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.Clarkson, R. and K. Deyes (2002). Estimating the social cost of carbon emissions. Government Economic Service Working Paper 140. London, HM Treasury. http://www.hm-treasury.gov.uk/d/SCC.pdf
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.Interagency Working Group on Social Cost of Carbon. (2010). Social cost of carbon for regulatory impact analysis under executive order 12866. Whitehouse Council of Economic Advisors, Washington, DC, USA. These estimates were updated in 2013 and 2016. In 2017, the National Academies of Sciences, Engineering, and Medicine issued recommendations for improving SCC calculations.National Academies of Sciences, Medicine, Division of Behavioral, Board on Environmental Change, Committee on Assessing Approaches to Updating the Social Cost of Carbon. Valuing climate damages: Updating estimation of the social cost of carbon dioxide. National Academies Press; 2017 May 23. 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 + In addition to SCC estimates, many countries and regions have implemented direct carbon pricing programs or shadow valuation frameworks. The following table highlights major initiatives:World Bank. 2024. State and Trends of Carbon Pricing 2024. World Bank. http://hdl.handle.net/10986/41544ProgramCountry/RegionLaunch YearTypeEU Emissions Trading Scheme (EU ETS)European Union2005Cap-and-tradeNew Zealand Emissions Trading Scheme (NZ ETS)New Zealand2008Cap-and-tradeKorea Emissions Trading Scheme (K-ETS)South Korea2015Cap-and-tradeCanadian Carbon PricingCanada2019Federal carbon price with provincial systemsChina National ETSChina2021Cap-and-trade (power sector)German GIVE Model (Greenhouse Gas Inclusive Valuation Estimate)Germany2024Shadow pricing for regulatory impact
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.Burke J, Byrnes R, Fankhauser S. How to price carbon to reach net-zero emissions in the UK. Policy Report, London School of Economics, London. 2019 May.Bueb J, Le Hir B, Mesqui B, Pommeret A, Margerie GD, Salin M, Quinet E, Broca OD, Chasseloup S, Combaud M, Bureau D. The Value for Climate Action. A shadow price of carbon for evaluation of investments and public policies. Report by the Commission chaired by Alain Quinet. 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)Howard P. Omitted damages: What's missing from the social cost of carbon. Institute for Policy Integrity. 2014 Mar. https://costofcarbon.org/files/Omitted_Damages_Whats_Missing_From_the_Social_Cost_of_Carbon.pdf
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.Drupp M, Freeman M, Groom B, Nesje F. Discounting disentangled: an expert survey on the determinants of the long-term social discount rate. Centre for Climate Change Economics and Policy Working Paper. 2015 May;195. http://piketty.pse.ens.fr/files/DruppFreeman2015.pdf
Discounting formula:where PV = present value, FV = future value, r = discount rate, and t = time.
Recent literature supports declining discount rates,Gollier, Christian (June 2008). "Declining Discount Rates: Economic Justifications and Implications for Long-Run Policy" (PDF). IDEI, Université Toulouse I; DIEES, Athens University of Economics and Business; DEFA, National University of Ireland Maynooth. 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
MDR: Marginal Damage Ratio- How much global GDP drops per degree Celsius of warming HDP: Horizon Discounted GDP- Present value of global GDP over time (used to weight future damages) TCRE: Transient Climate Response to Cumulative Emissions- How much global temperature increases (in degrees C) per 1,000 gigatonnes of CO2 emitted (about 1.8 °C/1 trillion tons of carbon) FDR: Future Discount Rate- Applied to calculate the present value of future damages
Catastrophic Risk Premium Adds a risk premium to account for potential catastrophic damage, uncertainty, and risk aversion
MCRD: Marginal Catastrophe Risk Density- Change in the probability of a disaster per ton of CO2 emitted MDD: Mean Disaster Damage- Expected GDP loss if a catastrophe occurs RA: Relative Risk Aversion- How strongly society prefers to avoid risk V: Value of GDP- Total or marginal economic value at risk (often equivalent to global GDP) R: Discount rate for catastrophic events (may differ from FDR in SCC1)
The final SCC combines risk-neutral and risk-adjusted components.
Integrated Assessment Models (IAMs) Three principal Integrated Assessment Models - DICE, FUND, and PAGE - have historically underpinned SCC calculations. DICE emphasizes a globally-aggregated, deterministic pathway that optimizes mitigation costs against economic damages. FUND introduces more granular regional and sectoral variation, allowing for some beneficial warming effects in higher latitudes. PAGE, by contrast, is probabilistic, explicitly modeling uncertain catastrophic risks. These methodological differences can lead to dramatically different SCC values. Obama-era SCC relied on an average across multiple runs of DICE, FUND and PAGE.Interagency Working Group on Social Cost of Carbon, United States Government (November 2013). "Technical Support Document: - Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis - Under Executive Order 12866" (PDF). obamawhitehouse.archives.gov.
DICE (Dynamic Integrated Climate Economy) Source:
Optimizes emissions abatement based on cost-benefit balance, tends to produce lower SCCs because it ignores deep uncertainty and treats damage as reversible
Assumptions:
Climate and economic systems are tightly coupled in a smooth, deterministic way Damages increase with the square of temperature (i.e., GDP loss = a × T2) Doesn't include tipping points or fat-tailed catastrophic risk
FUND (Framework for Uncertainty, Negotiation, and Distribution) Source:
Shows wide variation in SCC depending on who's affected and when, can understate damages dure to assumptions about adaptation and potential warming benefits
Assumptions: Models multiple impact categories (e.g., agriculture, health, sea level rise) by region Includes some adaptation responses over time Allows for negative damages (i.e., benefits from warming in some regions/sectors)
PAGE (Policy Analysis of the Greenhouse Effect) Source:
Produces higher SCC estimates with large uncertainty bands, complexity & uncertainty can make outputs difficult for policy communication
Assumptions:
Uses Monte Carlo simulations to model thousands of futures Probabilistic treatment of catastrophic events and tipping points Damages increase sharply after certain thresholds Often uses declining discount rates
Tipping Points Standard IAMs tend to assume smooth, continuous damages from warming, which may underestimate risk by ignoring climatic tipping points.