Last year, in one of his first actions on inauguration day, President Donald Trump signed an executive order directing federal agencies to stop using the social cost of carbon (SCC) when weighing the costs and benefits of regulations. The decision prompted predictable outrage from many environmental activists, climate scientists, and economists, who argued that abandoning the SCC would strip climate regulations of their scientific grounding. 

That reaction misunderstands what the SCC represents. The SCC, an estimate of the marginal damage caused by an incremental increase in greenhouse gas emissions, is not a scientific constant. It is the product of complex climate and economic models and is unavoidably shaped by uncertainty and ethical judgements. This does not mean policymakers should ignore how today’s actions affect future generations. But it does mean that the SCC rests on a set of contested assumptions reflecting differing values. Effective and durable climate policy therefore requires acknowledging those disagreements, rather than pretending that a single number can resolve fundamentally ethical questions or ignoring those questions altogether.

The most important of these assumptions is the choice of discount rate. Discounting is a foundational economic concept used to translate future costs and benefits into present-day terms. In the climate context, where damages are projected centuries into the future, the discount rate takes on moral significance. It reflects a judgment about how much the present generation should sacrifice for the benefit of future generations.

A high discount rate places little weight on future well-being and emphasizes present-day economic benefits. A low discount rate places greater weight on future welfare and strengthens the case for aggressive emissions reductions today, even at substantial cost. 

As a result, the discount rate largely determines the SCC. The first federal SCC estimate produced by the Obama administration was about $42 per ton. It fell to roughly $7 or less under the first Trump Administration and then rose to $190 under President Biden. These dramatic swings are largely driven by differences in the assumed discount rate, not changes in climate science or economic modeling.

Policymakers and analysts have historically relied on two broad approaches to selecting a discount rate. The first, known as descriptive discounting, looks to observed market interest rates to value future costs and benefits, mirroring how firms or individuals evaluate investments over conventional planning horizons. This is the approach used by the federal government and is often portrayed as more objective or scientific because it relies on observed behavior rather than explicit moral reasoning.

In practice, however, descriptive approaches can yield widely varying discount rates depending on how they are estimated, even when drawn from the same underlying data. More fundamentally, observed market interest rates answer the wrong question. They reflect intrapersonal tradeoffs of consumption and savings over an individual’s lifetime, not intergenerational judgments about how society should weigh costs and benefits across generations. There is no market interest rate that reveals society’s collective time preference or resolves the ethical question at the core of climate policy: how much present-day sacrifice is warranted on behalf of people living far in the future.

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The other approach, prescriptive discounting, attempts to answer that ethical question directly by making explicit moral judgments about intergenerational equity. Under this framework, researchers select a discount rate based on their views about how society ought to trade off present and future well-being, informed by assumptions about time preference and expectations about economic growth. This approach was most famously employed in the 2006 Stern Review, which recommended aggressive climate mitigation based on a low discount rate reflecting the authors’ ethical views. 

The difficulty with prescriptive discounting is that it requires policymakers or modelers to impose a particular moral framework on society as a whole, without any clear basis for believing it reflects broadly shared values. There is no consensus on the “correct” ethical position.

At the extremes, the assumptions of prescriptive discounting become untenable. A high discount rate implies indifference to the welfare of future people simply because they are born later in time. At the other extreme, most reasonable people would agree that while we have an obligation to consider how our actions affect future generations, there are limits to how much the present generation should be required to sacrifice, particularly given that future generations are likely to be substantially wealthier than we are.

The difficulty lies in determining where that balance should be struck. Judgements about when future benefits or present sacrifices cease to be morally justified are inherently idiosyncratic, reflecting individuals values and views about fairness across generations.

This problem is analogous to deciding how much a person ought to give to charity each year. It is easy to criticize someone who gives nothing as selfish or someone who gives all of their income as overly generous. But judgements about the middle ground are more dubious. A person who donates 30 percent of their income cannot reasonably condemn someone who only gives 15 percent as greedy, just as the latter cannot reasonably accuse the former of being excessively altruistic. Each choice is a defensible value judgment based on individual circumstances and priorities.

For these reasons, neither descriptive nor prescriptive discounting can give us a satisfactory answer to what is ultimately a deeply value-laden question. The ambiguities surrounding discounting, and the resulting sensitivity of SCC estimates to the discount rate, are often treated as a fatal flaw. The Trump Administration explicitly cited such uncertainties, including disagreement over the appropriate discount rate, in justifying its decision to abandon the SCC altogether.

In an important sense, that critique is correct. Disagreement over the discount rate, along with broader scientific, economic, and ethical uncertainties mean that the SCC is necessarily imprecise. But this does not imply that policymakers should ignore the possibility that today’s actions impose costs on future generations. The ambiguity surrounding discounting is not a defect to be eliminated; it is the core issue climate policy must confront. How much should we be willing to sacrifice today to reduce future harm has no single correct answer.

In practice, that question is resolved through politics, which has produced an unstable cycle of policy reversals and regulatory whiplash. The result is limited progress on reducing climate risks combined with real economic costs created by uncertainty for firms that need to plan beyond the next election cycle. 

The alternative is to compromise. This requires acknowledging that the values motivating opposing views are legitimate, even when one disagrees with their implications. It also requires charting a middle path that supports stable policy that addresses climate risks while preserving opportunities for economic growth that benefit both present and future generations. Achieving that balance likely requires using a best guess SCC while openly recognizing its uncertainty. By making the ethical judgments embedded in that estimate explicit, policymakers can foster a more honest debate and begin the work of finding common ground.

The views and opinions expressed are those of the author’s and do not necessarily reflect the official policy or position of C3.