Abstract
The social cost of carbon (SCC) refers to the economic damages caused by an additional ton of carbon dioxide and is a foundational concept for both developing and developed countries. Transforming the climate change problem from an abstract environmental problem to an economic concern, emphasizing that governments consider it while framing their budgets, long-term planning, and decision-making (Tol, 2011). From being an academic construct for integrated assessment models, it has evolved into an important instrument of climate governance (Nordhaus, 2017; Pindyck, 2019; Wang et al., 2019). Functioning as a benchmark for international mitigation frameworks, regulatory appraisals, and carbon pricing debates, its importance extends far beyond its numerical value in institutional policy decision-making (Tol, 2019,2023).
In developed economies, this is an important consideration, as they are responsible for the largest cumulative greenhouse gas emissions (Molocchi and Mela, 2024; Rickels et al., 2023; Rising, 2026). Governments that focus on methane regulations, power plant rules, and vehicle standards use the social cost of carbon to quantify these in economic terms. Developed countries operate within strict fiscal and legal accounting systems. Policy-wise, the social cost of carbon justifies emission trading systems, investment in clean energy infrastructure, and carbon pricing. In turn, it helps align national policies with global commitments under agreements such as the Paris Agreement and institutions such as the Environmental Protection Agency. Setting social cost of carbon prices based on carbon emissions yields low carbon prices and greater reliance on fossil fuels. It also serves as a guide for financial markets and provides a signal for investors. Developed countries host most of the world’s capital markets. Having a credible carbon price benchmark promotes more investment in renewable energy, energy efficiency, and electrification, acting not only as a regulatory tool but also as a macroeconomic coordination mechanism.
The social cost of carbon is equally important for the developing countries. (Balmford et al., 2023; Calcaterra et al., 2024; Rennert et al., 2022). Strong climate impacts, such as floods, extreme heat, food insecurity, droughts, and coastal erosion, make developing economies very vulnerable. Incorporating the social cost of carbon into planning can help governments better evaluate decisions between long-term climate vulnerability and short-term developmental goals. SCC in the guide for developing countries on the path to sustainable industrialization. Instead of investing in carbon-intensive infrastructure, they should use SCC to benchmark and justify investments in low-carbon urban planning, renewable power grids, and resilient infrastructure.
Global Rulemaking and Regulatory Reliance
Even though the social cost of carbon has been institutionalized and accepted in the United States, multilateral and jurisdictional bodies globally are using functional equivalents in their economic analysis frameworks (Chen et al., 2024; Erdogdu, 2025; Tian et al., 2024). Multilateral development banks have been considering carbon-pricing logic in project appraisal processes, reflecting concern for environmental benefits. In line with the Paris Agreement’s temperature targets, the World Bank is encouraging countries to prepare consistent carbon-pricing schedules. It helps countries make present-day lending decisions consistent with the long-term impacts of climate change. They can consider low-carbon alternatives and favor renewable energy targets. Countries can assess the cost-benefit of fossil fuel infrastructure and thereby adopt carbon-pricing benchmarks to evaluate transport, urban infrastructure, and energy projects. The International Monetary Fund is trying to incorporate the social cost of carbon estimates into its Article IV consultations and fiscal policy. Recognizing the tool’s importance as a reference for sovereign transition planning and for assessing stranded risk, institutions are treating climate issues as macro-critical risks. The European Commission has implemented the carbon border adjustment mechanism to equalize carbon costs between imported and domestic goods. The Financial Stability Board has established the Task Force on Climate-Related Financial Disclosures. The Paris One Planet Summit in 2017 launched the Network for Greening the Financial System (NGFS) by eight founding banks, which use stress-testing networks and create scenarios that consider carbon price trajectories. The Intergovernmental Panel on Climate Change includes integrated assessment scenarios in its reports, considering long-term decarbonization strategies and climate finance allocation frameworks to achieve temperature stabilization targets.
Therefore, even though in global rulemaking the social cost of carbon appears as a mandated number, it serves as a regulatory logic in climate-mitigation scenario design, macroeconomic surveillance, and development lending criteria. Countries are trying to integrate the social cost of carbon into their assessment models. However, it is imperative to discuss how companies in emerging economies can incorporate it without compromising competitiveness and growth.
Tension and Pillars Supporting Integration in Emerging Economies
Companies in emerging economies compete on cost advantages, operate in growth-dependent environments, and face capital and infrastructure constraints. Traditional economic theory relies on a static efficiency network and holds that accounting for the social cost of carbon imposes more costs than benefits, thereby reducing competitiveness. However, when viewed through strategic and dynamic lenses, it can enhance firms’ long-term performance. Stakeholder theory holds that firms are responsible to stakeholders beyond shareholders, including supply chain partners, future generations, regulators, and communities. Integrating the social cost of carbon thereby aligns with the firm’s strategy of increasing long-term value and shareholder welfare. Resource-based theory focuses on sustained competitive advantage arising from inimitable, rare, and valuable resources. Integrating the social cost of carbon helps firms develop energy-efficiency competencies and low-carbon innovation capabilities. According to dynamic capability theory, emerging economies face policy transitions and institutional volatilities. Developing dynamic capabilities helps companies sense environmental shifts and transform organizational processes. Climate concern strategies help anticipate global transition risks and understand carbon border taxes and supply chain decarbonization demands. Porter’s hypothesis posits that regulating the environment helps stimulate innovation. Climate-sensitive strategies, such as long-term reductions in input volatility through cleaner production, increase productivity. Compliance costs are reduced through innovation, and internalizing SCCs helps increase process efficiency. Institutional theory supports incorporating the social cost of carbon, as it helps emerging economies align with global markets. Climate-aligned finance, international carbon pricing, and adherence to Environmental, Social and Governance (ESG) disclosure norms strengthen firms’ export competitiveness.
Theoretical Proposition Framework
Companies in developing and emerging economies that incorporate the social cost of carbon into their assessments develop dynamic capabilities compared with firms that treat it solely as a regulatory metric.
Emerging economies like China, India, and Bangladesh are moving towards integrating sustainability beyond compliance, and companies are adopting ESG practices aligned with stakeholder integration and socioeconomic goals. Large Indian companies like Imperial Tobacco Company of India, Tata Group, and Infosys are linking sustainability to national development priorities. They are not only considering the mandatory disclosures by the Securities and Exchange Board of India (SEBI), such as SEBI’s Business Responsibility and Sustainability reporting. However, they are also developing dynamic capabilities, such as strategic adaptation, sustainable investment planning, and climate innovation. Aligning with India’s clean energy expansion, investing in green technologies enhances resilience against supply chain risks and improves energy security. It is important because India is the world’s third-largest emitter and still has a very low carbon price of around $50–$100 per ton, as recommended by climate economists to meet the Paris Agreement. Indonesia has a carbon cost close to zero for most of the industries and is one of the most coal-dependent economies. It is exposed to sea-level rise and deforestation, making it important for firms to incorporate the social cost of carbon into their strategic planning.
Brazilian companies in the paper and pulp industry are incorporating the social cost of carbon, SDGs, and ESG metrics, responding to market demands and nongovernmental and societal pressure, which has become necessary under the Amazon deforestation debate. Still, the cost of carbon is very low in Brazil, around $1 per ton in projected scenarios. Firms are trying to shape public environmental policies by advancing carbon credit agendas, investing in community dialogue mechanisms, complying with environmental laws, and developing capabilities in bioenergy and agriculture. South Africa also has low carbon prices around $6–$8 per ton and is a coal-based economy, which makes it important to consider the social costs of corporate transformation. Bangladesh is among the top 10 emerging countries most vulnerable to climate change, even though it contributes only 0.5 percent of global greenhouse gas emissions. It faces disproportionately serious damage compared to its emission level. Bangladeshi textile and garment conglomerate Dilip Buildcon Limited (DBL) embeds sustainability into its core operations, focusing on Sustainability 5.0, which prioritizes water recycling, worker welfare, and renewable energy. Therefore, instead of viewing carbon pricing as a mitigation cost, it should be seen as a driver of competitiveness and innovation, helping countries and companies address global market pressures such as investor ESG expectations and sustainability reporting standards. Sector-sensitive and gradual social cost of carbon integration covers the loss of competitiveness and increases long-term productivity.
A gradual integration of the social cost of carbon across sectors can help firms adjust their investment strategies, technologies, and production processes without sudden price shocks. A sudden imposition on carbon-intensive sectors can lead to high operating costs, loss of competitiveness in global markets, and reduced profit margins. Carbon efficiency policies, such as the Perform, Achieve and Trade scheme, are being adopted by Indian companies like Tata Steel. It is encouraged to invest in energy-efficient technologies and in hydrogen-based steelmaking. On the same lines, Bangladesh-based telecom company Grameenphone is investing in energy-efficient infrastructure and adopting solar-powered base stations. Carbon cost integration in company policies is a must to reinforce energy investments without tarnishing service competitiveness. Regulatory shocks and stranded assets are less for companies that incorporate climate transition risks in their capital budgeting processes.
Emerging economies need to account for the climate transition in their capital budgeting processes, as climate transition risk arises from changes in policy such as fossil fuel restrictions, emissions trading systems, and carbon taxes. Firms that do not account for the above may be affected by regulatory changes and by investor preferences for socially aligned firms. Studies show that including transition risks improves investment efficiency and long-term resilience.
Dupir (2025) discusses how financial markets are directing capital toward sustainable technologies and climate-resilient infrastructure. Başci and Çıtak (2025) discuss the importance of international cooperation for scaling up market transformation of energy systems in developing countries. Wongsinhirun et al. (2026) find that firms that incorporate green finance achieve superior financial returns and are protected from extreme environmental and economic shocks. The study also suggests that, despite progress in green finance, there is an ongoing need for research and development and for the inclusion of public-private partnerships, sustainable practices, and technological innovation.
Developed economies are increasingly focusing on climate-aware capital budgeting as part of their corporate strategy. For firms in the European Union, stringent climate regulations under the European Green Deal are being mandated. Studies show that when companies align their investments with decarbonization pathways, their exposure to stranded assets decreases. Fu et al. (2025) argue that enhanced climate disclosure, renewable energy deployment, and portfolio optimization are part of companies’ mitigation strategies. Encouraging investment in energy-efficient and renewable energy capital, along with banning fossil-intensive investment, is the need of the day (Von Dulong et al., 2023).
Conclusion
This viewpoint argues that the social cost of carbon is not only a regulatory or environmental metric but also a strategic tool to promote long-term competitiveness, sustainable growth, and innovation in both developed and developing countries. The study argues that firms that incorporate the social cost of carbon into their capital budgeting processes can manage climate-related risks, adapt to evolving global climate regulations, and attract sustainable finance. Gradual integration of the social cost of carbon by developing economies can help them manage environmental responsibilities without harming competitiveness. Therefore, the social cost of carbon can catalyze sustainable economic transformation rather than a cost imposed on the industrial sector.
Footnotes
Author Disclosure Statement
No competing financial interests exist.
Funding Information
No funding was received for this article.