What These Models Do
Environmental and economic models for climate attempt to predict what happens โ in both physical and financial terms โ when greenhouse gases accumulate in the atmosphere. They connect the science of warming temperatures to the economics of damage, helping answer questions like: how much will it cost if we keep emitting at current rates, and how much is it worth to reduce emissions now?
Integrated Assessment Models
The most influential tools are Integrated Assessment Models, or IAMs. These combine climate science (how emissions raise temperatures) with economic modeling (how temperature changes affect agriculture, health, infrastructure, and productivity). The three most widely referenced IAMs are DICE (Dynamic Integrated Climate-Economy), FUND (Climate Framework for Uncertainty, Negotiation and Distribution), and PAGE (Policy Analysis of the Greenhouse Effect). Each takes a different approach to representing climate damages, and they often produce different estimates as a result.
Damage Functions and Discount Rates
At the core of every IAM is a damage function โ a mathematical relationship between temperature increase and economic loss. Small differences in how this function is shaped can dramatically change the results. Equally controversial is the discount rate, which determines how much we value future damages compared to present costs. A high discount rate treats harm decades from now as relatively unimportant today. A low rate says future generations matter nearly as much as the current one. This single assumption can shift the estimated cost of carbon by hundreds of dollars per tonne.
Why It Matters
These models directly inform the Social Cost of Carbon, which in turn shapes climate regulations, carbon pricing, and investment decisions worldwide. Understanding how they work helps explain why climate policy debates often come down to disagreements about assumptions rather than facts. For purchasers โ whether individuals or businesses โ the Social Cost of Carbon is the bridge between these complex models and the real-world climate cost of the products and services you buy.