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The social cost of carbon: implications for modernizing our electricity system

Abstract

The US government must use an official estimate of the “social cost of carbon” (SCC) to estimate carbon emission reduction benefits for proposed environmental standards expected to reduce CO2 emissions. The SCC is a monetized value of the marginal benefit of reducing one metric ton of CO2. Estimates of the SCC vary widely. The US government uses values of $11, $33, and $52 per metric ton of CO2, classifying the middle value as the central figure and the two others for use in sensitivity analyses. Three other estimates using the same government model but lower discount rates put the figures at $62, $122, and $266/ton. In this article, we calculate, on a cents-per-kilowatt-hour basis, the environmental cost of CO2 emissions from fossil fuel generation and add it to production costs. With this, we compare the total social cost (generation plus environmental costs) of building new generation from traditional fossil fuels versus cleaner technologies. We also examine the cost of replacing existing coal generation with cleaner options, ranging from conventional natural gas to solar photovoltaic. We find that for most SCC values, it is more economically efficient (from a social cost–benefit perspective) for the new generation to come from any of these cleaner sources rather than conventional coal, and in several instances, the cleanest sources are preferable to conventional natural gas. For existing generation, for five of the six SCC estimates we examined, replacing the average existing coal plant with conventional natural gas, natural gas with carbon capture and storage, or wind increases economic efficiency. At the two highest SCCs, solar photovoltaic and coal with carbon capture and storage are also more efficient than maintaining a typical coal plant.

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Notes

  1. The US Government revised its SCC numbers (US Government 2013) using the same three models it used in 2010 (US Government 2010), updated to incorporate more recent climate science. The 2010 values were $5, $21, and $35 per metric ton of CO2; the revised values are $11, $33, and $52. The new estimates were released while this article was in press. Accordingly, results were updated prior to publication.

  2. The government also had an upper bound “sensitivity” estimate of $90/ton, the 95th percentile value using a 3 % discount rate. Here, we present only mean estimates from both the US government and JH at the different discount rates. In addition, for comparability with government estimates and JH, all SCC estimates are in 2007$ for a metric ton of carbon emitted in 2010 for the main comparisons. We also give results when 2018 government SCCs generated qualitatively different results over 2010 government SCCs.

  3. As discussed in an earlier footnote, the increased values are a result of more recent science being incorporated into the earlier model versions, with greater climate impacts and associated costs. Importantly, we did not reestimate Johnson and Hope’s original calculations with the updated models; were they to be similarly revised, the SCC values at their discount rates would also be significantly higher.

  4. Levelized cost represents the total cost of building and operating a generating plant over an assumed financial life and duty cycle, converted to equal annual payments and expressed in terms of real dollars that remove the impact of inflation. It includes overnight capital cost, fuel cost, fixed and variable operation and maintenance costs, financing costs, and an assumed utilization rate for each plant type. Various incentives including state or federal tax credits, which would lower producer costs, are not assumed. An ideal comparison of costs would be one that adjusted for the intermittency of renewable sources, which is not captured in a levelized cost comparison. Adjusting for this factor is beyond the scope of this analysis, so the estimates here should be viewed as a first approximation. An important recent analysis by the National Renewable Energy Laboratoty (2012), however, concluded that with the proper set of policies, the nation could reliably get 80 % of its electricity from renewable sources by 2050. In addition, renewable energy has much lower operation and maintenance costs than traditional generation, so that over time its higher upfront investment costs can be recouped through these savings. Another study just released by Synapse Energy Economics (Vitolo et al. 2013) finds that at a high level of renewable penetration reliability would not be a problem and would cost less than business as usual.

  5. A small fraction of costs that cannot be avoided even after a plant ceases operation are included in this measure, such as rental fees that must be paid until a lease expires. However, operation and maintenance cost, and purchases of emission allowances, account for the majority of costs associated with operation (plants that reduce pollution below standards can sell excess emission allowances, lowering their operation costs).

  6. While the market has all but abandoned new coal generation, we include it here for completeness.

  7. SCC estimates are per metric ton of CO2 emitted in 2010 for both JH and government values (for comparability between the two); generation costs are for plants constructed in 2018.

  8. The US Office of Management and Budget (OMB; 2003) guidelines specify two standard rates of 3 and 7 %, regularly applied to benefits and costs that occur within the current generation. However, the government used 5 % as its upper value rather than 7 % for climate damages for the reason that they are expected to primarily and directly affect consumption rather than the allocation of capital. A rate of 7 % corresponds to returns on capital investments (see p. 33 of OMB Circular A-4 and JH for further explanation).

  9. There are estimates of the social cost of methane and upstream emissions; however, internalizing these costs into generation costs was beyond the scope of this analysis.

  10. The 2018 values equal $62, $41, and $12/ton CO2 for discount rates of 2.5, 3, and 5 %, respectively.

  11. Methane leaks from the natural gas system are uncertain but may be high enough to significantly increase the life cycle costs of gas plants.

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Correspondence to Laurie T. Johnson.

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Johnson, L.T., Yeh, S. & Hope, C. The social cost of carbon: implications for modernizing our electricity system. J Environ Stud Sci 3, 369–375 (2013). https://doi.org/10.1007/s13412-013-0149-5

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  • DOI: https://doi.org/10.1007/s13412-013-0149-5

Keywords

  • Social cost of carbon
  • Cost–benefit analysis
  • Climate change
  • Regulatory impact analysis