The Financial Cost of Carbon

In an ideal world, the financial cost of carbon (FCC) reflects the full social cost of carbon (SCC). The SCC is a familiar notion in climate change economics. It is an estimate of the future damages that are expected to be caused by the effects on climate change of emitting an additional ton of CO2 in the atmosphere. Estimates of the SCC are based on integrated assessment models (IAMs), which are economic growth models augmented with an energy input, carbon emissions from production, the expected effect of these emissions on temperature increases (as best assessed by the climate science that underlies the climate change projections of the Intergovernmental Panel on Climate Change (IPCC)), and the expected feedback effect of this projected overheating of the planet on expected future economic productivity.