The social cost of carbon (SCC) is an economic estimate, typically expressed in dollars, of the long-term damages associated with emitting an additional ton of carbon dioxide into the atmosphere. It falls under the broader field of Environmental economics, serving as a critical metric for policymakers and decision-makers to understand the monetary implications of carbon emissions and the economic benefits of reducing them. The SCC quantifies the future impacts of Climate change into present-day economic terms, encompassing potential harms to human health, agricultural productivity, property values, and ecosystem services85, 86, 87. This metric is vital for conducting Cost-benefit analysis of policies and projects that affect greenhouse gas emissions83, 84.
History and Origin
The foundational concept of pricing environmental harms, known as Externalities, can be traced back to economist Arthur Pigou in the early 20th century. However, the specific development of the social cost of carbon emerged much later. In the early 1990s, economist William Nordhaus introduced the Dynamic Integrated Climate-Economy (DICE) model, which was among the first integrated assessment models (IAMs) to explicitly estimate the external costs associated with greenhouse gas emissions. This work helped formalize the idea that the economic damages from climate change could be quantified.
The SCC gained significant traction in the United States when, following a 2007 federal court ruling, the U.S. government was required to account for the costs and benefits of changes in greenhouse gas emissions in its economic analyses81, 82. In response, the Obama administration established an Interagency Working Group (IWG) on the Social Cost of Carbon in 2009. This group, comprising experts from multiple federal agencies, developed a harmonized set of SCC estimates for consistent use across the federal government, with initial estimates published in 2010 and updated in 2013 and 201678, 79, 80. These estimates have since seen fluctuations across different administrations, reflecting varying methodologies and policy priorities76, 77.
Key Takeaways
- The social cost of carbon (SCC) is a monetary estimate of the economic damages caused by emitting an additional ton of carbon dioxide.
- It serves as a tool in Policy decisions to evaluate the economic trade-offs of actions impacting greenhouse gas emissions.
- SCC estimates are highly sensitive to methodological choices, particularly the Discount rate and the scope of damages considered (global vs. domestic)73, 74, 75.
- The metric is used globally by governments and organizations for Regulatory impact analysis and in discussions around Carbon pricing70, 71, 72.
- Despite its utility, the SCC faces criticisms regarding its complexity, inherent uncertainties, and the ethical considerations embedded in its calculation69.
Interpreting the Social Cost of Carbon
The social cost of carbon represents the present value of future damages from an additional ton of CO₂ emissions. A higher SCC implies greater economic harm from carbon emissions and, consequently, suggests a stronger economic rationale for policies aimed at reducing them. 68For instance, if a policy designed to prevent one ton of carbon emissions costs less than the estimated SCC, then the economic benefits of avoiding those damages outweigh the costs of the policy, making it a potentially beneficial investment for society.
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The interpretation of the social cost of carbon is heavily influenced by underlying assumptions within the integrated assessment models (IAMs) used for its calculation. 66Key assumptions include projections of future economic growth, population changes, the physical response of the climate system to emissions, and how future damages are valued in present-day terms through the Discount rate. 63, 64, 65A lower discount rate places more weight on future damages, resulting in a higher SCC, while a higher discount rate diminishes the present value of future damages, leading to a lower SCC. 60, 61, 62The choice of whether to consider global or only domestic damages also significantly impacts the estimated value of the social cost of carbon.
57, 58, 59
Hypothetical Example
Consider a hypothetical country, "Ecotopia," that is evaluating a new environmental regulation aimed at reducing industrial carbon emissions. The regulation proposes to reduce emissions by 1 million tons of CO₂ per year. The estimated cost of implementing this regulation (e.g., upgrading factory equipment, developing new technologies) is $30 million annually.
Ecotopia's environmental agency uses an estimated social cost of carbon of $70 per ton. To evaluate the regulation, they would calculate the total avoided damages:
- Total avoided damages = (1,000,000 tons CO₂ per year) * ($70/ton) = $70,000,000 per year.
Comparing the benefits to the costs:
- Benefits (avoided damages) = $70,000,000
- Costs (implementation) = $30,000,000
Since the annual benefits ($70 million) significantly exceed the annual costs ($30 million), this regulation would be considered economically beneficial from a Public goods perspective, leading to an estimated Net present value of $40 million in benefits for society each year from this specific emissions reduction.
55, 56Practical Applications
The social cost of carbon is a widely applied tool in government and organizational decision-making related to climate and energy policy.
- Regulatory Impact Analysis: Government agencies, such as the U.S. Environmental Protection Agency (EPA), use the SCC in Regulatory impact analysis to quantify the benefits of proposed regulations that reduce greenhouse gas emissions. This53, 54 helps justify the stringency of environmental standards, such as fuel economy standards.
- 51, 52Investment Decisions: The SCC helps inform investment decisions by providing a monetary value for the long-term benefits of reducing emissions. Businesses and governments can use this to prioritize investments in renewable energy projects, energy efficiency, and sustainable development initiatives.
- 49, 50Carbon Pricing Mechanisms: While distinct, the SCC often serves as a theoretical basis for setting the levels of Carbon pricing tools, such as Carbon tax and cap-and-trade systems. It a46, 47, 48ims to ensure that the price of emissions reflects their true Economic impact on society.
- 45International Policy: The SCC and similar approaches are adopted globally, with countries like Canada, the United Kingdom, and France integrating carbon cost estimates into their policy assessments to guide national Resource allocation and climate strategies.
In 43, 44recent years, the EPA has continued to update its estimates for the social cost of carbon, significantly increasing the figures to reflect advancing scientific understanding of climate damages. For example, the Biden administration's EPA has proposed estimates as high as $190 per ton for 2020, a substantial increase over prior estimates, signaling stronger justifications for future Environmental regulations aimed at reducing greenhouse gases.
L40, 41, 42imitations and Criticisms
Despite its utility, the social cost of carbon is subject to significant limitations and criticisms, primarily stemming from the inherent complexities and uncertainties in its calculation.
One major point of contention is the choice of the Discount rate. Smal37, 38, 39l changes in this rate can lead to vastly different SCC values. Critics argue that a high discount rate undervalues the impacts of climate change on future generations, potentially leading to insufficient action today. Conv35, 36ersely, a very low discount rate can be seen as impractical in economic modeling. A key academic critique, for instance, highlights how sensitive SCC estimates are to this parameter, noting that philosophical choices about valuing future generations can dramatically influence the outcome. [https://academic.oup.com/qje/article/130/2/839/1898115]
Furthermore, the integrated assessment models (IAMs) used to calculate the SCC are complex and rely on numerous assumptions and projections about future economic activity, population growth, technological advancements, and climate sensitivity. The 32, 33, 34valuation of long-term climate damages, particularly those extending centuries into the future, is inherently uncertain and can be highly speculative. Some30, 31 critics argue that these models may not fully capture the potential for catastrophic or irreversible "tipping points" in the climate system.
Ano28, 29ther criticism revolves around the scope of damages included. While the SCC aims to be comprehensive, some non-market damages, such as biodiversity loss or certain ecosystem services, are difficult to monetize and may be excluded or only partially accounted for in models. This27 can lead to an underestimate of the full societal harm. Addi26tionally, debates exist over whether the SCC should consider only domestic damages or global damages, as climate change is a global phenomenon but policies are often made at national levels. Focusing solely on domestic damages typically yields a much lower SCC.
The22, 23, 24, 25 significant variation in SCC estimates across different studies and administrations also undermines its perceived objectivity. Historically, official U.S. government estimates have ranged from $3-$5 per ton to $190 per ton, depending on the administration's chosen assumptions regarding discount rates and global vs. domestic impacts. This20, 21 variability has led some to argue that the SCC can be politically manipulated to justify pre-determined policy outcomes.
18, 19Social Cost of Carbon vs. Carbon Tax
While closely related and often discussed together, the social cost of carbon (SCC) and a Carbon tax are distinct concepts. The key difference lies in their nature:
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Social Cost of Carbon (SCC): The SCC is a calculated value representing the estimated monetary damages of emitting one additional ton of carbon dioxide into the atmosphere. It is a theoretical metric derived from economic models, intended to inform policy and evaluate the benefits of emissions reductions. It is a measure of the harm caused.
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16, 17Carbon Tax: A carbon tax is a policy instrument that directly sets a price on carbon emissions. It is a levy imposed on activities that produce carbon dioxide, typically on a per-ton basis. Its purpose is to internalize the negative externality of carbon emissions, making polluters pay for the environmental damage they cause and incentivizing them to reduce their emissions.
In t13, 14, 15heory, an "optimal" carbon tax would be set equal to the social cost of carbon, ensuring that the price of emitting carbon accurately reflects the societal harm. Howe11, 12ver, in practice, political, economic, and practical considerations often mean that actual carbon tax levels may differ from the calculated SCC. A carbon tax is a mechanism for achieving emissions reductions, while the social cost of carbon is a tool for measuring the economic justification for those reductions.
FAQs
What is the primary purpose of the social cost of carbon?
The primary purpose of the social cost of carbon (SCC) is to provide a monetary estimate of the total Economic impact of emitting an additional ton of carbon dioxide into the atmosphere. This helps policymakers assess the benefits of regulations and investments aimed at reducing greenhouse gas emissions.
9, 10How is the social cost of carbon calculated?
The social cost of carbon is calculated using complex integrated assessment models (IAMs). These models combine climate science, economic projections, and damage functions to estimate the present value of future climate damages (such as impacts on agriculture, health, and property) caused by one additional ton of CO₂. Key inputs include future emissions pathways, projected economic growth, and the Discount rate used to value future costs and benefits in today's terms.
Wh8y do estimates of the social cost of carbon vary so much?
Estimates of the social cost of carbon vary significantly due to differences in underlying assumptions within the models. These include the choice of Discount rate, which determines how heavily future damages are weighed against present costs, and whether the scope of damages considered is limited to domestic impacts or includes global impacts. Varying scientific understanding of climate sensitivity and economic projections also contribute to the range of estimates.
Wh6, 7o uses the social cost of carbon?
Governments at national and sub-national levels, international organizations, and sometimes businesses use the social cost of carbon. It is primarily used in Regulatory impact analysis to evaluate the economic benefits of policies that reduce carbon emissions, inform Policy decisions related to climate change, and guide discussions around carbon pricing.
Is4, 5 the social cost of carbon a fixed value?
No, the social cost of carbon is not a fixed value. It is an evolving estimate that is subject to periodic updates as scientific understanding of climate change improves, economic conditions change, and methodologies are refined. Different organizations and governments may also use their own sets of assumptions, leading to different contemporaneous estimates.1, 2, 3