The Social Cost of Carbon and the Shadow Price of Carbon: what they are, and how to use them in economic appraisal in the UK

This paper sets out: - a definition of the social cost of carbon, hitherto used in UK government appraisals to reflect the external costs of greenhouse gas emissions; - the rationale for adopting a shadow price of carbon (SPC) for use in policy and investment appraisals across UK government; and the factors which the SPC reflects which the social cost of carbon (SCC) does not; - our approach to setting the appropriate level for the shadow price of carbon (SPC), now and in the future; and - how the SPC should be used in policy advice, and why it differs from other carbon price and cost concepts. Our conclusion is that we should adopt as our starting point an SPC based on an SCC consistent with range of atmospheric concentrations of carbon identified by the Stern Review as the target for global action. Consideration will also be given to adjusting the SPC in the future in order to bring it progressively in line with the level of marginal abatement costs (MAC) consistent with our abatement goal. It will become possible to do this as our knowledge of UK and global MACs improves over the next couple of years.