Economics of climate change[fr][de] 

If the world wants to tackle global warming, it will have to review the economic costs and benefits of the essential policy measures. This cost/benefit analysis of climate- change policies is very controversial because, in the end, it comes down to the question of whether we are willing to accept some restraints on economic growth now in order to leave a less dangerous future for our grandchildren.

The first real controversy on the costs of climate change began when US President George W. Bush announced in 2001 that his country would withdraw from the Kyoto Protocol with the argument that it "would cause serious harm to the US economy". Although there was no economic impact analysis underpinning Bush's U-turn on Kyoto, there had been cost studies which pointed to high economic costs for the American economy, eg the study "Impacts of the Kyoto Protocol on US Energy Markets and Economic Activity " undertaken by the US Energy Information Administration in 1998.

The most comprehensive cost analysis was made for the British government by former World Bank chief economist Nicholas Stern. In the Stern Review on the Economics of Climate Change presented in November 2006, the authors concluded that, in case of non-action on climate change, the world would lose between 5% GDP per year or in the worst case 20% of GDP and that action to deal with the risks of global warming can be limited to 1% of world GDP per year.

One of the main messages of the 700-page review is that urgent action to fight climate change is needed for economic reasons and that the benefits of strong urgent action 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," states the report.

BBC News has a good overview of key points in the Stern Review .

A further study on the costs related to climate change mitigation and adaptation was presented in August 2007 by the secretariat of the UN Framework Convention on Climate Change (UNFCCC). The report concludes that dealing with climate change will require significant changes in global investment patterns, including investment flows to the developing world of up to 1.7% of global GDP by 2030 (EurActiv 06/09/07).

Problems and challenges:

The problems of calculating costs and benefits of climate-change policies have to do with the fact that one is dealing with lots of complexities and uncertainties  (such as how can potential freak weather be predicted and what therefore would be the long-term costs or benefits of preventing it?). 

Another (more technical) issue in the debate is the value placed on the welfare of future generations relative to the present. This is called the "social discount rate". In the Stern Review, the authors have started from a near-zero discount rate (0.1% per year) arguing from an ethical point of view for intergenerational neutrality.

Although political leaders have embraced the Stern Review, some of the world's leading economists have questioned it, even if they agree with the need to tackle climate change.

One of the most critical responses to the Stern Review has come from environmental economist Richard Tol (Hamburg and Carnegie Mellon University). 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 has slightly watered down this statement admitting that is is positive that the Stern Review had "put the economics of climate change on the public agenda", and that 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 has also attacked Stern's conclusions, saying that the Review should be viewed "as a political document", lacking serious peer review. His main criticism is that the report uses an extremely low social discount rate. "This magnifies enormously impacts in the distant future and rationalizes deep cuts in emissions, and indeed in all consumption, today," Nordhaus writes. 

The European Environment Agency (EEA) has conducted a detailed study of