The Math Behind the $190 Social Cost of Carbon: How Discount Rates and Damage Functions Price Emissions

The $190 social cost of carbon is calculated by modeling the physical climate impacts of one additional ton of CO2, converting those impacts into dollar damages, and then discounting that future economic harm back to present-day value. The final figure is overwhelmingly dictated by the discount rate: lowering the rate from 2.5% to 1.5% nearly triples the cost, shifting the burden of climate policy from physical science to economic philosophy.[3]

"The SC-GHG is the monetary value of the net harm to society associated with adding a small amount of that GHG to the atmosphere in a given year," the Environmental Protection Agency (EPA) states in its 2023 final methodology report. To find that value, regulators rely on Integrated Assessment Models (IAMs), which link socioeconomic projections, climate physics, and economic damage functions.[1]

When a ton of carbon dioxide is emitted, IAMs simulate its journey through the carbon cycle, calculating the resulting fractional increase in global temperatures over a 300-year horizon. Those temperature changes are then fed into damage functions, which translate degrees of warming into specific economic losses: decreased agricultural yields, increased mortality from heatwaves, higher energy demands for cooling, and property lost to coastal flooding.[1]

The EPA's 2023 update heavily weighted human health impacts, with mortality accounting for roughly 50% of the total $190 valuation. Because carbon dioxide persists in the atmosphere for centuries, the vast majority of these economic damages occur decades or centuries after the initial emission.

This time delay introduces the most contested variable in climate economics: the discount rate. Economists discount future values because a dollar today is worth more than a dollar tomorrow, assuming baseline economic growth and investment returns. The discount rate determines how much present-day society should pay to prevent future harm to generations not yet born.[2]

The sensitivity of the final price tag to this rate is extreme. Under the EPA's framework, using a 2.5% discount rate yields a 2030 social cost of carbon of $120 per ton. Dropping that central rate to 2.0% raises the cost to $190 per ton. Dropping it further to 1.5% skyrockets the valuation to $340 per ton.[3]

This mathematical leverage means that a 1-percentage-point shift in economic assumptions changes the regulatory landscape more than major updates to physical climate models. A higher social cost of carbon justifies stricter emissions regulations, higher efficiency standards for appliances, and greater subsidies for clean energy deployment by making the avoided damages appear more valuable on federal balance sheets.[3]

Despite the precision of the $190 figure, the underlying damage functions contain significant uncertainty. IAMs have historically struggled to price non-market impacts, such as biodiversity loss, ocean acidification, and the economic shock of crossing irreversible climate tipping points like the collapse of the West Antarctic Ice Sheet.[1]

To address some of this uncertainty, recent models have shifted from constant discount rates to dynamic, Ramsey-based discounting. This approach ties the discount rate to uncertain future economic growth, lowering the rate if climate damages severely depress future GDP, thereby placing a higher premium on near-term mitigation.[1][2]

Another major structural shift is the geographic scope of the damages. The $190 figure represents global climate damages, a departure from earlier frameworks that isolated domestic-only impacts. The EPA argues that because climate change is a global commons problem, pricing only domestic damages would lead to severe global under-regulation and harm US strategic interests.

In practice, this metric is the administrative engine of federal climate policy. Whenever an agency proposes a rule—from the Department of Transportation's vehicle fuel standards to the Department of the Interior's public land leases—it must conduct a cost-benefit analysis. The $190 per ton figure allows agencies to legally quantify the climate benefits of their actions.

As the foundation of climate economics, the social cost of carbon remains an evolving metric. It forces policymakers to compress centuries of atmospheric physics, global agricultural shifts, and intergenerational ethics into a single, legally defensible dollar amount.[3]