The social cost of carbon is an increasingly important, yet

controversial, concept in the policy discussion of climate

change. This term designates the economic damages of
an additional ton of carbon dioxide emitted into the
atmosphere, which implies the societal benefits of climate
actions aiming at reduce the emissions. The SCC is
intended to capture the changes in, inter alia, net
agricultural

productivity,

human

health,

property

damages and the value of the eco-systems. The concept

came into spotlight when the U.S Government published
its first estimates of the societal benefits of reducing
carbon dioxide emissions in 2010. However, economists
and scientists have heavily criticized the economic
models used to derive these values for their empirical
weaknesses. Other researchers have also presented
alternative estimates but there has been no consensus on
what the correct value of SCC should be. The process to

derive SCC is an extremely complex and laden with

uncertainties.

The

SCC

is

often

estimated

using

integrated models that combine the insights drawn from

science and economics to stimulate the real-word factors.
Most important input parameters that are shared across
models are socioeconomic and emissions trajectories,
climate sensitivity, and discount rates. They differ in the
underlying assumption and value judgments.
Discount rates (Aggregation across time)
The discount rate is used in benefit-cost analyses to
compare values over time. Choosing the appropriate
discount rate is crucial to the calculation of SCC. As the
economic consequences of carbon dioxide emissions
occur over an exceptionally long-time horizon (the halflife of carbon dioxide approximates a hundred years), the
stream of the damages needs to be converted to the
current value using the discount rate. Because the time

scales are on the order of decades or centuries, the

discount rate can become extremely powerful and the
outcomes of the BCA become highly sensitive to the
minuscule variation in the discount rate.
The choices of discount rate are ripe with scientific,
economic, ethical and legal complexities. Confounding
factors include: the investment horizon is longer than any
the conventional timeframe to derive the rate of return
on capital; future generations have no say in the decisionmaking process; in comparison with intergenerational
horizon, intergenerational investment horizons implicates
greater uncertainty (Spellman, 2015).
In

intergenerational

discounting,

researchers

often

determine the social discount rate from two perspectives:

descriptive and prescriptive (Arrow et al., 1996). In the
former approach, discount rates should be inferred from
actual market behaviors whereas in the later approach,

they are established from ethical criteria and behavioral

evidence. Many respected economists tend to agree
Ramsey formula is a useful starting framework to
establish SCC but dispute about how to estimate Ramsey
parameters (Arrow et al., 2012).
r = + g
r: discount rate; : pure rate of time preference
: elasticity of marginal utility; g: per capita rate of
growth in consumption
The choice of , which is defined as the marginal rate of
substitution between present and future consumption
under the same consumption levels, is an ethical one. In
practice, The U.S interagency working group assigned a
zero to while in the Stern review is equal to 0.01. Many
economists including Ramsey assert that at the societal
level, the appropriate value should be 0. They contend it
is ethically indefensible to assume a positive number
since it implies the humanity will be extinct. The major

counter-argument questions the entire survival of the

human race and we should account for the possibility of
human extinction. Those who apply a positive value to
the pure rate of time preference tends to assume the
same degree of impatience of an individual within lives
can hold for a society of individuals across lives (Bergh
and Botzen, 2015).

It is due to the parallels between

human generations and different periods of a humans

life.

Another,

more

straightforward,

rationale

for

positive , refuses to view use as a measure of

individuals

impatience

but

as

the

inter-temporal

preferences regarding the welfare of future generations:

we seem to care more about generation 100 years from
now than those from 1000 years (Pearson, 2011).
The second composition of the Ramsey equation captures
the wealth effect. The central meaning of parameter
represents the strength of the diminishing marginal utility

of consumption. It is also interpreted as an indicator of

our aversion in inter-temporal inequality in income
(Dasgupta 2008; Gollier et al. 2008): were judged to be
2, the maximum sacrifice group A whose income is 100
times higher than group B will make to increase group Bs
income by one dollar is $10,000. While is mathematical
equivalent to the individual risk aversion in the expected
utility approach, equating for risk aversion would lead to
paradoxical results: on the one hand, a high implies
higher risk aversion resulting in higher expected value of
damages; on the other hand, a high , working through
Ramsey equation, will reduce the present value of
damages.
disentangle

Some
the

researchers
risk

aversion

have
from

attempted

to

inter-temporal

substitutability (Ackerman et al., 2013; Cai et al., 2012).

The expected rate of growth of per-capita consumption,

g, is not a choice parameter but can be treated as
exogenous or endogenous in the analysis.

Equity weighting (Intra-generational equity)

BIBLOGRAPHY
Arrow, K. J., Cropper, M., Gollier, C., Groom, B., Heal, G.
M., Newell, R. G., ... & Weitzman, M. (2013). How should
benefits and costs be discounted in an intergenerational
context? The views of an expert panel.
Spellman,FrankR. EconomicsforEnvironmentalProfessionals.N.p.:
n.p.,2015.