The Social Cost of Carbon: Why $51 vs $190 Matters

The Obama-era Interagency Working Group set the federal social cost of carbon at $51 per ton (2020 dollars). The EPA's 2023 revision, drawing on Resources For the Future and Carleton et al. methodology, set it at $190. The 3.7x jump reflects updated discount-rate logic and damage-function shape — and it changes the cost-benefit math for every federal regulation.

The social cost of carbon (SCC) is the dollar value of damages from emitting one additional metric ton of CO2. It is the single number that links climate science to climate policy in conventional economic analysis. The US Interagency Working Group's 2021 central estimate was $51 per ton at a 3% discount rate. The EPA's 2023 revision raised it to $190 at a 2% discount rate. The choice between these numbers — or others elsewhere in the range — determines what cost-benefit analysis recommends for almost every climate-relevant federal regulation.

How the SCC Is Computed

The SCC requires three ingredients. A climate model that translates emissions into atmospheric concentrations and temperature changes. A damage function that translates temperature changes into economic losses. A discount rate that converts future damages into present value.

Each ingredient is contested. The climate model can be a simple energy-balance model or a complex coupled atmosphere-ocean general circulation model, and the choice affects sensitivity estimates. The damage function can be linear, quadratic, or threshold-based, and the empirical basis for any of them is limited at the high temperature levels where the climate may actually end up. The discount rate is the most contested — small changes (2% vs. 3%) produce large changes in SCC because the bulk of climate damages occur decades to centuries in the future.

The 2021 Update and Its Critics

The IWG's 2021 update used a 3% discount rate as its central case, producing $51 per ton, with sensitivity ranges based on 2.5% and 5%. This was viewed by many climate economists as conservative — using a relatively high discount rate that down-weighs future damages. The EPA 2023 revision used a 2% discount rate consistent with newer empirical work on long-run interest rates and risk-adjustment, producing $190.

Critics of the higher estimate argue that:

The damage function at higher temperatures has substantial uncertainty, and assigning a precise dollar value to catastrophic outcomes is itself uncertain.
Low discount rates imply unrealistic intergenerational welfare weights — they treat damages to people not yet born as comparable to damages to people alive today.
The model uncertainty is so large that any precise estimate is spurious; better to use a range or a hard target.

Critics of the lower estimate argue that:

The damage function is more likely under- than over-estimating catastrophic risks because of model limitations.
The discount rate should match observed long-run real interest rates, which have averaged closer to 2% than 3% over recent decades.
Equity weighting — giving more weight to damages on poor countries that did not emit historically — would raise the SCC further.

Why the Number Matters Politically

The SCC is not just an academic curiosity. It is used in cost-benefit analysis for virtually every federal regulation that affects emissions. A vehicle fuel-economy standard, a power-plant emission rule, a building-efficiency standard — all use the SCC to monetize the climate benefits.

The $51 vs. $190 choice changes which regulations pass cost-benefit muster. A regulation that costs $80 per ton of emissions abated fails benefit-cost analysis at $51 SCC but passes at $190. The OMB and agency rulemaking analyses use the central SCC to compute net benefits, and the choice of central estimate effectively sets the stringency of climate regulation across the federal government.

This is why the SCC is litigated. Industry groups have repeatedly challenged higher SCC estimates in court, arguing the methodology is flawed. Environmental groups have challenged lower estimates, arguing the methodology is too conservative. The DC Circuit has generally deferred to agency methodology when adequately documented, but each revision invites new challenges.

The Discount-Rate Debate

The most consequential and contested input is the discount rate. The argument for higher rates (3-5%) is that they reflect the actual cost of capital and the opportunity cost of investment. The argument for lower rates (1-2%) is that they reflect intergenerational welfare weighting and the falling natural interest rate observed empirically over recent decades.

Nicholas Stern's 2006 review used a 1.4% discount rate, producing SCC estimates much higher than the IWG's central case. Stern argued that intergenerational ethics require near-zero discounting; future generations should not be valued less than current ones. William Nordhaus, his most prominent critic, argued for higher rates on the grounds that observed savings behavior implies higher implicit discounting.

Both positions have technical merit. The empirical work since 2006 has tended to support lower discount rates because real interest rates have indeed fallen substantially. The 2024 consensus among climate economists is closer to Stern than to the 1990s Nordhaus position, though significant disagreement remains.

The Equity-Weighting Question

The IWG's models calculate damages as a percentage of GDP, then convert to dollars at exchange rates. This treats a dollar of damage in Bangladesh as equal to a dollar of damage in the US. Equity weighting — giving heavier weight to damages on poor countries because of declining marginal utility of income — would raise the SCC substantially, possibly by a factor of 2-3.

The IWG declined to incorporate equity weighting in 2021. The EPA's 2023 revision incorporated it modestly. The political optics are complicated: explicitly weighting damages on developing countries higher than damages on US households is uncomfortable, but the welfare economics says it should be done.

The International Implications

Different countries use different SCC estimates. The UK uses about $370 per ton equivalent. Germany uses about $200. China does not use an explicit SCC but its implicit policies imply a much lower estimate. The variation produces inconsistencies in international policy coordination — a country with a high SCC will accept higher costs to abate emissions than a country with a low SCC, which creates the leakage and free-rider problems already discussed elsewhere.

The Honest Reading

The social cost of carbon is a single number that aggregates an enormous amount of contested empirical and ethical analysis. The $51 vs. $190 range reflects real uncertainty about climate damages, real debate about discount rates, and real disagreement about whether to equity-weight damages across countries. The choice among the numbers is partly technical and substantially political. The trend in the academic literature has been toward higher estimates, which would justify more aggressive climate policy. The trend in the political fight has been toward sustained challenge of the higher numbers by industry interests, which has constrained how aggressively the agencies will adopt the higher estimates. The next administration's SCC choice will be one of the more consequential climate-policy decisions of the 2020s, even though it will not look like one to the public.