Calculating the Climate Reciprocity Ratio for the US
A key question in the application of the Social Cost of Carbon (SCC) in benefit-cost analysis (BCA) of federal climate change regulations is how to treat the benefits to other countries of reducing emissions within the US. Traditionally, federal BCAs focus on domestic costs and benefits as federal policymakers are elected or appointed to serve US citizens. Climate change, however, is uniquely global in nature. Just as one ton of CO2 reduced in the US benefits citizens of other countries, one ton of CO2 reduced in other countries benefits US citizens. The Obama administration considered global benefits in its application of the SCC, while the Trump administration only considered domestic benefits.
A leading argument for the use of a global SCC has been the reciprocal effect of climate action in the US on the behavior of other countries. US commitments to reduce emissions will likely be met with commitments by others to do the same, and emission reductions in other countries will benefit citizens of the US. With the negotiation and adoption of the Paris Agreement, we now have an evidence base upon which to evaluate this argument. One hundred and eighty-nine countries have ratified or otherwise formally adopted the Paris Agreement and through it the majority have made emission reduction commitments. In this paper, we quantify the emissions impact of these commitments to calculate the US “Climate Reciprocity Ratio” (CRR)—how many tons other countries committed to reduce for every ton pledged by the US. We find a CRR of between 6.1 and 6.8. This means the benefit to US citizens of reducing a ton of CO2 within the US is roughly comparable to the global SCC, if adjusted to account for the reciprocal reduction that US action prompts in other countries. The CRR provides an empirical rationale for the consideration of global benefits in climate change-related BCA.
Background on the US government’s use of the Social Cost of Carbon
In 2007, the US Supreme Court ruled that the Environmental Protection Agency (EPA) has the authority to regulate carbon dioxide (CO2) and other greenhouse gas (GHG) emissions under the Clean Air Act. Other agencies also have the authority under existing law to promulgate regulations that reduce GHG emissions. Under Executive Order 12866, federal agencies must conduct a BCA of all economically significant regulations, including those aimed at reducing GHG emissions, where benefits are weighed against costs. The Office of Management and Budget (OMB) provides guidance to federal agencies on how to implement EO 12866 through Circular A-4.
A key ingredient in a BCA of regulations aimed at reducing CO2 emissions is the SCC, an estimate of the monetized benefits of reducing one ton of CO2. To standardize agency approaches to quantifying the SCC, the Obama Administration created the Interagency Working Group on the Social Cost of Carbon (IWG) in 2009. The IWG offered its first SCC guidance in 2010, and updated this guidance in 2016. A key question facing the IWG was whether to recommend the use of a domestic or global SCC. While Circular A-4 requires agencies to consider domestic benefits in conducting BCAs, consideration of international benefits is optional. The IWG chose a global SCC, based on the following justification:
[C]limate change problem is highly unusual in at least two respects. First, it involves a global externality: emissions of most greenhouse gases contribute to damages around the world even when they are emitted in the United States. Consequently, to address the global nature of the problem, the SCC must incorporate the full (global) damages caused by GHG emissions. Second, climate change presents a problem that the United States alone cannot solve. Even if the United States were to reduce its greenhouse gas emissions to zero, that step would be far from enough to avoid substantial climate change. Other countries would also need to take action to reduce emissions if significant changes in the global climate are to be avoided. Emphasizing the need for a global solution to a global problem, the United States has been actively involved in seeking international agreements to reduce emissions and in encouraging other nations, including emerging major economies, to take significant steps to reduce emissions. When these considerations are taken as a whole, the interagency group concluded that a global measure of the benefits from reducing U.S. emissions is preferable.
In 2016, the National Academies of Sciences, Engineering and Medicine was asked by the US government to offer recommendations for how best to improve estimates of the SCC over time, drawing on the most recently available science. In their findings, published in 2017, the National Academies supported the IWG’s decision to use the global SCC, citing research by Kopp and Mignone, Howard and Schwartz, and Pizer et al, all of whom argue that action to reduce GHG emissions in the US leverages emission reductions in other countries, which in turn has benefits for US citizens.
Despite these recommendations, during the Trump administration the EPA chose to use the domestic SCC for climate-related regulations. For example, in the agency’s rollback and replacement of the Obama administration Clean Power Plan, the Trump administration EPA estimates the domestic benefits of reducing one ton of CO2 in 2030 to be $8.52 in 2019 US dollars using a 3% discount rate. That’s 14% of the $61.65 global SCC estimate for that same year and discount rate suggested by the IWG in their 2016 update.
The Paris Agreement under the UN Framework Convention on Climate Change, which was negotiated in 2014 and 2015 and entered into force in 2016, offers the first robust real-world test of the argument made by the IWG, the National Academies, and recent academic studies that using the global SCC is justified based on the benefit to US citizens of reciprocal climate action in other countries. As of today, 189 countries have ratified or otherwise officially joined the Paris Agreement, accounting for 97% of global emissions. Most parties to the Paris Agreement have made emission reduction commitments in the form of Nationally Determined Contributions (NDCs). By quantifying the impact of these NDCs we can estimate the US’s “Climate Reciprocity Ratio” (CRR), or the number of tons of non-US emission reductions pledged for every ton the US pledged under the Paris Agreement.
Methodology for calculating the Climate Reciprocity Ratio
Quantifying the impact of NDCs under the Paris Agreement requires constructing a baseline scenario that captures the prevailing outlook for national GHG emissions before the Paris Agreement was signed. For energy CO2 emissions, the most widely used and regularly updated source of global projections is the International Energy Agency’s World Energy Outlook (WEO). We selected the 2014 WEO as our pre-Paris baseline because it was released in November 2014 right before the US and China announced their NDCs, which prompted other countries to announce NDCs over the following year in the run-up to the COP 21 climate conference in Paris a year later. We selected the “Current Policies Scenario” from the 2014 WEO, which only includes those policies for which implementation measures had been formally adopted as of mid-2014, and assumes those policies persist unchanged. Energy-related CO2 emissions account for roughly two-thirds of net global GHG emissions. The remaining third includes CO2 emissions released from industrial processes, methane (CH4) emissions from coal, oil and gas production, agriculture and waste, N20 emissions largely from agriculture, and F-gases used in industrial processes and consumer goods. Given the lack of robust, broadly accepted and regularly updated projections for these gases, for this analysis we assumed they grow at the same rate as energy-related CO2. For emissions from land use and land use change, we hold levels constant at 2004-2014 averages.
We then reviewed the initial NDC submissions of all 43 countries listed in Annex I of the UN Framework Convention on Climate Change (industrialized countries that were members of the OECD when the UNFCCC was signed in 1990s plus economies in transition, mostly former members of the Soviet Union) and the 28 largest emitters among non-Annex I countries. These 71 countries accounted for roughly 90% of global GHG emissions in 2014, based on Rhodium Group’s global GHG data. We compared each country’s NDC to its pre-Paris emissions baseline using the projection method described above. We treated the then 28 members of the European Union as a single entity, as they submitted their NDC collectively covering EU-wide emissions.
We only assessed unconditional emission reduction commitments included in NDCs, not those made conditional on international financial support or technology transfer. This omitted three of the top 71 emitters. For another eight countries, NDCs were not submitted or were in a form that did not easily allow for quantification and were thus excluded from our analysis. And for nine countries, our pre-Paris emissions baseline was lower than the emissions reductions pledged in their NDC, rendering the NDC non-binding in our analysis. These pledges were excluded as well from our analysis. That left 51 countries, 28 of which were members of the EU at the time the Paris Agreement was signed (the UK has since left reducing the number of EU member states to 27). These 51 countries accounted for 75% of global emissions in 2014.
Using the methodology described above, the US NDC of a 26-28% reduction below 2005 levels by 2025 results in a cumulative reduction of 6.2 to 7.6 billion metric tons CO2e of GHG emissions between 2015 and 2030 compared to the pre-Paris baseline, assuming the US remained at 2025 emissions levels through 2030 (Table 1). Commitments from Annex I countries, if achieved, deliver an additional 13.0-13.2 billion tons relative to a pre-Paris baseline. Unconditional NDCs from non-Annex I countries result in even larger reductions if successfully achieved—29.0-33.0 billion metric tons or roughly 60% of the global total based on the NDCs we assessed.
Based on this analysis, the US achieved a CRR of 6.1-6.8 under the Paris Agreement. That means that for every ton the US pledged to reduce under its NDC, other countries pledged 6.1-6.8 tons. This is a deliberately conservative estimate. First, it excludes NDCs that were not easily quantified or were submitted by the more than 100 smaller countries that accounted for less than 10% of global emissions combined in 2014. These countries will likely take at least some steps to reduce emissions as a result of the Paris Agreement, either directly through new policy or indirectly as the result of reductions in clean energy technology costs brought about by actions taken in other countries. Second, the initial NDCs of many countries, if successfully achieved, will reduce emissions beyond 2030. If post-2030 effects are included in the analysis, the US CRR grows.
This analysis considers emission reduction pledges only, and it will be several years before we know whether countries will successfully meet those commitments. Yet early evidence suggests some of the world’s largest emitters are currently on track to meet their initial Paris Agreement pledges from which the US CRR is calculated. In the most recent World Energy Outlook, the IEA projects China will exceed its Paris Agreement pledge of a 60-65% reduction in the carbon intensity of GDP and an expansion of non-fossil energy to 20% of total primary energy supply by 2030. Indeed, Chinese President Xi Jinping recently increased those targets to a “greater than 65%” reduction in carbon intensity and 25% of total primary energy coming from non-fossil sources. The EU also appears on track to meet its initial 2030 commitment of a 40% reduction in GHG emissions below 1990 levels, and the European Council just raised that pledge to 55%. Japan now also appears on track to meet its initial NDC, though the Japanese leaders have not yet revised that target.
What insight does this empirically-based estimate of the US CRR provide into the relative merits of using a domestic vs. global SCC in federal regulatory BCA? If the domestic-only SCC used by the Trump administration EPA is multiplied by the CRR, US citizens receive $60-67 of benefit for every ton of CO2 reduced within the US (Figure 1) at a 3% discount rate.
That’s in line with the $62 dollar per ton global SCC that was recommended by the IWG in their 2016 update. And the US CRR is also likely to grow over time as America’s share of global GHG emissions continues to fall. The theoretical arguments the IWG, National Academies, and academic researchers have made for using a global SCC based on likely reciprocal action by other countries now has an evidentiary foundation.Related Work: Climate Convexity - The Inequality of a Warming World