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Shadow Price and Social Cost of Carbon


A reading titled ‘The Social Cost of Carbon and the Shadow Price of Carbon’ by Richard Price, Simeon Thornton and Stephen Nelson Department for Environment, Food and Rural Affairs (Defra), London, that discusses the topics of social cost of carbon (SCC) and shadow pricing of carbon (SPC) when formulating appraisals and climate change policies. This resource uses the United Kingdom (UK) as the area of study but can also be used for other regions. The reading introduces the concepts of shadow prices and market prices and explains the link between them. It includes discussions on the benefits of calculating both the SCC and the SPC to reflect the overall cost of greenhouse gas emissions to determine a well-informed stabilisation goal. It further includes discussions to understand the importance of climate informed policies in the economic assessment of a country.

Students will learn about the social cost of carbon and the shadow price of carbon. They will learn how to compare the marginal abatement costs and social costs of carbon for different stabilisation goals as determined by the Stern Review. Students will further learn the application of the SCC and the SPC when determining cost-effectiveness of resources, the concepts of discounting and discount rates for calculating carbon prices

Use this tool to help your students find answers to:

  1. Carbon pricing is used as an instrument for making climate policies. Explain.
  2. What is the difference between market prices and shadow prices?
  3. What is the importance of shadow pricing in evaluating the costs of greenhouse gases?
About Tool
Tool Name 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
Discipline Economics 
Topic(s) in Discipline Environmental Economics, Carbon Emissions, Social Cost of Carbon, Shadow Price of Carbon, Carbon Pricing, Cost-Benefit Analysis, Market Price, Stabilization Goals, Marginal Abatement Cost, Emissions
Climate Topic Climate Economics
Type of tool Reading
Grade Level Undergraduate, Graduate
Location United Kingdom
Language English
Translation      –
Developed by Richard Price, Simeon Thornton and Stephen Nelson 
Hosted at Munich Personal RePEc Archive (MPRA) 
Access Online/Offline
Computer Skills Basic


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