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A Discounting Rule for the Social Cost of Carbon

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  • Richard G. Newell
  • William A. Pizer
  • Brian C. Prest

Abstract

We develop a discounting rule for estimating the social cost of carbon (SCC) given uncertain economic growth. Diminishing marginal utility of income implies a relationship between the discount rate term structure and economic growth uncertainty. In the classic Ramsey framework, this relationship is governed by parameters reflecting pure time preference and the elasticity of the marginal utility of consumption, yet disagreement remains about the values of these parameters. We calibrate these parameters to match empirical evidence on both the future interest rate term structure and economic growth uncertainty, while also maintaining consistency with discount rates used for shorter-term benefit-cost analysis. Such an integrated approach is crucial amid growth uncertainty, where growth is also a key determinant of climate damages. This results in an empirically driven, stochastic discounting rule to be used in estimating the SCC that also accounts for the correlation between climate damage estimates and discount rates.

Suggested Citation

  • Richard G. Newell & William A. Pizer & Brian C. Prest, 2022. "A Discounting Rule for the Social Cost of Carbon," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 9(5), pages 1017-1046.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/718145
    DOI: 10.1086/718145
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    Cited by:

    1. Kopits, Elizabeth & Kraynak, Daniel & Parthum, Bryan & Rennels, Lisa & Smith, David & Spink, Elizabeth & Griffiths, Charles & Perla, Joseph & Burns, Nshan & Howerton, Michael, 2025. "Economic Damages from Climate Change to U.S. Populations: Integrating Evidence from Recent Studies," National Center for Environmental Economics-NCEE Working Papers 368258, United States Environmental Protection Agency (EPA).
    2. Richard G. Newell & William A. Pizer & Brian C. Prest, 2024. "The Shadow Price of Capital: Accounting for Capital Displacement in Benefit-Cost Analysis," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 5(1), pages 49-69.
    3. William Brock & Anastasios Xepapadeas, 2025. "Land Use, Climate Change and the Emergence of Infectious Diseases: A Synthesis," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 88(3), pages 795-854, March.
    4. van der Ploeg, Frederick & Emmerling, Johannes & Groom, Ben, 2022. "The Social Cost of Carbon with Intragenerational Inequality under Economic Uncertainty," RFF Working Paper Series 22-08, Resources for the Future.
    5. Sterner, Thomas & Ewald, Jens & Sterner, Erik, 2024. "Economists and the climate," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 109(C).
    6. Prest, Brian C. & Wingenroth, Jordan & Errickson, Frank, 2024. "Challenges and Opportunities for Incorporating Climate Change’s Impacts on Ocean Systems into the Social Cost of Greenhouse Gases," RFF Reports 24-17, Resources for the Future.
    7. Prest, Brian C., 2023. "Disentangling the Roles of Growth Uncertainty, Discounting, and the Climate Beta on the Social Cost of Carbon," RFF Working Paper Series 23-41, Resources for the Future.
    8. Wingenroth, Jordan & Prest, Brian C. & Rennels, Lisa & Rennert, Kevin & Errickson, Frank & Anthoff, David, 2024. "Accounting for Biodiversity Loss Raises the Social Cost of CO2," RFF Working Paper Series 24-23, Resources for the Future.
    9. Adam Michael Bauer & Cristian Proistosescu & Gernot Wagner, 2023. "Carbon Dioxide as a Risky Asset," CESifo Working Paper Series 10278, CESifo.
    10. Christian Azar & Jorge García Martín & Daniel JA. Johansson & Thomas Sterner, 2023. "The social cost of methane," Climatic Change, Springer, vol. 176(6), pages 1-22, June.
    11. Tan, Tammy & Rennels, Lisa & Parthum, Bryan, 2023. "The Social Costs of Hydrofluorocarbons and the Large Climate Benefits from their Expedited Phasedown," National Center for Environmental Economics-NCEE Working Papers 348913, United States Environmental Protection Agency (EPA).
    12. Christian P. Fries & Lennart Quante, 2023. "Intergenerational Equitable Climate Change Mitigation: Negative Effects of Stochastic Interest Rates; Positive Effects of Financing," Papers 2312.07614, arXiv.org, revised Aug 2025.
    13. Elizabeth Kopits & Daniel Kraynak & Bryan Parthum & Lisa Rennels & David Smith & Elizabeth Spink & Joseph Perla & Nshan Burns, 2025. "Economic Impacts of Climate Change in the United States: Integrating and Harmonizing Evidence from Recent Studies," Papers 2509.00212, arXiv.org.
    14. Frikk Nesje & Moritz A. Drupp & Mark C. Freeman & Ben Groom, 2024. "Sense and Sensitivity: An Argument Against Reporting Multiple Net Present Values," CESifo Working Paper Series 11547, CESifo.
    15. Beaulieu, Jake & Kopits, Elizabeth & Moore, Chris C. & Parthum, Bryan M., 2024. "The Climate Benefits of Improving Water Quality," National Center for Environmental Economics-NCEE Working Papers 348911, United States Environmental Protection Agency (EPA).
    16. Petersen, Claire & Reguant, Mar & Segura, Lola, 2024. "Measuring the impact of wind power and intermittency," Energy Economics, Elsevier, vol. 129(C).
    17. William Brock & Anastasios Xepapadeas, 2023. "Natural world preservation and infectious diseases: Land-use, climate change and innovation," DEOS Working Papers 2319, Athens University of Economics and Business.

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