Social Cost of Carbon: Putting a Price on Climate Damage

The Social Cost of Carbon is a dollar value for the harm from emitting one tonne of carbon dioxide. The harm is counted for a single emission year. Economists often shorten the name to SCC.

What are its four key features?

• Per tonne: it is measured for one metric tonne of CO2 emitted in a given year.
• Monetary: it is stated in dollars, not in tonnes or degrees.
• Long-term: it adds up damage that stretches over many decades.
• Policy tool: governments use it to judge climate rules.

What kinds of damage does it count?

The US Environmental Protection Agency (EPA) lists the damage types. They include farm output, human health, flood damage to property, disasters, energy systems, conflict and migration. They also include the value of ecosystems.

The figure is a net one. The EPA says it probably understates the benefit of cutting emissions. Damages that nobody could value are counted as zero.

What does it not measure?

• It is not the fossil fuel a country needs for its goods and services.
• It is not the effort a climate refugee makes to settle elsewhere.
• It is not one person’s carbon footprint.

William Nordhaus of Yale University is the economist most linked with the idea. In 2018 he shared the economics prize in memory of Alfred Nobel. The citation reads “for integrating climate change into long-run macroeconomic analysis”. The prize was announced on 8 October 2018.

What is the DICE model?

DICE stands for Dynamic Integrated model of Climate and the Economy. It links the economy to the climate in one set of equations. Nordhaus published it in 1994. The Nobel background paper calls such models the workhorses of climate economics.

Where did the US government use it?

In 2010 a US Interagency Working Group (IWG) set official US figures. Its report lists values of $5, $21, $35 and $65 per tonne. These are in 2007 dollars. The IWG used three models. DICE was one of them, with PAGE and FUND.

The same model can give very different answers. A big part of the reason is the discount rate. This is a rate that shrinks the weight of future damage when it is added to today’s cost.

How much does the rate change the answer?

The 2021 US interim estimates show it clearly. They give the cost of a tonne emitted in 2020, in 2020 dollars.

The 95th percentile at a 3% rate is $152. A lower rate gives a higher cost.

Can the rate alone change the answer by a lot?

Yes. The Nobel background paper compares two rates in one model. A welfare discount rate of 0.1% gives a cost 8.2 times higher than a rate of 1.5%.

Why is the estimate probably too low?

The EPA notes that some damages are left out. Those omitted damages are valued at zero. So the final number likely understates the true harm.

The discount rate hides a real ethical question. How much should today’s economy give up for people not yet born? The Stern Review and Nordhaus answered it differently.

What did the Stern Review argue?

The Stern Review looked at climate economics. The Nobel background paper says finance minister Gordon Brown commissioned it. The review argued that it is wrong to discount the welfare of future generations. It used a welfare discount rate of 0.1% a year.

What did Nordhaus argue?

DICE uses a welfare discount rate of about 1.5% a year. This is closer to what market prices show. Market prices suggest that households discount the future by about a percent a year.

Why does the gap matter?

Look at how much a distant year counts. At 0.1%, welfare 500 years away has a weight of 0.60. At 1.5%, the weight is 0.0005.

The DICE runs show the effect on a carbon tax for 2020. All values are in 2010 dollars.

• $35.3 per tonne: Nordhaus’s best-guess optimal tax.
• $299.6 per tonne: the same model with Stern-style 0.1% discounting.

The official US figure has been raised, set aside and withdrawn between 2010 and 2025. Dollar years differ between the figures, so read each label.

What are the main steps?

• 2010: the IWG set $21 per tonne at a 3% rate, in 2007 dollars.
• 2021: interim values restored $51 per tonne, in 2020 dollars, at 3%. They match values from 2013 and 2016.
• 2023: the EPA report gave $190 per tonne for 2020 emissions, in 2020 dollars.

From 2017 to 2020, US values followed Executive Order 13783.

Why did the 2023 figure jump?

The EPA moved from a fixed 3% rate to a falling rate that starts at 2%. It also updated its models of the economy, the climate and the damages. These changes together raised the earlier $51 to $190.

The EPA report is dated November 2023. The EPA says the IWG process continues, and the report gives its own estimates.

What happened in 2025?

On 20 January 2025 an executive order titled “Unleashing American Energy” disbanded the IWG. The order withdrew its cost estimates. It said the calculation had “logical deficiencies, a poor basis in empirical science, politicization”. Agencies were told to act “to the extent permitted by law, consistent with the guidance contained in” OMB Circular A-4 of 17 September 2003.

India’s scheme is the Carbon Credit Trading Scheme (CCTS). It prices emissions through the trading of Carbon Credit Certificates.

What are the key facts?

• Notified: 28 June 2023, with an amendment on 19 December 2023.
• Law: clause (w) of section 14 of the Energy Conservation Act lets the Centre set up the scheme with the Bureau of Energy Efficiency (BEE).
• Amendment Act: the 2022 changes to the Act took effect on 1 January 2023.
• Administrator: the BEE. The Grid Controller of India is the Registry.
• Oversight: a National Steering Committee, co-chaired by the Secretaries of the Ministry of Power and the Ministry of Environment.

Which sectors and what rule?

The Government picked nine energy-intensive sectors. They are aluminium, cement, steel, paper, chlor-alkali, fertiliser, refinery, petrochemical and textile.

The targets are set on emission intensity. A firm that cuts its intensity below its target can earn Carbon Credit Certificates.

How does it relate to the older PAT scheme?

Sectors under the Perform, Achieve and Trade (PAT) scheme are moving to the CCTS. The Government has developed a transition plan for them.

Regulators use it in benefit-cost analysis. They set the cost of a rule against the emission damage it prevents. The EPA calls the figure “the theoretically appropriate value” for benefit-cost analyses of policies that affect emissions.

How does it link to a carbon tax?

In theory, the Social Cost of Carbon equals the best tax on carbon. This holds if no other market failures interfere. The Nobel background paper states this link.

The tax is the payment. The Social Cost of Carbon is the damage estimate. The two match only when no other market failures exist.

Why is it a moving target?

The figure changes with science, discount rates and politics. The US case shows the swing.

• 2010: $21, in 2007 dollars.
• 2023: $190, in 2020 dollars.
• 2025: the IWG was disbanded.

UPSC asked the definition directly. The question carried the standard trap options.

What was UPSC CSP 2020, question 85?

The Set A paper asked which statement best describes the “Social Cost of Carbon”. It is a measure, in money, of the long-term damage done by a tonne of CO2 emissions in a given year. The Set A key gives (a).

Which facts should you hold?

• The definition: dollars of damage per tonne of CO2 in one emission year.
• The wrong options: fuel needs, a refugee’s effort, a personal footprint.
• Nordhaus won the 2018 prize and built DICE.
• A low discount rate gives a high cost.
• The CCTS runs on emission-intensity targets under the BEE.