Valuing a Ton of CO2
Economists use the cost of carbon to quantify the societal damages resulting from each ton of greenhouse gas emissions. Two major approaches dominate this effort. The cost-benefit method attempts to determine the optimal point at which the economic cost of mitigation equals the social benefit of avoided climate damage. This method is highly sensitive to assumptions about global impacts, discount rates, and the valuation of non-market outcomes, making it difficult to apply with precision. The cost-effectiveness method instead aims to identify the lowest-cost pathway for reaching a specific emissions target, such as the goals set in the Paris Agreement.
The current estimated social cost of carbon stands at approximately 85 dollars per ton under business-as-usual projections. This figure reflects damages from climate-related phenomena such as sea level rise, extreme weather, reduced agricultural yields, and health impacts. Some institutions and frameworks, including the UN Global Compact, recommend setting internal carbon prices at 100 dollars per ton or higher to reflect a more ambitious mitigation agenda.
Despite these estimates, the global average market price of carbon remains around 3 dollars per ton. Fewer than five percent of global emissions are priced above 40 dollars. At these levels, carbon pricing fails to create strong economic incentives for companies or governments to reduce emissions at the scale required.
Marginal abatement cost curves illustrate how emissions reduction costs vary across sectors and technologies. The left side of the curve often includes interventions with net financial benefits, such as energy efficiency upgrades. As reduction goals become more stringent, the costs per ton of abatement increase significantly. These curves help prioritize early action where benefits exceed costs and support policy design by revealing cost-effective opportunities across sectors.
For carbon pricing to be an effective policy tool, it must be designed to balance ambition with feasibility. Prices should be high enough to drive investment in low-emission technologies and behavioral change but must avoid unintended economic hardship, particularly in regions with limited mitigation capacity or high energy poverty.
In financial reporting, internal carbon pricing is becoming a standard tool for managing climate risk. Companies integrate these values into investment models and capital expenditure decisions to future-proof operations.
Carbon Offsets
Carbon offsets provide an alternative to direct emissions reductions by allowing entities to finance projects that remove or avoid emissions elsewhere. Offsets are used by governments, companies, and individuals either voluntarily or under compliance frameworks that set binding emissions caps. Typical offset projects include forest preservation, renewable energy development, methane capture, and cleaner cookstove distribution in developing countries.
In an offset transaction, the buyer claims the emissions reduction, not the project host. This creates challenges in ensuring accountability and real impact.
High-quality offsets must satisfy several criteria:
- Additionality requires proof that the project would not have occurred without the offset.
- Permanence ensures that the carbon sequestered or avoided will not be released later. Double counting must be avoided so that no two parties claim the same reduction.
- Leakage must be minimized to prevent emissions from simply being displaced from one location to another.
A common example is a steel manufacturer purchasing carbon credits from a broker to support mangrove reforestation, which sequesters carbon naturally. The company receives credit for the estimated emissions avoided or captured by the project. Brokers play a central role in connecting project developers with buyers and often help assess project quality, though oversight varies widely.
Concerns about offset integrity are widespread. Many credits on the market fail to deliver meaningful or verifiable emissions reductions. Low-quality offsets can result from poorly designed methodologies, weak monitoring, or perverse incentives. The market currently contains a higher proportion of ineffective offsets than high-integrity ones. This imbalance has led to skepticism about the environmental benefit of carbon offsetting.
Offset prices remain low, which limits their ability to drive significant climate action. At the same time, raising prices too quickly can make them inaccessible to many buyers, reducing demand and limiting investment in climate projects. Effective carbon markets require robust governance frameworks, transparent methodologies, and international cooperation. Regulatory clarity and strong institutional oversight are critical to ensuring that offsets contribute to genuine emissions reductions and support long-term climate goals.
Criticism
Critics argue offsets delay necessary internal reductions. Many believe they offer a way for companies to maintain business as usual while appearing green. The conservative lens focuses on market integrity. Without strong verification, offsets risk being symbolic rather than substantive.
There is concern that offset schemes may turn into wealth transfers without results, especially when managed poorly or politically. Direct emissions reductions are considered more effective and transparent.