What is the social cost of carbon?
An estimate, in money, of the damage caused by emitting one additional tonne of carbon dioxide — used to put climate effects into cost-benefit analysis of policies and projects.
Why it exists. Emissions impose costs on people who did not cause them and are not compensated — the classic externality. Without a price, those costs are invisible in decisions. Assigning a value allows climate damage to be weighed against the benefits of an activity in the same units.
How it is estimated. Through integrated assessment models combining economic projections, a climate model relating emissions to warming, a damage function translating warming into economic loss, and a discount rate converting future damage into present value.
Why estimates vary so enormously — from modest figures to very high ones — comes down to a small number of contested choices:
The discount rate. The single largest factor. Climate damage occurs largely in the future, so how much future harm is worth today dominates the result. A higher rate makes distant damage nearly worthless; a lower rate makes it enormous. This is an ethical judgement about obligations to future generations dressed in technical clothing, and the disagreement between economists on it has been substantial and public.
The damage function. Translating temperature into economic loss requires assumptions about effects far outside observed experience, and functions are frequently criticised as understating damage at higher warming.
Whether catastrophic and tipping point risks are included, which most models handle poorly.
Equity weighting — whether harm to poorer people counts more, given the same loss represents a greater welfare loss.
Non-market damages — ecosystems, health, migration, conflict — which are difficult to monetise and are frequently omitted, biasing estimates downward.
How it is used: in regulatory impact assessment, appraisal of public projects, and as a reference for carbon pricing. The UK uses a carbon value in policy appraisal derived differently — from the cost of meeting targets rather than from damage estimates.
The fundamental criticism: the exercise attempts to place a single price on outcomes that are uncertain, unevenly distributed and partly irreversible, and any single number conceals that.