EPA raised its estimate of the cost of future damage from CO2 emissions from $42 to $65 per metric ton of CO2 emitted in 2020. The lower number is the 2010 estimate; the higher number is the 2013 estimate.
To estimate the cost of carbon emissions EPA uses several models that asses potential changes in agricultural productivity, human health, property damage due to increased flooding risk with rising sea levels, and the value of ecosystem damage due to global warming. Thinking about the elements used as input, it seems clear that the resulting models must be imprecise.
Some model projections are taken directly from the 4th Intergovernmental Panel on Climate Change report while others are derived from independent projections of factors including air and ocean temperatures, and Arctic, Antarctic and Greenland ice melting.
The ultimate element of the calculation is the selection of the discount rate (inflation rate) used to calculate how much future damage from climate change costs today. The EPA has chosen to use a discount rate of 3 percent, which makes the current cost of emissions appear high. A typical business might use 5 percent. Higher current costs will justify more expensive regulations. Simplified: if EPA estimates that there will be a billion dollars in damage in 2020 due to sea level rise or crop failure and the discount rate/rate of inflation is 3 percent per year, the present cost is $605 million. If the discount rate is 5 percent, the present cost is $436 million.
The justification for developing this estimate is Executive Order 12866: government regulators must “assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.”
As an example of how the EPA estimate impacts everyday life, in June the Department of Energy announced new rules specifying the energy efficiency required of new microwave ovens. The rule only applies to microwaves in standby mode, i.e., not cooking food. Reducing standby power use from the current level of 4.7- 9 watts, down to 1-2.2 watts in mid-2016 is projected by EPA to save consumers $3 billion by 2030 and eliminate 38 million metric tons of CO2 emissions, equivalent to taking 12 million new cars off the road for one year. These numbers use the new estimates of future damage from CO2 emissions. The additional cost of microwaves with the new features is expected to add about $65 million to the costs of microwaves each year–that is another complicated computation that makes assumptions about undeveloped technology.