Cross-posted from Real Climate Economics.
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. That’s why Elizabeth Stanton and I have written Climate Economics: The State of the Art, an in-depth review of new developments in climate economics and science since the Stern Review (2006) and the Intergovernmental Panel on Climate Change’s Fourth Assessment Report (2007), with more than 500 citations to the recent research literature.
We begin with a survey of 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.
We then focus on innovations in the economic theory and analysis of climate change, including new approaches to uncertainty that build on Weitzman’s “dismal theorem,” which shows the marginal benefit of emission reduction can be infinite. We also cover new developments in the longstanding debate about discount rates and intergenerational economic analysis, and the problems of international equity, which are central to climate negotiations but barely visible in the economics literature.
Finally, we turn to research on mitigation and adaptation. We look at cost projections for various mitigation scenarios, such as those that aim to keep warming below 2°C; the analysis of 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.
We conclude with several recommendations for improving the economic analysis of climate change:
In the end, analyzing climate change is not an academic exercise. The climate crisis is an existential threat to human society: It poses unprecedented challenges and demands extraordinary levels of cooperation, skill, and resource mobilization to craft and enact policies that will create a sustainable future. Getting climate economics right is not about publishing the cleverest article of the year but rather about helping solve the dilemma of the century. The tasks ahead are daunting, and failure, unfortunately, remains quite possible. Better approaches to climate economics will allow economists to be part of the solution rather than part of the problem.