Climate economics: the state of the art

Economic analysis has become increasingly central to the climate policy debate, but the models and assumptions of climate economics often lag far behind the latest developments in this fast-moving field.

The first of three major sections covers climate science that is potentially relevant to economic analysis, including uncertainties in climate dynamics, the role of black carbon, temperature thresholds for irreversible losses, a new understanding of climate impacts on agriculture, and projections that temperatures could remain near their historical peak for centuries or millennia after greenhouse gas concentrations start declining.

The second section focuses on innovations in the economic theory and analysis of climate change, including new approaches to uncertainty that build on Martin Weitzman’s “dismal theorem,” which shows the marginal benefit of emission reduction can be infinite. The chapter also covers new developments in the longstanding debate about discount rates and intergenerational economic analysis, and about international equity, which is central to climate negotiations but is barely visible in the economics literature.

The third section turns to research on mitigation and adaptation. It looks at cost projections for various mitigation scenarios, such as those that aim to keep warming below 2°C; costs depend both on existing technologies and on economic issues such as the pace of endogenous technical change; the interpretation of negative-cost energy savings opportunities; the expected future price of fossil fuels; and potential rebound effects. The economics of adaptation, meanwhile, remains in its infancy, due to a paucity of data and the highly site-specific nature of adaptation measures.

Drawing on this review, the authors also make several recommendations for aligning climate economics with climate science.

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