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Social Cost of Carbon: A Tool to Measure the Economic Impact of Carbon Emissions and Guide Decision-Making in Climate Adaptation

CRISIS - Atmospheric CO2 Levels by Karnik Aswani Global Commons Oct 17th 20234 mins
Social Cost of Carbon: A Tool to Measure the Economic Impact of Carbon Emissions and Guide Decision-Making in Climate Adaptation

Climate change – driven primarily by fossil fuels, deforestation, and polluting industrial processes – is a global crisis with wide-reaching socioeconomic consequences affecting millions of people annually. Thankfully, there are vital methods available to help us understand and quantify these economic aspects, including costs and potential benefits. One of them is the Social Cost of Carbon (SCC).

Challenges Beyond Temperature

Climate change impacts go beyond rising temperature. Factors like changing precipitation patterns, prolonged droughts, and more frequent and intense extreme weather events all contribute to staggering economic losses. These effects are often linked to temperature changes; for example, rising temperatures alter precipitation patterns, affecting agriculture and infrastructure.

You might also like: US Sets Record For the Most Billion-Dollar Natural Disasters In Single Year

Climate Change Model

Climate change is inherently uncertain, making it difficult to predict future emissions, technological advancements, and economic developments accurately. 

There are climate models designed to project the physical impacts of climate change, and economic models used to estimate the costs and benefits of climate mitigation policies. However, these models have limitations. For instance, they may not capture all the relevant data, leading to incorrect assessments of technology adoption and energy efficiency improvements. 

A study on air quality co-benefits from climate mitigation for human health in South Korea suggested: “Climate change mitigation efforts to reduce greenhouse gas (GHG) emissions have associated costs, but there are also potential benefits from improved air quality, such as public health improvements and the associated cost savings.”

Additionally, these models rely on assumptions about the availability and costs of low-carbon technologies, which can greatly influence the results of mitigation scenarios.

The Significance of the Social Cost of Carbon

The Social Cost of Carbon (SCC) is a crucial tool in climate economics. It serves as a vital metric for quantifying the economic costs attributed to emitting an additional ton of carbon dioxide (CO2) into the atmosphere. This quantification is pivotal for policymakers as it provides a standardised unit of measurement to facilitate informed decisions regarding climate change mitigation strategies.

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Estimating SCC is tough due to uncertainty in economic damages from climate change, with factors such as limited data and complex models making it particularly challenging. The choice of a damage function significantly shapes the estimates of SCC. These damage functions employ diverse assumptions and methodologies to gauge the economic damages attributable to climate change.

Impact of Damage Functions 

In the context of estimating SCC, the choice of a damage function plays a critical role in shaping SCC estimates. Prominent economists Martin L. Weitzman and Marshall Burke have developed damage functions that exhibit high sensitivity to different emission scenarios, resulting in wide-ranging SCC estimates. On the other hand, economists William D. Nordhaus and Michael Golosov have formulated damage functions that are comparatively less sensitive, offering more consistent SCC values. This variation in SCC estimates underscores the significance of the chosen damage function and its implications for policymaking in the realms of climate change mitigation and carbon pricing.

Sensitivity to Climate Variables 

SCC depends on climate variables, especially on Equilibrium Climate Sensitivity (ECS) and future economic output projections. ECS, representing long-term temperature change from CO2 doubling, greatly influences SCC. Higher ECS means higher SCC. Projected economic growth also affects SCC, as damages are relative to future output.

Costs of Climate Change

One of the major costs associated with climate change is the cost of healthcare, which increases from treatments and health conditions resulting from climate-related factors. Climate health factors would include heat-related illnesses, respiratory issues from air pollution, and infectious diseases. The impact of higher healthcare costs inevitably affects both public and private healthcare systems, with citizens faced with higher expenses for medical services and treatments.

Climate-related health issues can also lead to missed workdays, resulting in lost wages and income. This primarily affects individuals and their families, potentially undermining their financial stability.

Public healthcare programmes like Medicaid and Medicare in the United States, which are typically funded by taxpayers, may face disadvantages due to the economic burden of climate-sensitive health costs. The increased financial strain on these programmes could lead to higher taxes or reduced funding for other essential services. Additionally, climate-sensitive health costs might divert resources away from emergency care payments and services.

Climate change can also result in substantial economic costs linked to property and infrastructure damage, necessitating repair and replacement expenses. These costs have widespread effects, impacting governments, businesses, and homeowners alike. They may lead to increased insurance premiums, property devaluation, and diminished economic productivity in affected regions.

Adaption Investments

While climate change entails economic costs, it can also serve as a catalyst, encouraging policymakers and economists to invest in climate-resilient infrastructure, early warning systems, and healthcare preparedness. These investments can ultimately lead to reduced economic costs related to health issues and climate-induced damage.

Prioritising investments in climate-sensitive initiatives enables policymakers to allocate resources effectively for climate change mitigation and adaptation. This prioritisation yields long-term economic benefits, including reduced property damage, improved public health, and increased resilience in the face of climate-related challenges.


In summary, climate change is a pressing global crisis that affects both the environment and our finances. To tackle this challenge, we use tools like the Social Cost of Carbon (SCC) to measure the economic impact of carbon emissions and guide decision-making. 

However, as we have seen in this article, estimating SCC is tricky due to uncertainties in climate damage and various calculation methods. Climate models also help us understand the costs, but they have limitations. Nonetheless, addressing climate change has significant economic aspects, including healthcare costs, lost wages, impacts on healthcare funding, property, and infrastructure expenses, and the need for investments in adaptation. Prioritising these actions is essential for a more resilient and sustainable future.

You might also like: 4 Climate Adaptation Strategies From Around the World

About the Author

Karnik Aswani

Karnik Aswani, a data science and engineering management enthusiast with dual master's degrees and a strong background in engineering and science. Proficient in analytics techniques, he aims to merge his diverse skills in data science, engineering, and business to drive innovation and success as an aspiring entrepreneur.

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