The social cost of carbon (SCC) is an estimate, typically expressed in dollars, of the economic damages associated with emitting one additional ton of carbon dioxide into the atmosphere. By translating the effects of climate change into monetary terms, the SCC provides policymakers with a tool to assess the potential impacts of actions that increase or reduce greenhouse gas emissions. It is commonly used in regulatory impact analyses to inform investment decisions, cost-benefit assessments, and climate policy development.
History The concept of pricing environmental externalities was first proposed by economist Arthur Pigou in 1912, who suggested taxing activities that generate negative externalities, such as pollution. Although Pigou's framework did not specifically address carbon dioxide emissions, it laid the intellectual foundation for the development of the Social Cost of Carbon. In the early 1990s, economist William Nordhaus introduced the Dynamic Integrated Climate-Economy (DICE) model, one of the first Integrated Assessment Models (IAMs) to explicitly estimate the external costs of greenhouse gas emissions. His work helped formalize the idea that economic damages from climate change could be quantified. Various countries began implementing carbon pricing schemes in the 2000s, including the European Union Emissions Trading Scheme (EU ETS) in 2005 and New Zealand's ETS in 2008. Meanwhile, the UK explored IAM-based policy evaluation with the Government Economic Service Working Paper 140 in 2002. In 2007, the United States Court of Appeals for the Ninth Circuit ruled in Center for Biological Diversity v. National Highway Traffic Safety Administration that the federal government must account for the monetary effects of climate change in regulatory analyses. The United States formalized the Social Cost of Carbon under President Barack Obama in 2010. An Interagency Working Group (IWG) composed of 12 federal agencies developed the first U.S. government SCC estimates, drawing on outputs from three IAMs: DICE, FUND, and PAGE. These estimates were updated in 2013 and 2016. In 2017, the National Academies of Sciences, Engineering, and Medicine issued recommendations for improving SCC calculations. However, Executive Order 13783 under President Donald Trump disbanded the IWG. President Joe Biden reinstated the IWG through Executive Order 13990 in 2021, directing it to update SCC estimates to reflect scientific advances. In 2025, President Trump signed an executive order to again disband the IWG, and the Environmental Protection Agency (EPA) subsequently announced plans to "overhaul" SCC calculations.
Adoption Following Nordhaus's early work, the concept of the Social Cost of Carbon gained prominence through the Stern Review (2006) and the formation of the U.S. Interagency Working Group in 2009. The SCC became a standard tool for regulatory analysis under the Obama administration.
Use by Country
The SCC is distinct from carbon pricing tools such as taxes or cap-and-trade systems. The Social Cost of Carbon or similar approaches have been adopted globally, though implementations differ:
United States: Fluctuations under Obama ($51/ton, 3% discount rate), Trump ($1–$7/ton, focusing on domestic damages), and Biden (proposed >$190/ton, accounting for global damages at lower discount rates). Canada: Integrates SCC estimates directly into fuel pricing regulations. United Kingdom and France: Apply "shadow pricing" in regulatory impact assessments, embedding a cost of carbon without a direct market price. Germany: Introduced the GIVE model in 2024 to better capture long-term uncertainties. China, New Zealand, South Korea, and others: Operate emissions trading systems (ETS) that reflect implicit or explicit carbon costs. Discount rates, scope of damages (global vs. domestic), and valuation methods vary substantially across 40 governments and 25 sub-governmental entities that currently employ some form of carbon pricing.
Calculation
Basic Process SCC calculations typically involve:
Projecting Future Emissions: Based on economic growth, technological change, and demographics. Modeling Climate Responses: Simulating atmospheric CO2 levels, temperature increases, sea level rise and other changes. Assessing Impacts: Evaluating effects on agriculture, health, energy use, infrastructure, and ecosystems. Monetizing Damages: Converting impacts into monetary terms. Discounting Future Damages: Applying a discount rate to reflect time preferences.
Key Factors that Influence Social Cost of Carbon Sources:
Climate sensitivity (how much warming one ton of carbon causes, estimated via IAMs) Economic assumptions/growth projections Discount Rate Choice Global vs. domestic damage scope Inclusion of non-market damages (i.e. ecosystem services)
Discount Rates The discount rate affects how future damages are valued today. A simplified example: an offer to receive $100 now or $110 in a year implies a 10% simple discount rate. In climate economics:
Low discount rate (1–2%): Future generations' welfare valued nearly equally with today's. High discount rate (4–5%): Present benefits are prioritized and future damages are heavily discounted. Discounting formula: P V = F V ( 1 + r ) t {\displaystyle PV={\frac {FV}{(1+r)^{t}}}} where PV = present value, FV = future value, r = discount rate, and t = time. Recent literature supports declining discount rates, starting higher in the near-term but decreasing over time to reflect long-term uncertainty and ethical considerations.
Equations
Risk-Neutral Damages Captures the central tendency cost of emitting 1 additional ton of CO2 today without accounting for catastrophic risks or risk aversion
S C C 1 = M D R × H D P × T C R E × 1 F D R {\displaystyle SCC_{1}=MDR\times HDP\times TCRE\times {\frac {1}{FDR}}}
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