The social cost of carbon (SCC) is a theoretical price tag that represents the damage of emitting one additional ton of CO2 or analogous greenhouse gases. While the SCC is expressed as a monetary value, many of the costs it considers are not necessarily financial in nature. Instead, it models socioeconomic factors like economic and population growth rates; climate factors such as temperature, sea level, storms and potential damages; and an appropriate discount rate to weigh the future value of these costs and benefits.  

The SCC estimate, little known outside of academic and select policy circles, is often utilized by policymakers as a baseline to devise climate policy and regulation. It considers the cost and benefit of public and private projects, as well as estimates appropriate carbon pricing. And it will soon be updated.

Currently, the social cost of carbon in the United States is $51 per ton of CO2 emitted, but the new estimate takes into account new scientific understanding of growing climate damages across society and increased costs for decarbonization of the economy. However, the range of estimates has varied greatly given the many challenges inherent in estimating the SCC. For example, the estimate is limited by known social, technological and climate outcomes projected over decades. The SCC does not benefit from the price discovery inherent in being dictated by market forces either.

Despite these estimation challenges, the social cost of carbon could have many practical applications. It provides a common language and foundation for projects, policy and pricing. It can be used in cost-benefit analyses to inform whether individual projects should be financed or how they should be executed. It is also an important input in crafting legislation and regulation.

The impact of these initiatives could have far-reaching implications for the economy and investors. For example, regulations can impose significant costs on companies, which can in many ways mirror the impact of an explicit “carbon tax.” On the other hand, tax credits from a higher SCC could support specific sectors. Regulatory action on carbon emissions is likely to intensify in the coming years, and companies that are actively addressing these risks could have a competitive advantage in the future.

Rick Barragan is the Managing Director,
Los Angeles Market Manager, for
J.P. Morgan Private Bank. | (310) 860-3658

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