased people? [note*]). 
Disgusted, I realized that Resources for the Future probably had an unbiased review of the government study. They did (The agency vs Industry: Who's got it right on methane?). Alan Krupnick:
Last week, the US Environmental Protection Agency (EPA) issued its proposed rules for reducing methane from new and modified oil and natural gas wells, processes, pipelines, and storage facilities. The agency’s goal is to cut emissions of methane, a greenhouse gas, from the oil and gas sector by 40 to 45 percent from 2012 levels by 2025. These rules, however, were attacked out of the gate by the American Petroleum Institute (API). The charges: they are duplicative of ongoing industry practices, costly, and unnecessary. ...
The top-level question that should be asked is whether these rules offer society greater benefits than costs. According to EPA’s regulatory impact assessment (RIA), net benefits are positive. Note that I restricted my purview to the New Source Performance Standard (NSPS) rules. The RIA counts the benefits of methane reduction from reducing greenhouse gas emissions (valued at around $45 per ton based on the potency of methane as a greenhouse gas relative to carbon dioxide (CO2, termed CO2e) and the administration’s social cost of carbon), subtracts out the engineering costs of the rules over an estimate of what the industry would otherwise be doing, and adds the value of any natural gas the industry would capture that would otherwise have leaked away. Overall and on a per ton basis, according to the RIA, the rules cost $40 per ton whereas the benefits are a bit higher, so net benefits are around $8 per ton of CO2 emissions. Excluded from the calculation are the reductions of emissions of volatile organic compounds, which could fairly be allocated some of the costs of the rule. These are also important because these reductions would help lower the costs of meeting ozone standards. Also not counted are ancillary benefits from reducing hazardous air pollutants. So, the rules benefit society.
*For example:
  1. The oil and gas industry doesn't like a regulation that adds costs
  2. Pays a consulting firm money to write a report criticizing a study that finds the benefits of the regulation exceed the costs
  3. The oil and gas industry makes big campaign contributions to politicians who waive the study around and try to get rid of the legislation
Yes, that's how it works. The wonder is why anyone pays attention to any such study? And I'm looking at you (with a stupid grin) Exxon and BP funded economists who critique the CVM and DCE

Environmental Economics - "The Cromulent Economics Blog"
Posted by John Whitehead on May 12, 2017

Tesla Solar Roof Costs Released

Solar Roof complements a home’s architecture while turning sunlight into electricity. With an integrated Powerwall, energy collected during the day is stored and made available any time, effectively turning a home into a personal utility. Solar energy can be generated, stored and used day and night, providing uninterrupted power even if the grid goes down.

Tesla recognized the need for a roof that is simultaneously affordable, durable, beautiful and integrated with battery storage.

Solar Roof is more affordable than conventional roofs because in most cases, it ultimately pays for itself by reducing or eliminating a home’s electricity bill. Consumer Reports estimates that a Solar Roof for an average size U.S. home would need to cost less than $24.50 per square foot to be cost competitive with a regular roof. The cost of Solar Roof is less. The typical homeowner can expect to pay $21.85 per square foot for Solar Roof,1 and benefit from a beautiful new roof that also increases the value of their home.

Solar Roof uses two types of tiles—solar and non-solar. Looking at the roof from street level, the tiles look the same. Customers can select how many solar tiles they need based on their home’s electricity consumption. For example, households that charge an electric vehicle every day may want more solar tiles on their roof.

In doing [their] research on the roofing industry, it became clear that roofing costs vary widely, and that "buying a roof is often a worse experience than buying a car through a dealership". Initial contracts tend to be overly optimistic, and later customers face hidden costs that were never mentioned up front.
At Tesla, [they] believe in transparency and putting the customer in control. That’s why [they] created a Solar Roof calculator that lets homeowners estimate the upfront price of Solar Roof, as well as the value of the energy it can generate for their home. The calculator is based on factors like roof size, the average local price of electricity, and how much sunlight a neighborhood receives throughout the year.

As shown in the graph below, the cost of [their] non-solar tiles is comparable to regular roofing tiles.2 Although the cost of our solar tiles is more expensive up front, it can be more than offset by the value of energy the tiles produce.3 In many cases, the reduction in a home’s electricity bill over time will be greater than the cost of the roof.
Design & Durability
Solar Roof will be available in a variety of designs, including Smooth and Textured (available this year) and Tuscan and Slate (available early 2018). Made with tempered glass, Solar Roof tiles are more than three times stronger than standard roofing tiles, yet half the weight. They do not degrade over time like asphalt or concrete. Solar Roof is the most durable roof available and the glass itself will come with a warranty for the lifetime of your house, or infinity, whichever comes first.

Customers may place an order for Solar Roof today on the Tesla website. Installations of Solar Roof will begin in the U.S. this summer and we expect installations outside the U.S. to begin in 2018.
Speaking on a briefing call with reporters, Musk said a solar roof covering 40 percent of the average-sized American home would generate 10 percent to 20 percent more electricity than a standard solar system. "It's a better product at a slightly better price," said Musk, comparing the product to conventional roofs.  "It's the most affordable roof you can buy," said Peter Rive, SolarCity's chief technology officer, on the call.
If you price out your home, Tesla will encourage you to add a Powerwall. That'll add another $7,000 to the system.
Tesla plans to make the entire system in Buffalo, New York, with cells made from Panasonic. Peter Rive, the CTO of SolarCity, said the efficiency of the solar roof tile was equivalent to a standard solar PV module.
This week’s "Energy Gang" podcast at, sifts through all the new details about Musk’s latest solar project.

Blog Post dated May 10, 2017
Also see:

1. $21.85 per square foot is the price of a Solar Roof derived using similar methodology, roof size, and energy costs described in Consumer Reports’ research. This price does not reflect any solar incentives. The price was calculated for a roof where 35 percent of the tiles are solar (solar tiles cost more per square foot than non-solar tiles), in order to generate $53,500 worth of electricity, which according to Consumer Reports would make a solar roof more affordable than an asphalt shingle roof.
2. Average roofing costs were derived from data available on Home Advisor and Homewyse. In each case, there is a wide range of roofing costs and we report the midpoint in each case. Ranges for roof tile types from Home Advisor were derived using information from roofing contractors that included all equivalent components of a Solar Roof (such as installation labor, materials, existing roof tear-off, and underlayment). Range of fully installed costs per square foot from Home Advisor were: Slate, $13.00 - $21.00; Metal, $9.60 - $21.40; Tile, $7.80 - $16.00; Asphalt, $4.40 - $8.70. Costs from Homewyse were derived using their online cost calculator, averaged across 3 representative zip codes (Albany, NY 12220; Fort Worth, TX 76122; Bakersfield, CA 93314) and resulted in the following cost ranges per square foot: Slate, $12.03 - $17.57; Metal, $11.22 - $16.24; Tile, $11.85 - $17.34; and Asphalt, $3.28 - $5.45.
3. In the bar chart, the “Solar Roof with Value of Energy” is calculated based on a roof where 50 percent of the tiles are solar; 30 years of electricity production; and a grid electricity price of 13.7 cents per kilowatt-hour in year one (the average electricity price in Q1 2017 across California, Texas, and North Carolina — the states referenced by Consumer Reports), escalating at 2 percent annually. The calculation also reflects the inclusion of one Powerwall 2 battery. The ability to realize the full value depends on a household’s electricity usage, the amount of energy storage available, and local utility regulations.

Major European utilities put €14 billion of earnings at risk by missing climate goals, report finds

New CDP report reveals European utilities such as RWE and Endesa at risk

  • 14 major European utilities set to exceed carbon targets by 1.3 billion tonnes of CO2, equivalent to Japan’s entire annual CO2 emissions.
  • €14 billion of earnings at risk across the 14 major European utilities from carbon price of €30;
  • Industry heavily depends on fossil fuels for power generation, despite EU renewables target. The global utilities sector as a whole is responsible for a quarter of emissions;
  • Verbund, Iberdrola, Fortum and Enel are best performing companies on carbon-related metrics relative to peers; RWE, CEZ, Endesa and EnBW rank lowest of companies assessed.

A new report ‘Charged or static’ analyzing a €256 billion market cap grouping of Europe’s major publicly-listed utilities companies reveals many are locked into high emissions from long-lived fossil fuel power plants until 2050 and EUR€14 billion of earnings are at risk unless they rapidly respond to climate goals laid out in the Paris Agreement.

The report from CDP – voted no. 1 climate change research provider by institutional investors – reveals major utilities companies remain heavily dependent on fossil fuels, which is responsible for 43% of their electricity generation. Almost half are producing more than 20% of electricity from coal and on aggregate the 14 companies are set to exceed the ‘carbon budget’ required to keep temperature rises below 2°C by 14% or 1.3 billion tonnes of greenhouse gases. This comes despite the EU’s target to provide 45% of electricity from renewables by 2030.

The electric utilities industry is responsible for a quarter of global emissions and must reduce greenhouse gas emissions by over two thirds (67%) by 2030 to meet the goals of the Paris Agreement. Capacity for short-term turnarounds are restricted due to the long term capital investment in fossil fuel power plants. There are positive signs that the sector is already in transition, highlighted by the UK’s decision to close all coal fired power plants by 2025 and decisions taken by E.ON and RWE to split their renewable and fossil fuel assets into separate companies. Utilities generating larger amounts of power from renewables are outpacing their peers in reducing emissions compared to those reliant on fossil fuels, with emissions ten times more intensive than those using renewables.
Paul Simpson, CEO of CDP, said: “EU utilities are at a crossroads and must make some rapid decisions. The last year has seen a step change in support for, and engagement with, low carbon policies but the industry remains heavily reliant on fossil fuels to meet electricity needs. Market prices are showing that renewable energy sources like wind and solar power are more cost competitive than ever and utilities should look to capitalize on the strong growth that is forecast for these technologies. The recommendations of Mark Carney’s Taskforce on Climate-related Financial Disclosure (TCFD) is another marker of increasing investor pressure for companies to not only disclose but manage their transition risk. CDP’s mission is more important now than ever and we continue to drive global environmental disclosure and track corporate progress towards achieving a well below 2-degree world." 

[The] report benchmarks major European utilities’ performance on climate issues and finds that Verbund, Iberdrola, Fortum and Enel are the best performing companies on carbon-related metrics relative to peers, with RWE, CEZ, Endesa and EnBW ranking lowest among those who disclose to CDP.

CDP’s summary League Table for European utilities is below:
Drew Fryer, Senior Analyst, Investor Research at CDP said: “In Europe, major utilities must transform their business models to achieve the climate goals laid out in the Paris Agreement. Verbund is leading the way in planning for the future, targeting a 100% renewable energy generation portfolio by 2020 and is decommissioning remaining fossil fuel assets. But many other utilities remain reliant on coal for a significant share of power generated, and will break their carbon budgets in years to come based on existing fossil fuel assets. Rapid deployment of renewables is critical for the sector as it transitions to a low carbon future.”

Other findings from the report include:
  • Renewables: Companies have increased their renewable portfolios, and 20% of electricity generated in 2016 was from renewables. However, fast progress is needed to meet the EU's 2030 target of 45% from renewables.
  • Innovation: Carbon Capture & Storage (CCS) technology could be a key means to limit global warming to below 2°C if existing fossil fuel assets are to continue operating, yet progress on this technology is slow which risks it becoming commercially available too late to contribute to effective mitigation.
  • Water: Exposure to water stress is considerable. By 2030, half of utilities’ thermal generation capacity will be in areas of high or extremely high water stress.

Friday, May 12, 2017

Hedging an Uncertain Future: Internal Carbon Prices in the Electric Power Sector

This report examines how internal carbon prices are used by companies and electricity regulators to manage regulatory risk, and identifies ways policymakers can offer guidance for companies to manage such risk in uncertain political climates.

Key Findings

  • Electric power companies have been at the forefront of using internal carbon prices to anticipate future policies, manage regulatory risks, prepare for new markets and services, and respond to customer interests.
  • In particular, electric utilities have used carbon prices in integrated resource plans (IRPs) to evaluate future resource portfolios and to examine business decisions such as the retirement of fossil fuel units.
  • A review of recent IRPs shows a diversity of carbon prices used based on a number of factors, including the potential for future constraints on carbon that go beyond current state and federal policies.
  • In a new political environment less supportive of climate policy, the estimation of internal carbon prices for planning and hedging regulatory risk has become more difficult but no less important.
  • State policymakers and electric power companies should consider renewed efforts to provide transparent assumptions about carbon prices in IRPs. In addition, there should be continued efforts to improve modeling and methodologies for carbon pricing.

Companies and analysts cite several benefits of using internal carbon prices (WBCSD 2015):
• anticipating future policies that may put a mandatory price on carbon or that require deployment of low- or zero-carbon technologies;
• managing regulatory risk associated with stranded assets or inefficiently allocated capital associated with fossil fuel facilities that could be costly to ratepayers and shareholders (CERES 2010; Morris 2015);
• preparing for new markets and customer services that will evolve as the electricity sector decarbonizes; and
• responding to customers’ or investors’ interests in reducing emissions (UN Global Compact 2015).

US companies in the electric power sector employ a wide variety of carbon prices in Integrated Resources Plans (IRPs)  Table 1 displays carbon price information from a sample of recent integrated resource plans (IRPs) from US investor-owned electric utilities. These IRPs are all dated after the announcement of the final Clean Power Plan regulations in August 2015 but before the November 8, 2016 presidential election.
Several differences in the carbon pricing used by electric power companies are worth noting. First, companies differ on whether they include a carbon price in their base case assumptions, in sensitivity analyses, or in both.  Barbose et al. (2009, 16) argue for including in the base case an estimated carbon price that reflects “the most likely carbon regulations over the planning period.” In addition, some IRPs present a range of carbon prices that reflect different future natural gas price assumptions, rather than alternative stringencies for future carbon policies.

Prices range from $0 to $122 per ton.

Also see which notes that A 2016 international survey of companies across all economic sectors found that carbon prices ranged from less than $8 to greater than $800 per metric ton CO2.

by Joseph A. Kruger
Resources For the Future (RFF)
April 25, 2017 

Report: Fortune 500 companies accelerating renewable energy, energy efficiency efforts - Clean energy actions saving companies $3.7 billion a year, cutting annual carbon pollution equivalent to 45 coal-fired power plants

Despite efforts from Washington to sideline action on climate change, a growing number of Fortune 500 companies are taking increasingly ambitious steps to reduce their greenhouse gas (GHG) emissions, procure more renewable energy and reduce their energy bills through energy efficiency, according to a new report released April 25, 2017 from World Wildlife Fund (WWF), Ceres, Calvert Research and Management (Calvert) and CDP.

Sixty-three percent of Fortune 100 companies have set one or more clean energy targets. Nearly half of Fortune 500 companies – 48 percent – have at least one climate or clean energy target, up five percent from an earlier 2014 report. Accompanying this growth is rising ambition, with significant numbers of companies setting 100 percent renewable energy goals and science-based GHG reduction targets that align with the global goal of limiting global temperature rise to below two degrees Celsius.

Findings from the new report, “Power Forward 3.0: How the largest U.S. companies are capturing business value while addressing climate change,” are based on 2016 company disclosures to CDP, which holds the world’s largest collection of self-reported corporate environmental data, and other public sources.

“American businesses are leading the transition to a clean economy because it’s smart business and it’s what their customers want,” said Marty Spitzer, World Wildlife Fund’s senior director of climate and renewable energy. “Clean energy is fueling economic opportunity from coast to coast without regard for party line. Washington policies may slow this boom, but these companies are making it very clear that a transition to a low-carbon economy is inevitable.”
The report highlights the financial benefits companies receive from their clean energy investments: Nearly 80,000 emission-reducing projects by 190 Fortune 500 companies reporting data showed nearly $3.7 billion in savings in 2016 alone. The emission reductions from these efforts are equivalent to taking 45 coal-fired power plants offline every year. Praxair, IBM and Microsoft are among the companies saving tens of millions of dollars annually through their energy efficiency efforts.

Thursday, May 11, 2017

The Impact of Trading on the Costs and Benefits of the Acid Rain Program

Enacted under the Clean Air Act Amendments of 1990 with the goal of reducing sulfur dioxide emissions from electric utilities, the Acid Rain Program is often cited as evidence that an emissions trading program can reduce the costs of pollution reduction. A team of researchers examines the compliance costs and health effects realized under the Acid Rain Program compared with a command-and-control alternative.

This study quantifies the cost savings from the Acid Rain Program (ARP) compared with a command-and-control alternative and also examines the impact of trading under the ARP on health damages. To quantify cost savings, we compare compliance costs for non-NSPS (New Source Performance Standards) coal-fired electricity generating units (EGUs) under the ARP with compliance costs under a uniform performance standard that achieves the same aggregate emissions. We do this for the year 2002, the third year of Phase II of the program. We find annual cost savings of approximately $240 million (1995$). To examine the health effects of trading, we compute the health damages associated with observed sulfur dioxide (SO2) emissions from all units regulated under the ARP in 2002—approximately 10.2 million tons—and compare them with damages from a No-Trade counterfactual in which each unit emits SO2 at a rate equal to its allocation of permits for the year 2002, plus any drawdown of its allowance bank. Damages under the ARP are $2.4 billion (2000$) higher than under the No-Trade scenario. This reflects the transfer of allowances from EGUs west of the Mississippi River to units in the eastern United States with higher exposed populations.
by H. Ron Chan, B. Andrew Chupp, Maureen L. Cropper, Nicholas Z. Muller
Resources For the Future (RFF)
Discussion Paper DP 15-25-REV | April 12, 2017 | 52 pages |

Wednesday, May 10, 2017

Evolution of Assessments of the Economics of Global Warming: Changes in the DICE model, 1992 - 2017

Many areas of the natural and social sciences involve complex systems that link together multiple sectors. Integrated assessment models (IAMs) are approaches that integrate knowledge from two or more domains into a single framework, and these are particularly important for climate change. One of the earliest IAMs for climate change was the DICE/RICE family of models, first published in Nordhaus (1992), with the latest version in Nordhaus (2017, 2017a). A difficulty in assessing IAMs is the inability to use standard statistical tests because of the lack of a probabilistic structure. In the absence of statistical tests, the present study examines the extent of revisions of the DICE model over its quarter-century history. The study finds that the major revisions have come primarily from the economic aspects of the model, whereas the environmental changes have been much smaller. Particularly sharp revisions have occurred for global output, damages, and the social cost of carbon. These results indicate that the economic projections are the least precise parts of IAMs and deserve much greater study than has been the case up to now, especially careful studies of long-run economic growth (to 2100 and beyond).
The dominant underlying change in the results of this IAM has been in the economic sectors, particularly in the measurement or prospect of current and future global output per capita. A useful example is the revision in global output for 2015. The level of 2015 output (in 2010$) was revised upwards by 35% over the period. Most of this was conceptual, involving the change from market exchange rates to purchasing power parity. The major revision in the 2100 outlook for output was a change from the stagnationist view of global growth in the 1980s and 1990s to a view of continued rapid growth today. This change can be seen by comparing the survey in Nordhaus and Yohe (1983) with that of Christensen et al (2017). As a result of these two changes, projected 2100 output per capita was revised upward by a factor of 3½ over the period. This major upward revision drove all economic variables, including damages and the social cost of capital.

A further major revision has been in the damage function. There was essentially no established aggregate damage function in the early 1990s, and this module of the DICE model was put together based on very rudimentary primary information.

Another large change has been in the rate of decarbonization, where the revisions have been to lower emissions per unit output over the period. This was largely due to the upward revision in output (which was not well measured) compared to a stable estimate of emissions (which was relatively well measured).

Perhaps the most dramatic revision has been the social cost of carbon (SCC). The SCC for 2015 has been revised upwards from $5 to $31 per ton of CO2 over the last quarter-century. This is the result of several different model changes as shown in Table 6. While this large a change is unsettling, it must be recognized that there is a large estimated error in the SCC. The estimated (5%, 95%) uncertainty band for the SCC in the 2016R model is ($6, $93) per ton of CO2. This wide band reflects the compounding uncertainties of the temperature sensitivity, output growth, damage function, and other factors. Moreover, it must be recognized that analyses of the social cost of carbon were not widespread until after 2000. Finally, estimates of the SCC are both highly variable across model and specification and have increased substantially over the last quarter-century. If we take early estimates of the SCC from two other well-known models (PAGE and FUND), these were close to estimates in the DICE1992 model.
refer to caption
A final result concerns the estimated uncertainty of the estimates. Because of their non-statistical structure, it is difficult to estimate the uncertainties associated with future forecasts of IAMs. Two sets of formal estimates of uncertainty for the model (in 2008 and 2017) were examined and compared with actual errors. While a complete comparison is not available, the actual errors to date (measured as forecast revisions) are reasonably within the error bands. This suggests that studies of the uncertainties of IAM projections are an important companion to standard projections as a way of signaling the reliability of different projections (a recent multi-model study of uncertainty is in Gillingham et al. 2015).

by William D. Nordhaus
National Bureau of Economic Research (NBER)
NBER Working Paper No. 23319; Issued in April 2017

Tropical Forests, Tipping Points, and the Social Cost of Deforestation

Recent work has suggested that tropical forest and savanna represent alternative stable states, which are subject to drastic switches at tipping points, in response to changes in rainfall patterns and other drivers. Deforestation cost studies have ignored the likelihood and possible economic impact of a forest-savanna critical transition, therefore underestimating the true social cost of deforestation. We explore the implications of a forest-savanna critical transition and propose an alternative framework for calculating the economic value of a standing tropical forest. Our framework is based on an average incremental cost method, as opposed to currently used marginal cost methods, for the design of optimal land-use policy or payments for ecosystem services. We apply this framework to the calculation of the social cost of deforestation of the Amazon rainforest.
Table 1 shows estimates for the present value of the foregone economic benefits from one hectare of Amazon deforestation. These are marginal values in that they represent the change in value for a small change in the forest area, at current deforestation levels.
Most of the numbers in this table are derived from estimates from two deforestation cost studies of the Brazilian Amazon, Andersen et al. (2002) and Margulis (2004). In order to make these estimates comparable and accessible, the collected values were updated to 2016 US$ values (i.e., adjusted for inflation), and converted into present values using a common discount rate, 2.5%, based on survey results in Pindyck (2016). In addition to the sources for each estimate, Table 1 also shows the method used for each calculation. 
In order to estimate the economic loss from a forest-savanna transition, it is necessary to estimate the change in average economic value of a representative hectare of forest that undergoes the state transition.