The Social Cost of Carbon

How economists try to put a dollar figure on the damage caused by a single ton of carbon emissions.

When a factory or a car emits carbon dioxide, the person or business emitting it typically pays nothing for the damage that emission eventually causes elsewhere - a classic externality, covered in the earlier lesson on externalities and the environment. But policymakers deciding how strongly to regulate emissions or how to price carbon still need some way to weigh the cost of emitting against the benefit of the activity producing it. That’s the purpose of the social cost of carbon: an estimate, expressed in dollars, of the total economic damage caused by emitting one additional ton of carbon dioxide.

What actually goes into the estimate

Calculating the social cost of carbon means modeling how a ton of emitted carbon contributes to future warming, and then estimating the economic damage that warming causes over time - reduced agricultural yields, increased damage from extreme weather, higher healthcare costs from heat-related illness, and lost economic output in vulnerable regions, among many other effects. Because these damages unfold over decades and even centuries, the models involved are complex and inherently uncertain, drawing on climate science, agriculture, public health, and economics simultaneously.

Using the estimate to evaluate a policy

Imagine a government agency deciding whether to approve a new environmental regulation requiring cleaner industrial equipment, which will cost businesses money to install but will reduce carbon emissions by an estimated one million tons per year. By multiplying that emissions reduction by the social cost of carbon, the agency can estimate a dollar value for the climate damage avoided, and compare that figure directly against the regulation's compliance costs - turning an otherwise difficult, apples-to-oranges comparison between environmental benefit and business cost into numbers that can actually be weighed against each other.

Why the discount rate matters so much

One of the most consequential and contested choices in these models is the discount rate - the rate used to convert future damage into today’s dollars, based on the idea that a dollar of damage occurring decades from now is generally valued somewhat less than a dollar of damage occurring today. A higher discount rate makes future climate damage look smaller in today’s terms, generally producing a lower social cost of carbon and less urgency for present-day action; a lower discount rate does the opposite, weighting future generations’ wellbeing more heavily and producing a higher estimate. Because climate damage unfolds over such a long time horizon, this single modeling choice can change the final estimate dramatically.

Treating the social cost of carbon as one precise, agreed-upon number

News coverage often reports the social cost of carbon as a single settled figure, but in reality different governments, researchers, and time periods have produced estimates varying by a wide range, driven by different assumptions about discount rates, future economic growth, and how severe various climate damages will actually turn out to be. It's better understood as a genuinely useful policy benchmark - a structured way to compare emissions reductions against costs - than as a precise, universally agreed-upon dollar figure everyone accepts without dispute.

How it actually gets used in policy

Despite the uncertainty involved, the social cost of carbon functions as an important policy benchmark: a common reference figure regulators can use across very different proposed rules and industries to keep cost-benefit comparisons at least roughly consistent with each other. It’s used in the US and several other countries to help evaluate environmental regulations, informing decisions about everything from vehicle emissions standards to power plant rules, even though the specific dollar figure used has shifted meaningfully across different administrations and revised models over time.

Key takeaways

The social cost of carbon estimates the total economic damage caused by emitting one additional ton of carbon dioxide.
The estimate accounts for damages like reduced crop yields, extreme weather costs, and health impacts over long time horizons.
The discount rate used to value future damage in today's dollars dramatically changes the final estimate.
Different models and assumptions have produced a wide range of estimates rather than one universally agreed figure.
Despite this uncertainty, the estimate serves as a useful, consistent benchmark for comparing regulations' costs and benefits.
The specific dollar figure used in US policy has shifted meaningfully across different administrations over time.