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Understanding the Social Cost of Carbon: A Deep Dive

The Social Cost of Carbon (SCC) is often referred to as “the most important number you’ve never heard of.” It is intended to represent the marginal damages of emitting one ton of CO₂e into the atmosphere. Despite being a fundamental tool in climate policy, it remains widely debated and contested.

Recent Developments and Policy Implications

One of the most significant updates in SCC policy comes from the U.S. Environmental Protection Agency (EPA), which has released a proposed SCC value almost four times as high as the previous estimate—bringing it close to $200 per ton. This significant revision could have substantial implications for climate regulations and economic decision-making. You can explore the details of this change in the 2022 USEPA Report on the Social Cost of Greenhouse Gases Estimates Incorporating Recent Scientific Advances.

For a broad overview of the topic, refer to the Social Cost of Carbon Climate Insights page.

Key Questions About the SCC

There are several critical questions surrounding the SCC:

• How are Integrated Assessment Models (IAMs) used to estimate the SCC?
• What key factors are missing from SCC estimates?
• Is the SCC designed to be politically feasible rather than purely science-based?
• Can conventional economic thinking, which discounts the future, generate a useful SCC?
• What would a risk-averse SCC look like?
• Does Einstein’s admonition—"you can’t solve a problem with the same tools that created it"—apply here?
• Will the SCC serve as a de facto carbon price?
• Could the SCC be deployed at state and local regulatory levels?

The Evolution and Use of the SCC

The concept of the SCC has been under discussion for decades. Initially, it was used to estimate an efficient carbon price for mitigating climate change. For a deeper exploration of carbon pricing, see I: Carbon Pricing (Deep Dive). An analysis of how the SCC could function as a carbon price is available in The SCC as Carbon Price.

In the United States, the federal government formally adopted the SCC in 2010, incorporating it into cost-benefit analyses for regulations such as fuel economy standards. Some states have also started using the SCC to internalize fossil fuel externalities and set subsidies for alternative energy sources. This has led to speculation that it could evolve into a backdoor national carbon price.

Over the years, the federal SCC has increased dramatically—from roughly $25 per ton to around $190 today. However, some analyses suggest the actual cost could be much higher. For instance, 2020 Archer: The Ultimate Cost of Carbon estimates the long-term, non-discounted SCC at an astonishing $100,000 per ton.

Limitations and Controversies Surrounding the SCC

Despite these high estimates, the SCC is still widely considered an underestimate. A 2022 study highlights the Scope of Damages Incorporated into the SCC, illustrating how many critical climate impacts are still excluded.

The SCC is not derived directly from climate models but rather from Integrated Assessment Models (IAMs). These models use “damage functions” to translate global temperature increases into economic costs.

One of the most contentious aspects of SCC calculations is the discount rate, which determines how we value future climate damages relative to present-day costs. The SCC is highly sensitive to the choice of discount rate, as demonstrated in The Impact of Discount Rates.

Additionally, SCC calculations tend to produce a Risk Neutral SCC, even though climate change presents significant existential risks that warrant a Risk Averse SCC. This discrepancy arises in part due to Under-Estimated Climate Risk and a failure to account for Fat and Long Tail Climate Risk.

Critics argue that the SCC is an inadequate tool for climate policy due to its inherent uncertainties and assumptions. A succinct critique of the SCC’s scientific, ethical, and policy limitations can be found in 2005 Ekins: A Note on the Impossibility of Deriving a Scientifically Valid, Ethically Sound, or Policy-Useful SCC. Meanwhile, some skeptics go so far as to claim that the SCC is negative, implying that carbon emissions generate net economic benefits—a notion explored in A Negative SCC?.

The Future of the SCC

Ultimately, the SCC remains a crucial yet imperfect policy tool. Its value is not purely analytical; rather, it is shaped by a range of policy choices and assumptions about the future. The vast uncertainties in predicting climate impacts and economic damages mean that different stakeholders can interpret the SCC in dramatically different ways.

Nonetheless, the SCC is vital for internalizing the economic externality of greenhouse gas emissions. Any serious attempt to mitigate climate change will require some form of carbon pricing, and the SCC provides a framework for doing so—despite its limitations. Understanding these nuances is critical for policymakers, businesses, and climate advocates who seek to navigate the complex landscape of climate economics and policy.