Climate Economics

Social Cost of Carbon

The SCC is the present value of all future damages caused by emitting one additional tonne of CO₂ today. It is the theoretically correct carbon price and the single most consequential number in climate economics. A discount rate of 4.25% (Nordhaus) yields ~$51/tCO₂. A rate of 1.4% (Stern) yields ~$450/tCO₂ — a nine-fold difference from one parameter.

Nordhaus (DICE 2023)

$3082/tCO₂

Discount rate: 4.25%/yr

DICE 2023 social discount rate (~4.25%), combining a pure time preference rate of 1.5% with an economic growth component. Produces a relatively low SCC, emphasising near-term consumption. Implies future generations are valued significantly less than present.

Nordhaus W (2023) DICE-2023. NBER Working Paper 31112.

Policy implication

Recommended carbon price: $/tCO₂

Stern Review (2006)

$10189/tCO₂

Discount rate: 1.4%/yr

Stern Review (2006) rate of ~1.4%, using near-zero pure time preference (0.1%) on ethical grounds — future lives count almost as much as present. Produces a high SCC, reflecting the full weight of long-run damages. Widely adopted in European policy analysis.

Stern N (2006) The Economics of Climate Change. HM Treasury.

Policy implication

Recommended carbon price: $/tCO₂

Updated Ramsey (2.5%)

$5946/tCO₂

Discount rate: 2.5%/yr

Post-2020 empirical Ramsey rate (~2.5%), consistent with U.S. EPA's 2023 interim SCC guidance. Calibrated to observed real risk-free rates and post-pandemic consumption growth. Rennert et al. (2022) derive a central estimate of $185–190/tCO₂ at this rate.

Rennert K et al (2022) Comprehensive evidence implies a higher social cost of carbon. Nature 610, 687–692.

Policy implication

Recommended carbon price: $/tCO₂

SCC by Discount Rate Preset — USD per tonne CO₂

Each bar represents the present value of 100 years of marginal climate damages, discounted at the chosen rate. The IPCC AR6 WG3 anchor for current marginal damage is ~$75/tCO₂ in year 0, growing at 2%/yr. Source: Nordhaus (2023 DICE), Stern (2006), Rennert et al. / EPA (2023).

The $3082–$5946 range shown here dwarfs most active carbon price debates. The EU ETS trades near $65–75/tCO₂ — consistent with the Ramsey preset. A Stern-consistent carbon price would require carbon taxes 5–6× higher than current EU levels.

SCC vs Discount Rate — Full Sensitivity Sweep (0.5%–7.0%)

How the Social Cost of Carbon changes continuously as the discount rate varies. The curve is highly non-linear at low discount rates — small changes near 1% produce enormous SCC shifts. Vertical dashed lines mark the three canonical presets.

Annual Present-Value Damage Contributions — First 30 Years

Each year's contribution to the SCC = marginal damage discounted back to today. Lower discount rates keep future years contributing more, inflating the total SCC.

Why the Discount Rate Dominates All Other Assumptions

The SCC formula is conceptually simple: sum up every year's marginal damage, discounted back to today. MD(t) = $75 × (1.02)^t grows at 2%/yr as climate damages compound. But PV = MD(t) / (1+r)^t shrinks that future value by the discount rate every year. Over 100 years, a 4.25% rate discounts year-50 damages by 97%; a 1.4% rate discounts them by only 50%. This is not primarily a scientific disagreement — it is an ethical question about how much we value future generations. The discount rate embeds the answer.

For scenario-level analysis using these economic assumptions, visit the Integration Desk or run the Policy Simulator.