Social Cost of Carbon

Memorandum

From: John Smith

To: Office of Management and Budget of the United States (OMB)

Ref: Climate change impact valuation

I would like to bring to your attention a sensitive concern that has risen among prominent scientists and economists with regards to economic models of climate change our country is currently using to determine mitigation policy of carbon emissions.

When speaking about climate change, it is essential to understand that Social Cost of Carbon (SCC) refers to the present value of economic damages from emitting a ton of carbon dioxide. In other words, every time a ton of carbon dioxide is emitted, models have been established to predict its economic damages in the future. This amount is further discounted at an exchange rate to convert this value into present day currency. Hence, The SCC is a great tool to estimate the benefits of rulemaking.

The models used to determine the SCC are usually based on the following key aspects:

1. Economic and population growth, and resulting emissions into changes in the atmosphere and mean temperature

2. The models then apply “damage functions” to approximate the relationship between temperature changes and economic costs from impacts in sea level, cyclone frequency, agricultural productivity and ecosystem function

3. Finally, future damages are translated into present monetary value by using a discount rate

Experts, however, argue that this models are not complex enough and should be extended to include a wider range of social and economic impact. In particular, I would like to point that a big impact in the SCC estimation could be made by the definition of discount rate used to determine