1. General perspectives
How should we frame the problem of climate change in economic terms? What principles of economics need to be changed or emphasized to comprehend and analyze the current crisis?
Climate economics in four easy pieces
Frank Ackerman
Development (2008) 51: 325-331.
This article presents four principles that are fundamental to a sound analysis of climate economics. First, your grandchildren’s lives are important; a low discount rate is needed to validate concern about far-future outcomes. Second, we need to buy insurance for the planet; prevention of catastrophic worst-case risks, not response to most likely outcomes, should be the motivation for climate policy. Third, climate damages are too valuable to have prices; the impossibility of putting meaningful prices on human life, endangered species, and ecosystems defeats attempts at cost-benefit analysis of climate policy. Fourth, some costs are better than others; the ‘costs’ of active climate policies will create jobs, incomes, and new technologies, while avoiding the much worse costs of physical destruction by an increasingly extreme climate.
Are optimal CO2 emissions really optimal? Four critical issues for economists in the greenhouse
Christian Azar
Environmental and Resource Economics (1998) 11(3-4): 301-315.
Several economic studies of the greenhouse effect, most notably Nordhaus’s DICE model, suggest that it is optimal to allow the emissions of greenhouse gases (GHG) to increase over the next century. Other studies have found that substantial reductions can be justified on economic grounds. This paper explores the reasons for these differences and identifies four crucial issues in the analysis of the economics of the greenhouse effect: low-probability but catastrophic events; cost evaluation methods; the choice of discount rate; the choice of decision criterion. The paper shows that (i) these aspects are crucial for the policy conclusions drawn from models of the economics of climate change, and that (ii) ethical choices have to be made for each of these issues. This fact needs wider recognition since economics is often perceived as a value neutral tool that can be used to provide policy makers with “optimal” policies.
The economics of avoiding dangerous climate change: An editorial essay on the Stern Review
Terry Barker
Climatic Change (2008) 89: 173–194.
Mainstream economic thinking about the climate problem has shifted with the Stern Review from a single-discipline focus on cost-benefit analysis to a new inter-disciplinary and multi-disciplinary risk analysis. The economics of the Stern Review has been accepted by governments and the public as mainstream economic thinking on climate change, when in some critical respects it represents a radical departure from the traditional treatment. The conclusions regarding economic policy for climate change have shifted from “do little, later” to “take strong action urgently, before it is too late”. This editorial sets out four issues of critical importance to the new conclusions about avoiding dangerous climate change: the complexity of the global energy-economy system (including the poverty and sustainability aspects of development), the ethics of intergenerational equity, the understanding from engineering and history about path dependence and induced technological change, and finally the politics of climate policy.
Why economic analysis supports strong action on climate change: A response to the Stern Review's critics
Simon Dietz and Nicholas Stern
Review of Environmental Economics and Policy (2008) 2(1): 94-113.
Economic research that opposes the strategy of strong and urgent reductions in greenhouse gas emissions usually makes a distinction between scientists, environmentalists, politicians, and others who favor strong action, and economists, who apparently do not. Drawing on the Stern Review on the Economics of Climate Change, this article shows that strong and urgent action is in fact good economics. Much of the previous economic literature on climate change has failed to simultaneously assign the necessary importance to issues of risk and ethics. The case for strong and urgent action set out in the Review is based, first, on the severe risks that the science now identifies (together with additional uncertainties that it raises, which are difficult to quantify), and second, on the ethics of the responsibility of current generations for future generations.
Reflections on the Stern Review: A robust case for strong action to reduce the risks of climate change
Simon Dietz, Chris Hope, Nicholas Stern and Dimitri Zenghelis
World Economics (2007) 8(1): 121-168.
Those who deny the importance of strong and urgent action on climate change essentially offer one of, or a combination of, the following arguments. First, there are those who deny the scientific link between human activities and global warming; most people, and the vast majority of scientists, would find that untenable given the weight of evidence. Second, there are those who, while accepting the science of anthropogenic climate change, argue that the human species is very adaptable and can make itself comfortable whatever the climatic consequences; given the scale of the outcomes that we now have to regard as possible or likely under business-as-usual (BAU), this must be regarded as reckless. Finally, there are those who accept the science of climate change and the likelihood that it will inflict heavy costs, but simply do not care much for what happens in the future beyond the next few decades; most would regard this as unethical. This paper deals primarily with the latter two arguments. An appendix addresses confusions and misconceptions about The Stern Review and responds to points made by critics in previous issues of this journal and elsewhere.
Climate economics: A meta-review and some suggestions for future research
G. Heal
Review of Environmental Economics and Policy (2009) 3(1): 4-21.
What have we learned from the outpouring of literature as a result of the Stern Review of the Economics of Climate Change? A lot. We have explored the models and the possible parameter values much more thoroughly. The Stern Review has catalyzed a fundamental rethinking of the economic case for action on climate change. We are now in a position to identify conditions that are sufficient to make a case for strong action on climate change, but more work is needed before we can have a fully satisfactory account of the relevant economics. In particular, we need to better understand how climate change affects natural capital — the natural environment and the ecosystems comprising it — and how this in turn affects human welfare.
Law and economics for a warming world
Lisa Heinzerling and Frank Ackerman
Harvard Law and Policy Review (2008) 1: 331-362.
This article argues that new assumptions and analyses are needed in both law and economics in order to comprehend and respond to climate change. Part I introduces the reasons why climate change requires new and different policy analyses. Part II examines the ways in which certain legal doctrines impede rather than encourage solutions to climate change. Part III does the same for core tenets of economics. Part IV concludes with recommendations for a revised approach to public policy.
The economics of climate change
Nicholas Stern
American Economic Review: Papers & Proceedings (2008) 98(2): 1-37.
GHG emissions are an externality which is different from our usual examples in four key ways: (a) it is global in its origins and impacts; (b) some of the effects are very long term and governed by a flow-stock process; (c) there is a great deal of uncertainty in most steps of the scientific chain; and (d) the effects are potentially very large and many may be irreversible. Thus the economic analysis must place at its core: (i) the economics of risk and uncertainty; (ii) the links between economics and ethics (with potential trade-offs both within and between generations), as well as notions of responsibilities and rights in relation to others and the environment; and (iii) the role of international economic policy. The potential magnitude of impacts means that, for much of the analysis, we have to compare strategies that imply radically different development paths for the world. We cannot, therefore, rely only on the methods of marginal analysis.