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Controversy on Discounting Greenhouse Gas Emissions

March 18, 2009
On March 13, Sens. Tom Harkin (D-Iowa) and Charles Grassley (R-Iowa) along with 10 others sent a new letter to EPA Administrator Lisa Jackson urging “EPA to refrain from including any calculations of the ILUC components in determining life-cycle GHG emissions for biofuels at this time.” The new letter referenced a letter sent in November to then-Administrator Stephen Johnson, which was signed by four of the current 12 signers as well as then Sen. (now Interior Secretary) Ken Salazar.

The latest letter argues that quantification of indirect land use change is difficult because there are many factors that affect it. Current models do not take into account the many causes of land use change or their overlapping effects. California’s recently proposed rule on the life cycle accounting shows how difficult it can be. While California’s Air Resources Board staff use modeling that relies on an assumption that use of land to grow crops for biofuels will push agricultural production to other countries and that this effect can be estimated through use of a general equilibrium market model, they acknowledge that the prediction is inconsistent with actual trade data.

The Senators wisely say,

It is possible that future domestic and international climate change policies will include major provisions restricting land use changes. Indeed, that may be the most appropriate and effective way to reduce GHG emissions associated with land use changes.”

The group also raises the issue of the use of a discount rate in the analysis of the reductions of greenhouse gases attributed to both biofuels and gasoline. (See earlier post on discounting.)

Michael J. Roberts, and Agricultural Resource Economist at North Carolina State University, makes a case for setting the discount rate at zero:

I have no idea how much we should spend reducing GHG emissions because I have no idea how costly reductions would be, the costs should warming occur, or how GHG affects all the possibilities. But I think a low discount rate, in the ballpark of zero, should be used when weighing current expenditures to future expected benefits.”

So how costly might reducing GHG emissions through use of advanced biofuels be? Sandia National Laboratories’ 90 Billion Gallon Biofuel Deployment Study suggests that the infrastructure costs of developing a large-scale advanced biofuels industry are essentially equivalent to those of drilling for more oil in U.S. onshore locations such as ANWR and the Rockies.

Use of a discount rate of any sort in the EPA rule seems highly inappropriate. It is well-noted that the choice of a discount rate can greatly affect the outcome of a cost-benefit comparison. But consider that the Renewable Fuel Standard requires biofuels to achieve a percentage reduction in greenhouse gas emissions compared to a gasoline baseline. The use of a discount rate on both biofuels and the gasoline baseline arbitrarily closes the gap between the two, understating both the costs of gasoline and the benefits of biofuels.