Economics of climate change[fr][de] 

Financing climate change policies aimed at tackling global warming is a contentious issue, as reliable and accurate information on the costs and benefits of such measures is difficult to obtain. 

Although there is now a wide consensus that the world must stop global temperatures from rising and maintain them below 2°C to escape dangerous climate impacts, calls to reserve government funds for the cause have not been universally welcomed. In particular, the recent financial meltdown is putting a strain on public finances.

Nevertheless, proponents of stringent climate policies argue that combating climate change now will come at a lower cost than dealing with negative and even irreversible effects later on.

The first real controversy on the costs of climate change began when US President George W. Bush announced in 2001 that his country would not sign the Kyoto Protocol on the grounds that it "would cause serious harm to the US economy". Although there was no economic impact assessment underpinning Bush's U-turn on Kyoto, previous studies had pointed to high economic costs for the American economy, like 'Impacts of the Kyoto Protocol on US Energy Markets and Economic Activity ,' carried out by the US Energy Information Administration in 1998.

The most comprehensive cost analysis was done for the British government by former World Bank chief economist Lord Nicholas Stern. In the Stern Review on the Economics of Climate Change , presented in November 2006, the authors concluded that were the world to take no action on climate change, it would lose between five and 20% of annual GDP, while the costs of tackling the risks could be limited to 1% of global GDP per year.

The 700-page review underlined that urgent action is imperative and offered an economic motivation by demonstrating that the benefits of immediate measures outweigh the costs. "Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and economic depression of the first half of the 20th century," the report stated (for a good overview, see BBC News).

Furthermore, the secretariat of the UN Framework Convention on Climate Change (UNFCCC) published a study in August 2007 on the costs related to climate change mitigation and adaptation. It concluded that dealing with climate change would require significant changes in global investment patterns, including much greater investment flows to the developing world of up to 1.7% of global GDP by 2030 (EurActiv 06/09/07).

The most recent contribution to the debate came from consulting firm McKinsey, which argued that escaping climate disaster is affordable. Should the most cost-effective green technologies be implemented urgently across the world, global warming could be kept under the crucial 2°C threshold, costing possibly as little as 0.5% of global GDP, a figure that compares favourably to the Stern Report's estimates of the costs of inaction (EurActiv 27/01/09).

Problems and challenges

The problems of calculating costs and benefits of climate change policies have to do with the fact that there are many complexities and uncertainties, including how  potential freak weather can be predicted and what the long-term costs and benefits of prevention are.

Another point of contention is the "social discount rate", which calculates the value placed on the welfare of future generations relative to the present. In the Stern Review, the authors started from a near-zero discount rate (0.1% per year), arguing that from an ethical point of view, future generations should not be discounted.

Although political leaders have embraced the Stern Review, it has been contested by some of the world's leading economists, despite a consensus that the need to tackle climate change exists.

One of the most critical responses to the Stern Review came from environmental economist  Richard Tol (Hamburg and Carnegie Mellon Universities). Tol believes that Stern has seriously overestimated the potential damage from global warming and underestimated the costs of cutting greenhouse gases.

"The Stern Review is very selective in the studies it quotes on the impacts of climate change. The selection bias is not random, but emphasizes the most pessimistic studies. In this sense, it reminds one of Lomborg (2001). The discount rate used is lower than the official recommendations by HM Treasury. Results are occasionally misinterpreted. The report claims that a cost-benefit analysis was done, but none was carried out. The Stern Review can therefore be dismissed as alarmist and incompetent," Tol concludes. 

In a later evaluation , Tol admitted that the Stern Review had rightly "put the economics of climate change on the public agenda". He said the economic case for emission reduction can be made, but that Stern's assessment has "missed the chance to make it".

American economist  William Nordhaus also attacked Stern's conclusions, saying that the review should be viewed "as a political document", lacking serious peer review. His main criticism was the extremely low social discount rate used in the report. "This magnifies enormously impacts in the distant future and rationalizes deep cuts in emissions, and indeed in all consumption, today," Nordhaus wrote.