View source for Economic analysis of climate change

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[[File:Kotz 2024 aggregate impacts map.png|thumb|upright=1.35|Estimated median income loss (red) or gain (blue) per person by 2050 due to climate change, compared to a [[Climate change scenario|scenario]] with no climate impacts.<ref name="Kotz2024">{{Cite journal |last1=Kotz |first1=Mazimilian. |last2=Levermann |first2=Anders |last3=Wenz |first3=Leonie |date=2024-04-17 |title=The economic commitment of climate change |journal=Nature |language=en |volume=628 |issue=8008 |pages=551–557 |doi=10.1038/s41586-024-07219-0 |pmid=38632481 |pmc=11023931|bibcode=2024Natur.628..551K }}</ref>]]
An '''economic analysis of climate change''' uses economic tools and models to calculate the magnitude and distribution of damages [[Effects of climate change|caused by climate change]]. It can also give guidance for the best policies for [[Climate change mitigation|mitigation]] and [[Climate change adaptation|adaptation to climate change]] from an economic perspective. There are many economic models and frameworks. For example, in a [[cost–benefit analysis]], the trade offs between climate change impacts, adaptation, and mitigation are made explicit. For this kind of analysis, [[Integrated assessment modelling|integrated assessment models]] (IAMs) are useful. Those models link main features of society and economy with the biosphere and atmosphere into one modelling framework.<ref>{{Cite book |last1=Wang |first1=Zheng |title=Integrated Assessment Models of Climate Change Economics |last2=Wu |first2=Jing |last3=Liu |first3=Changxin |last4=Gu |first4=Gaoxiang |date=2017 |publisher=Springer Singapore |isbn=9789811039430 |location=Singapore |doi=10.1007/978-981-10-3945-4}}</ref> The total economic impacts from climate change are difficult to estimate. In general, they increase the more the [[Instrumental temperature record|global surface temperature increases]] (see [[Climate change scenario|climate change scenarios]]).<ref name=":0">{{Cite book |author=IPCC |author-link=IPCC |title={{Harvnb|IPCC AR5 WG2 A|2014}} |year=2014 |page=12 |chapter=Summary for Policymakers |ref={{harvid|IPCC AR5 WG2 Summary for Policymakers|2014}} |access-date=15 February 2020 |chapter-url=https://archive.ipcc.ch/pdf/assessment-report/ar5/wg2/ar5_wgII_spm_en.pdf |archive-url=https://web.archive.org/web/20191219013825/https://archive.ipcc.ch/pdf/assessment-report/ar5/wg2/ar5_wgII_spm_en.pdf |archive-date=19 December 2019 |url-status=live}}</ref>

Many effects of climate change are linked to market transactions and therefore directly affect [[Econometrics|metrics]] like [[Gross domestic product|GDP]] or [[inflation]].<ref name="smith" />{{rp|936–941}} However, there are also non-market impacts which are harder to translate into economic costs. These include the [[Effects of climate change on human health|impacts of climate change on human health]], [[Effects of climate change on biomes|biomes]] and [[Ecosystem service|ecosystem services]]. Economic analysis of climate change is challenging as [[climate change]] is a long-term problem. Furthermore, there is still a lot of uncertainty about the exact impacts of climate change and the associated damages to be expected. Future [[Politics of climate change|policy responses]] and [[socioeconomic development]] are also uncertain.<ref>{{cite journal |last1=Cardenas |first1=IC |title=Mitigation of climate change. Risk and uncertainty research gaps in the specification of mitigation actions |journal=Environmental Science & Policy |date=2024 |volume=162 |issue=December 2024 |page=103912 |doi=10.1016/j.envsci.2024.103912 |doi-access=free }}{{Creative Commons text attribution notice|cc=by4|from this source=yes}}</ref>

Economic analysis also looks at the [[economics of climate change mitigation]] and the [[Climate finance#Adaptation costs and adaptation financing needs|cost of climate adaptation]]. Mitigation costs will vary according to how and when emissions are cut. Early, well-planned action will minimize the costs.<ref name="stern">Stern, N. (2006). ''Stern Review on the Economics of Climate Change: Part III: The Economics of Stabilisation.'' HM Treasury, London: http://hm-treasury.gov.uk/sternreview_index.htm</ref> Globally, the benefits and co-benefits of keeping warming under 2&nbsp;°C exceed the costs.<ref name="Sampedro-2020">{{Cite journal |last1=Sampedro |first1=Jon |last2=Smith |first2=Steven J. |last3=Arto |first3=Iñaki |last4=González-Eguino |first4=Mikel |last5=Markandya |first5=Anil |last6=Mulvaney |first6=Kathleen M. |last7=Pizarro-Irizar |first7=Cristina |last8=Van Dingenen |first8=Rita |date=2020 |title=Health co-benefits and mitigation costs as per the Paris Agreement under different technological pathways for energy supply |journal=Environment International |language=en |volume=136 |pages=105513 |bibcode=2020EnInt.13605513S |doi=10.1016/j.envint.2020.105513 |pmid=32006762 |s2cid=211004787 |doi-access=free |hdl-access=free |hdl=10810/44202}}</ref> Cost estimates for mitigation for specific regions depend on the quantity of emissions allowed for that region in future, as well as the timing of interventions.<ref>IPCC, 2007: [https://web.archive.org/web/20181017035910/http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4_wg3_full_report.pdf Technical Summary] - [http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_wg3_report_mitigation_of_climate_change.htm Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change] {{Webarchive|url=https://web.archive.org/web/20091211015940/http://www.ipcc.ch/publications_and_data/publications_ipcc_fourth_assessment_report_wg3_report_mitigation_of_climate_change.htm|date=2009-12-11}} [B. Metz, O.R. Davidson, P.R. Bosch, R. Dave, L.A. Meyer (eds)], Cambridge University Press, Cambridge, United Kingdom and New York, NY, United States., XXX pp.</ref>{{rp|90}} Economists estimate the incremental cost of climate change mitigation at less than 1% of [[Gross domestic product|GDP]].<ref>{{Cite news |title=The energy transition will be much cheaper than you think |url=https://www.economist.com/interactive/briefing/2024/11/14/the-energy-transition-will-be-much-cheaper-than-you-think |access-date=2024-12-27 |newspaper=The Economist |issn=0013-0613 |quote=The incremental bill to cut emissions is likely to be less than $1trn a year, which is to say less than one percent of global GDP.}}</ref> The costs of planning, preparing for, facilitating and implementing [[Climate change adaptation|adaptation]] are also difficult to estimate, depending on different factors. Across all developing countries, they have been estimated to be about USD 215 billion per year up to 2030, and are expected to be higher in the following years.<ref>United Nations Environment Programme (2023). [https://www.unep.org/resources/adaptation-gap-report-2023 Adaptation Gap Report 2023: Underfinanced.Underprepared. Inadequate investment and planning on climate adaptation leaves world exposed]. Nairobi. {{doi|10.59117/20.500.11822/43796}}</ref>{{rp |35-36}}{{TOC limit|3}}

== Purposes ==
Economic analysis of climate change is an umbrella term for a range of investigations into the economic costs around the [[effects of climate change]], and for preventing or softening those effects. These investigations can serve any of the following purposes:<ref name=":022">O'Neill, B., M. van Aalst, Z. Zaiton Ibrahim, L. Berrang Ford, S. Bhadwal, H. Buhaug, D. Diaz, K. Frieler, M. Garschagen, A. Magnan, G. Midgley, A. Mirzabaev, A. Thomas, and R.Warren, 2022: [https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_Chapter16.pdf Chapter 16: Key Risks Across Sectors and Regions]. In: [https://www.ipcc.ch/report/ar6/wg2/ Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change] [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 2411–2538, {{doi|10.1017/9781009325844.025}}</ref>{{rp|2495}}

* estimating the potential global aggregate economic costs of climate change (i.e. global climate damages)
* estimating sectoral or regional economic costs of climate change (e.g. costs to agriculture sector or energy services)
* estimating economic costs of facilitating and implementing climate change mitigation and adaptation strategies (varying with the objectives and the levels of action required); see also [[economics of climate change mitigation]].
* monetising the projected impacts to society per additional metric tonne of carbon emissions ([[social cost of carbon]])
* informing decisions about global climate management strategy (through UN institutions) or policy decisions in some countries

The economic impacts of climate change also include any mitigation (for example, limiting the global average temperature below 2&nbsp;°C) or adaption (for example, building flood defences) employed by nations or groups of nations, which might infer economic consequences.<ref name=":0a">{{Cite report |title=Global Climate Change Governance: The search for effectiveness and universality |last=Luomi |first=Mari |date=2020 |publisher=International Institute for Sustainable Development (IISD) |jstor=resrep29269}}</ref><ref name="Eryn2">{{cite journal |last1=Brown |first1=Eryn |date=30 September 2021 |title=Now is the time to prepare for the economic shocks of battling climate change |url=https://knowablemagazine.org/article/food-environment/2021/cost-of-climate-change |journal=Knowable Magazine |doi=10.1146/knowable-093021-1 |access-date=21 January 2022 |doi-access=free}}</ref><ref name="Rezai2">{{cite journal |last1=van der Ploeg |first1=Frederick |last2=Rezai |first2=Armon |date=6 October 2020 |title=Stranded Assets in the Transition to a Carbon-Free Economy |journal=Annual Review of Resource Economics |volume=12 |issue=1 |pages=281–298 |doi=10.1146/annurev-resource-110519-040938 |issn=1941-1340 |doi-access=free |hdl-access=free |hdl=10419/215027}}</ref> They also take into account that some regions or sectors benefit from low levels of warming, for example through lower energy demand or agricultural advantages in some markets.<ref name=":022" />{{rp|2496}}<ref name=":3">IPCC, 2022: [https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_SummaryForPolicymakers.pdf Summary for Policymakers] [H.-O. Pörtner, D.C. Roberts, E.S. Poloczanska, K. Mintenbeck, M. Tignor, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem (eds.)]. In: [https://www.ipcc.ch/report/sixth-assessment-report-working-group-ii/ Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change] [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 3–33, {{doi|10.1017/9781009325844.001}}</ref>{{rp|11}}

There are wider policy (and policy coherence) considerations of interest. For example, in some areas, policies designed to [[Climate change mitigation|mitigate climate change]] may contribute positively towards other [[sustainable development]] objectives, such as abolishing [[fossil fuel subsidies]] which would reduce [[air pollution]] and thus save lives.<ref name="parry sustainability">
{{citation |title=Climate Change 2007: Impacts, Adaptation and Vulnerability |chapter=TS.5.4 Perspectives on climate change and sustainability. In (book chapter) Technical summary |chapter-url=https://archive.ipcc.ch/publications_and_data/ar4/wg2/en/tssts-5-4.html |display-authors=etal |author-last1=Parry |author-first1=M. L.}}, in {{harvnb|IPCC AR4 WG2|2007}}
</ref><ref name="sathaye mitigation and development">
{{citation |title=Climate Change 2007: Mitigation of Climate Change |chapter=12.3 Implications of mitigation choices for sustainable development goals. In (book chapter) 12. Sustainable Development and mitigation |chapter-url=https://archive.ipcc.ch/publications_and_data/ar4/wg3/en/ch12s12-3.html |display-authors=etal |author-last1=Sathaye |author-first1=J.|series=Journal of Environmental Quality |date=2009 |volume=38 |issue=2 |page=837 |doi=10.2134/jeq2008.0024br |bibcode=2009JEnvQ..38..837V |url=https://oceanrep.geomar.de/id/eprint/57739/1/IPCC_AR6_WGIII_FinalDraft_FullReport.pdf }}, in {{harvnb|IPCC AR4 WG3|2007}}
</ref><ref name="Shindell_et_al_2018">{{cite journal |author1=Shindell D |author2=Faluvegi G |author3=Seltzer K |author4=Shindell C |year=2018 |title=Quantified, Localized Health Benefits of Accelerated Carbon Dioxide Emissions Reductions. |journal=Nat Clim Change |volume=8 |issue=4 |pages=291–295 |bibcode=2018NatCC...8..291S |doi=10.1038/s41558-018-0108-y |pmc=5880221 |pmid=29623109}}</ref> Direct global fossil fuel subsidies reached $319&nbsp;billion in 2017, and $5.2&nbsp;trillion when indirect costs such as air pollution are priced in.<ref name="pmid31733928">{{cite journal |author1=Watts N |author2=Amann M |author3=Arnell N |author4=Ayeb-Karlsson S |author5=Belesova K |author6=Boykoff M |display-authors=etal |year=2019 |title=The 2019 report of The Lancet Countdown on health and climate change: ensuring that the health of a child born today is not defined by a changing climate. |journal=Lancet |volume=394 |issue=10211 |pages=1836–1878 |doi=10.1016/S0140-6736(19)32596-6 |pmc= 7616843|pmid=31733928 |s2cid=207976337|hdl=10871/40583 |hdl-access=free }}</ref> In other areas, the cost of climate change mitigation may divert [[resource]]s away from other socially and environmentally beneficial [[investment]]s (the [[opportunity cost]]s of climate change policy).<ref name="parry sustainability" /><ref name="sathaye mitigation and development" />

== Types of economic models ==
Various economic tools are employed to understand the economic aspects around impacts of climate change, [[Economics of climate change mitigation|climate change mitigation]] and [[Climate change adaptation|adaptation]]. Several sets of tools or approaches exist. [[Econometric model]]s (statistical models) are used to integrate the broad impacts of climate change with other economic drivers, to quantify the economic costs and assess the value of climate-related policies, often for a specific sector or region. [[Computable general equilibrium|Structural economic models]] look at market and non-market impacts affecting the whole economy through its inputs and outputs. [[Integrated assessment modelling|Process models]] simulate physical, chemical and biological processes under climate change, and the economic effects.<ref name=":022" />{{rp|2495}}

=== Process-based models ===
{{Excerpt|Integrated assessment modelling|Process-based models}}

=== Structural models ===

==== Computable general equilibrium models ====
{{Excerpt|Computable general equilibrium|paragraphs=1,2}}

==== Aggregate cost-benefit models ====
{{See also|Integrated assessment modelling#Aggregate cost-benefit models}}
[[Integrated assessment modelling|Integrated assessment models]] (IAMs) are also used make aggregate estimates of the costs of climate change. These (cost-benefit) models balance the economic implications of mitigation and climate damages to identify the pathway of emissions reductions that will maximize total economic welfare.<ref name=":4">Clarke L., K. Jiang, K. Akimoto, M. Babiker, G. Blanford, K. Fisher-Vanden, J.-C. Hourcade, V. Krey, E. Kriegler, A. Löschel, D. McCollum, S. Paltsev, S. Rose, P.R. Shukla, M. Tavoni, B.C.C. van der Zwaan, and D.P. van Vuuren, 2014: [https://www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_chapter6.pdf Assessing Transformation Pathways.] In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.</ref> In other words, the trade-offs between climate change impacts, adaptation, and mitigation are made explicit. The costs of each policy and the outcomes modelled are converted into monetary estimates.

The models incorporate aspects of the natural, social, and economic sciences in a highly aggregated way. Compared to other climate-economy models (including process-based IAMs), they do not have the structural detail necessary to model interactions with energy systems, land-use etc. and their economic implications.<ref name=":4" />

=== Statistical (econometric) methods ===
{{See also|Econometric model}}
A more recent modelling approach uses empirical, statistical methods to investigate how the economy is affected by weather variation.<ref name=":022" />{{rp|2495}}<ref name=":2">Dell, M., Jones, B. F., & Olken, B. A. (2014). [[doi:10.1257/jel.52.3.740|What do we learn from the weather? The new climate-economy literature.]] ''Journal of Economic literature'', ''52''(3), 740-798.</ref>{{rp|755}} This approach can causatively identify effects of temperature, rainfall and other climate variables on agriculture, energy demand, industry and other economic activity. [[Panel analysis|Panel data]] are used giving weather variation over time and spatial areas, eg. ground station observations or (interpolated) gridded data. These are typically aggregated for economic analysis eg. to investigate effects on national economies.<ref name=":2" /> These studies examine temperature and rainfall, and events such as droughts and windstorms. They show that for example, hot years are linked to lower income growth in poor countries, and low rainfall is linked to reduced incomes in Africa.<ref name=":2" />{{rp|755}} Other econometric studies show that there are negative impacts of hotter temperatures on agricultural output, and on labour productivity in factories, call centres and in outdoor industries such as mining and forestry. The analyses are used to estimate the costs of climate change in the future.

== Analytical frameworks ==

=== Cost–benefit analysis ===
{{See also|Integrated assessment modelling#Aggregate cost-benefit models}}
Standard [[cost–benefit analysis]] (CBA) has been applied to the problem of climate change. In a CBA framework, the negative and positive impacts associated with a given action are converted into monetary estimates.<ref name=":72">IPCC, 2022: [https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_Annex-II.pdf Annex II: Glossary] [Möller, V., R. van Diemen, J.B.R. Matthews, C. Méndez, S. Semenov, J.S. Fuglestvedt, A. Reisinger (eds.)]. In: [https://www.ipcc.ch/report/sixth-assessment-report-working-group-ii/ Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change] [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 2897–2930, {{doi|10.1017/9781009325844.029}}</ref> This is also referred to as a monetized cost–benefit framework. Various types of model can provide information for CBA, including energy-economy-environment models ([[Integrated assessment modelling#Process models|process models]]) that study energy systems and their transitions. Some of these models may include a physical model of the climate. [[Computable general equilibrium|Computable General Equilibrium]] (CGE) structural models investigate effects of policies (including climate policies) on economic growth, trade, employment, and public revenues. However, most CBA analyses are produced using [[Integrated assessment modelling#Aggregate cost-benefit models|aggregate integrated assessment models]]. These aggregate-type IAMs are particularly designed for doing CBA of climate change.<ref>Clarke L., K. Jiang, K. Akimoto, M. Babiker, G. Blanford, K. Fisher-Vanden, J.-C. Hourcade, V. Krey, E. Kriegler, A. Löschel, D. McCollum, S. Paltsev, S. Rose, P.R. Shukla, M. Tavoni, B.C.C. van der Zwaan, and D.P. van Vuuren, 2014: [https://www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_chapter6.pdf Assessing Transformation Pathways]. In: [https://www.ipcc.ch/report/ar5/wg3/ Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change] [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.</ref>{{rp|428}}<ref name=":5">Kolstad C., K. Urama, J. Broome, A. Bruvoll, M. Cariño Olvera, D. Fullerton, C. Gollier, W.M. Hanemann, R. Hassan, F. Jotzo, M.R. Khan, L. Meyer, and L. Mundaca, 2014: [https://www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_chapter3.pdfhttps://www.ipcc.ch/site/assets/uploads/2018/02/ipcc_wg3_ar5_chapter3.pdf Social, Economic and Ethical Concepts and Methods]. In: [https://www.ipcc.ch/report/ar5/wg3/ Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change] [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA</ref>{{rp|238–239}}

The CBA framework requires (1) the valuation of costs and benefits using [[willingness to pay]] (WTP) or willingness to accept (WTA) compensation<ref name="pearce monetized cba">
{{citation |author-last1=Pearce |author-first1=D. W. |title={{harvnb|IPCC SAR WG3|1996|pp=184–185}} |chapter=6.1.2 The nature of damage assessment. In (book chapter) 6. The Social Costs of Climate Change: Greenhouse Damage and the Benefits of Control |display-authors=etal}}
</ref><ref name="Markandya" /><ref>
{{citation |title={{harvnb|IPCC TAR WG2|2001}} |chapter=2.5.3 Nonmarket impacts. In (book chapter) 2. Methods and Tools |display-authors=etal |author-last1=Ahmad |author-first1=Q. K.}}
</ref><ref name="ahmad cost benefit analysis">
{{citation |title={{harvnb|IPCC TAR WG2|2001}} |chapter=2.7.2.2 Cost-Benefit Analysis. In (book chapter) 2. Methods and Tools |display-authors=etal |author-last1=Ahmad |author-first1=Q. K.}}
</ref> as a measure of value,<ref name="goldemberg standard cba">
{{citation |author-last1=Goldemberg |author-first1=J. |title={{harvnb|IPCC SAR WG3|1996|p=24}} |chapter=1.3 Contribution of Economics. In (book chapter) 1. Introduction: scope of the Assessment |display-authors=etal}}
</ref> and (2) a criterion for accepting or rejecting proposals:<ref name="goldemberg standard cba" />

For (1), in CBA where WTP/WTA is used, climate change impacts are aggregated into a monetary value,<ref name="pearce monetized cba" /> with environmental impacts converted into [[consumption (economics)|consumption]] equivalents,<ref name="arrow consumption and certainty equivalents">
{{citation |title={{harvnb|IPCC SAR WG3|1996|pp=130–131}} |chapter=4.1.1 Areas of agreement and disagreement. In (book chapter) 4. Intertemporal Equity, Discounting, and Economic Efficiency |display-authors=etal |author-last1=Arrow |author-first1=K. J.}}
</ref> and risk accounted for using [[certainty equivalent]]s.<ref name="arrow consumption and certainty equivalents" /><ref>
{{citation |title={{harvnb|IPCC TAR WG2|2001}} |chapter=2.5.4.1. Insurance and the Cost of Uncertainty. In (book chapter) 2. Methods and Tools |display-authors=etal |author-last1=Ahmad |author-first1=Q. K.}}
</ref> Values over time are then discounted to produce their equivalent [[present value]]s.<ref>
{{citation |title={{harvnb|IPCC TAR WG2|2001}} |chapter=2.5.1.3 Discounting the future. In (book chapter) 2. Methods and Tools |display-authors=etal |author-last1=Ahmad |author-first1=Q. K.}}
</ref> The valuation of costs and benefits of climate change can be controversial<ref name="smith">{{cite book |author-last1=Smith |author-first1=J. B. |url=https://www.ipcc.ch/site/assets/uploads/2018/03/WGII_TAR_full_report-2.pdf |title=Climate Change 2001: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Third Assessment Report of the Intergovernmental Panel on Climate Change |date=2001 |publisher=Cambridge University Press |editor-last1=McCarthy |editor-first1=J. J. |location=Cambridge, UK, and New York, N.Y. |pages=913–970 |chapter=19. Vulnerability to Climate Change and Reasons for Concern: A Synthesis |display-authors=etal |access-date=2022-01-19 |display-editors=etal |chapter-url=https://www.ipcc.ch/site/assets/uploads/2018/03/wg2TARchap19.pdf}}</ref>{{rp|936–938}} because some climate change impacts are difficult to assign a value to, e.g., ecosystems and human health.<ref name="decanio iam limitations">{{cite journal |last1=Ackerman |first1=Frank |last2=DeCanio |first2=Stephen J. |last3=Howarth |first3=Richard B. |last4=Sheeran |first4=Kristen |date=August 2009 |title=Limitations of integrated assessment models of climate change |url=https://link.springer.com/content/pdf/10.1007/s10584-009-9570-x.pdf |journal=Climatic Change |volume=95 |issue=3–4 |pages=297–315 |bibcode=2009ClCh...95..297A |doi=10.1007/s10584-009-9570-x |s2cid=14011838 |access-date=21 January 2022}}</ref><ref name="Spash">{{cite journal |year=2008 |title=The economics of avoiding action on climate change |url=https://www.clivespash.org/wp-content/uploads/2015/04/2008_Spash_Adbusters_finalcopy.pdf |journal=Adbusters #75 |volume=16 |issue=1 |pages=4–5 |access-date=21 January 2022 |author-last1=Spash |author-first1=C. L.}}</ref> 

For (2), the standard criterion is the [[Kaldor–Hicks efficiency|Kaldor–Hicks]]<ref name="de canio 2007 climate change">{{citation |author=DeCanio, S. J. |title=Reflections on Climate Change, Economic Development, and Global Equity : Presented at the 2007 Leontief Prize Ceremony Tufts University Global Development and Environment Institute October 17, 2007 |date=17 October 2007 |website=www.academia.edu |url=https://www.academia.edu/19420793}}</ref>{{Rp|3}} [[compensation principle]].<ref name="goldemberg standard cba" /> According to the compensation principle, so long as those benefiting from a particular project compensate the losers, and there is still something left over, then the result is an unambiguous gain in welfare.<ref name="goldemberg standard cba" /> If there are no mechanisms allowing compensation to be paid, then it is necessary to assign weights to particular individuals.<ref name="goldemberg standard cba" /> One of the mechanisms for compensation is impossible for this problem: mitigation might benefit future generations at the expense of current generations, but there is no way that future generations can compensate current generations for the costs of mitigation.<ref name="de canio 2007 climate change" />{{Rp|4}} On the other hand, should future generations bear most of the costs of climate change, compensation to them would not be possible.<ref name="goldemberg general issues">
{{citation |author-last1=Goldemberg |author-first1=J. |title={{harvnb|IPCC SAR WG3|1996|pp=31–32}} |chapter=1.4.1 General issues. In (book chapter) 1. Introduction: scope of the Assessment |display-authors=etal}}
</ref>

CBA has several strengths: it offers an internally consistent and global comprehensive analysis of impacts.<ref name="smith" />{{rp|955}} Furthermore, sensitivity analysis allows critical assumptions in CBA analysis to be changed. This can identify areas where the value of information is highest and where additional research might have the highest payoffs.<ref>{{cite book |author-last1=Downing |author-first1=T. E. |url=https://www.ipcc.ch/site/assets/uploads/2018/03/WGII_TAR_full_report-2.pdf |title=Climate Change 2001: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Third Assessment Report of the Intergovernmental Panel on Climate Change |date=2001 |publisher=Cambridge University Press |editor-last1=McCarthy |editor-first1=J. J. |location=Cambridge, UK, and New York, N.Y. |pages=105–144 |chapter=2. Methods and Tools |display-authors=etal |access-date=2022-01-19 |display-editors=etal |chapter-url=https://www.ipcc.ch/site/assets/uploads/2018/03/wg2TARchap2.pdf}}</ref>{{rp|119}} However, there are many uncertainties that affect cost–benefit analysis, for example, sector- and country-specific damage functions.<ref name="toth">{{cite book |author-last1=Toth |author-first1=F. L. |url=https://www.ipcc.ch/site/assets/uploads/2018/03/WGIII_TAR_full_report.pdf |title=Climate Change 2001: Mitigation. Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change |date=2001 |publisher=Cambridge University Press |editor-last1=Metz |editor-first1=B. |location=Cambridge |chapter=10. Decision-making Frameworks |display-authors=etal |access-date=2022-01-20 |editor-last2=Davidson |editor-first2=O |editor-last3=Swart |editor-first3=R. |editor-last4=Pan |editor-first4=J. |display-editors=etal}}</ref>{{rp|654}}

==== Damage functions ====
[[File:Estimates of the Economic Damage of Climate Change.png|thumb|right|200px|This graph shows estimation confidence intervals from a meta-analysis of researchers as well as by the [[Stern Review]] in 2006 (damage costs measured as percent [[Gross domestic product|GDP]]).{{Update inline|date=January 2025}}]]Damage functions play an important role in estimating the costs associated with potential damages caused by climate-related hazards. They quantify the relationship between the intensity of the hazard, other factors such as the vulnerability of the system, and the resulting damages. For example, damage functions have been developed for sea level rise, agricultural productivity, or heat effects on labour productivity.<ref>Roson, R. and M. Sartori, 2016: [[doi:10.21642/JGEA.010202AF|Estimation of climate change damage functions for 140 regions in the GTAP 9 data base]]. J. Glob. Econ. Anal., 1(2), doi:10.21642/JGEA.010202AF</ref> In a CBA framework, damages are monetized to facilitate comparison with the benefits of proposed actions or policies. Sensitivity analysis is conducted to assess the robustness of the results to changes in assumptions and parameters, including those of the damage function.

===Cost-effectiveness analysis===

{{See also|Economics of climate change mitigation#Decision analysis}}

[[Cost-effectiveness analysis|Cost-Effectiveness Analysis]] (CEA) is preferable to CBA when the benefits of impacts, adaptation and mitigation are difficult to estimate in monetary terms. A CEA can be used to compare different policy options for achieving a well-defined goal.<ref name=":5" />{{rp|238}} This goal (i.e. the benefit) is usually expressed as the amount of GHG emissions reduction in the analysis of mitigation measures. For adaptation measures, there is no single common goal or metric for the economic benefits. Adaptation involves responding to different types of risks in different sectors and local contexts. For example, the goal might be the reduction of land area in hectares at risk to sea level rise.<ref name=":6">Watkiss, P. and Hunt, A. (2012). [https://weadapt.org/knowledge-base/adaptation-decision-making/mediation-cost-effectiveness-analysis/ Cost-effectiveness analysis:: Decision Support Methods for Adaptation], MEDIATION Project, Briefing Note 2. Funded by the EC's 7FWP</ref>{{rp|2}}

CEA involves the costing of each option, and providing a cost per unit of effectiveness. For example, cost per tonne of GHG reduced ($/tCO2). This allows the ranking of policy options. This ranking can help decision-maker to understand which are the most cost-effective options, i.e. those that deliver high benefits for low costs. CEA can be used for minimising net costs for achieving pre-defined policy targets, such as meeting an emissions reduction target for a given sector.<ref name=":5" />{{rp|238}}<ref name=":6" />{{rp|2–3}}

CEA, like CBA, is a type of [[decision analysis]] method. Many of these methods work well when different stakeholders work together on a problem to understand and manage risks.<ref name=":112" />{{rp|2543}} For example, by discussing how well certain options might work in the real world. Or by helping in measuring the costs and benefits as part of a CEA.<ref name=":112">New, M., D. Reckien, D. Viner, C. Adler, S.-M. Cheong, C. Conde, A. Constable, E. Coughlan de Perez, A. Lammel, R. Mechler, B. Orlove, and W. Solecki, 2022: [https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_Chapter17.pdf Chapter 17: Decision-Making Options for Managing Risk]. In: [https://www.ipcc.ch/report/ar6/wg2/ Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change] [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 2539–2654, {{doi|10.1017/9781009325844.026}}</ref>{{rp|2566,2576}}

Some authors have focused on a ''disaggregated analysis'' of climate change impacts.<ref>{{cite journal |last1=Stern |first1=Nicholas |date=May 2008 |title=The Economics of Climate Change |journal=American Economic Review |volume=98 |issue=2 |pages=1–37 |doi=10.1257/aer.98.2.1 |issn=0002-8282 |s2cid=59019533 |doi-access=free}}</ref>{{rp|23}}<ref>
{{citation |title=Climate Change 2007: Impacts, Adaptation and Vulnerability |chapter=19.1.1 Purpose, scope and structure of the chapter. In (book chapter) 19: Assessing Key Vulnerabilities and the Risk from Climate Change |chapter-url=https://archive.ipcc.ch/publications_and_data/ar4/wg2/en/ch19s19-1.html |display-authors=etal |author-last=Schneider |author-first=S.H.}}, in {{harvnb|IPCC AR4 WG2|2007|p=782}}
</ref> "Disaggregated" refers to the choice to assess impacts in a variety of indicators or units, e.g., changes in agricultural yields and loss of biodiversity. By contrast, monetized CBA converts all impacts into a common unit (money), which is used to assess changes in [[welfare economics|social welfare]].[[File:2021 Carbon dioxide (CO2) emissions per person versus GDP per person - scatter plot.svg|thumb|Scaling the effect of wealth to the national level: richer [[Developed country|(developed)]] countries emit more {{CO2}} per person than poorer [[Developing country|(developing)]] countries.<ref name="WashPost_20230301">{{cite news |last1=Stevens |first1=Harry |date=1 March 2023 |title=The United States has caused the most global warming. When will China pass it? |newspaper=The Washington Post |url=https://www.washingtonpost.com/climate-environment/interactive/2023/global-warming-carbon-emissions-china-us/ |url-status=live |archive-url=https://web.archive.org/web/20230301130719/https://www.washingtonpost.com/climate-environment/interactive/2023/global-warming-carbon-emissions-china-us/ |archive-date=1 March 2023}}</ref> Emissions are roughly proportional to [[Gross domestic product|GDP]] per person, though the rate of increase diminishes with an average GDP/pp of about $10,000.]]

=== Scenario-based assessments ===
{{Main|Climate change scenario|}}

The long time scales and [[uncertainty]] associated with global warming have led analysts to develop "[[climate change scenario|scenarios]]" of future [[environment (biophysical)|environmental]], [[social change|social]] and [[economic development|economic]] changes.<ref name="webster 2002 types of emissions projections">{{citation |title=Report 95: Uncertainty Analysis of Climate Change and Policy Response |date=December 2002 |url=http://web.mit.edu/globalchange/www/MITJPSPGC_Rpt95.pdf |pages=3–4 |access-date=20 January 2022 |location=Cambridge MA, USA |publisher=Massachusetts Institute of Technology (MIT) Joint Program on the Science and Policy of Global Change, Joint Program Report Series |display-authors=etal |author-last1=Webster |author-first1=M.}}</ref> These scenarios can help governments understand the potential consequences of their decisions.

The projected temperature in climate change scenarios is subject to scientific uncertainty (e.g., the relationship between concentrations of GHGs and global mean temperature, which is called the [[climate sensitivity]]). Projections of future atmospheric concentrations based on emission pathways are also affected by scientific uncertainties, e.g., over how carbon sinks, such as forests, will be affected by future climate change.

One of the economic aspects of climate change is producing scenarios of future [[economic development]]. Future economic developments can, for example, affect how [[climate change, industry and society#Vulnerability|vulnerable]] society is to future climate change,<ref>
{{citation |title=Climate Change 2007: Impacts, Adaptation and Vulnerability |chapter=7.4 Key future impacts and vulnerabilities. In (book chapter) 7. Industry, Settlement and Society |chapter-url=https://archive.ipcc.ch/publications_and_data/ar4/wg2/en/ch7s7-4.html |display-authors=etal |author-last1=Wilbanks |author-first1=T. J.}}, in {{harvnb|IPCC AR4 WG2|2007}}
</ref>  what the future [[effects of global warming|impacts of climate change]] might be, as well as the level of future GHG emissions.<ref>
{{cite book |author-last1=Fisher |author-first1=B. S. |url=https://www.ipcc.ch/site/assets/uploads/2018/03/ar4_wg3_full_report-1.pdf |title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change |publisher=Cambridge University Press |year=2007 |isbn=978-0-521-88011-4 |editor-last1=Metz |editor-first1=B. |location=Cambridge, UK, and New York, N.Y. |chapter=3.1.4 Economic growth and convergence. In (book chapter) 3. Issues related to mitigation in the long term context |display-authors=etal |access-date=2022-01-19 |display-editors=etal |chapter-url=https://archive.ipcc.ch/publications_and_data/ar4/wg3/en/ch3s3-1-4.html}}</ref>

Scenarios are neither "predictions" nor "forecasts" but are stories of possible futures that provide alternate outcomes relevant to a decision-maker or other user.<ref name=":112"/>{{rp|2576}} These alternatives usually also include a "baseline" or reference scenario for comparison. "Business-as-usual" scenarios have been developed in which there are no additional policies beyond those currently in place, and socio-economic development is consistent with recent trends. This term is now used less frequently than in the past.<ref name=":72"/>

In scenario analysis, scenarios are developed that are based on differing assumptions of future development patterns.<ref name="webster 2002 types of emissions projections" /> An example of this are the [[shared socioeconomic pathways]] produced by the [[Intergovernmental Panel on Climate Change]] (IPCC). These project a wide range of possible future emissions levels.

Scenarios often support sector-specific analysis of the physical effects and economic costs of climate change. Scenarios are used with [[cost–benefit analysis]] or [[cost-effectiveness analysis]] of climate policies.

=== Risk management ===
{{Main|Climate risk}}

Risk management can be used to evaluate policy decisions based a range of criteria or viewpoints, and is not restricted to the results of particular type of analysis, e.g., monetized CBA.<ref>{{cite book |author=National Research Council |url=https://www.nap.edu/read/12781/ |title=America's climate choices |date=2011 |publisher=National Academies Press |isbn=978-0-309-14585-5 |location=Washington, D.C. |chapter=Chapter Four: A Framework for Making America's Climate Choices |chapter-url=http://www.nap.edu/openbook.php?record_id=12781&page=42}}</ref>{{rp|42}} Another approach is that of [[uncertainty analysis]],<ref name="webster 2002 types of emissions projections" /> where analysts attempt to estimate the probability of future changes in emission levels.

In a cost–benefit analysis, an acceptable [[risk]] means that the benefits of a climate policy outweigh the costs of the policy.<ref name="halsnaes measuring costs and benefits">
{{citation |author-last1=Halsnæs |author-first1=K. |title={{harvnb|IPCC AR4 WG3|2007}} |chapter=2.3.3 Costs, benefits and uncertainties. In (book chapter) 2. Framing issues |chapter-url=https://archive.ipcc.ch/publications_and_data/ar4/wg3/en/ch2s2-3-3.html |display-authors=etal}}
</ref> The standard rule used by public and private decision makers is that a risk will be acceptable if the expected [[net (economics)|net]] [[present value]] is positive.<ref name="halsnaes measuring costs and benefits" /> The expected value is the mean of the distribution of expected outcomes.<ref name="goldemberg">
{{citation |title={{harvnb|IPCC SAR WG3|1996}} |chapter=1. Introduction: scope of the Assessment |display-authors=etal |author-last1=Goldemberg |author-first1=J.}}
</ref>{{Rp|25}} In other words, it is the average expected outcome for a particular decision. This criterion has been justified on the basis that:
* a policy's benefits and costs have known [[probability|probabilities]]<ref name="halsnaes measuring costs and benefits" />
* [[economic agent]]s (people and organizations) can diversify their own risk through [[insurance]] and other markets.<ref name="halsnaes measuring costs and benefits" />

On the second point, it has been suggested that insurance could be bought against climate change risks.<ref name="halsnaes measuring costs and benefits" />
Policymakers and investors are beginning to recognize the implications of climate change for the financial sector, from both physical risks (damage to property, infrastructure, and land) and transition risk due to changes in policy, technology, and consumer and market behavior. Financial institutions are becoming increasingly aware of the need to incorporate the economics of low carbon emissions into business models.<ref name="Grippa">{{cite journal |last1=Grippa |first1=Pierpaolo |last2=Schmittmann |first2=Jochen |last3=Suntheim |first3=Felix |date=2019 |title=Climate Change and Financial Risk Central banks and financial regulators are starting to factor in climate change |url=https://www.imf.org/external/pubs/ft/fandd/2019/12/climate-change-central-banks-and-financial-risk-grippa.htm |journal=Finance & Development |volume=56 |issue=4 |access-date=21 January 2022}}</ref>

In the scientific literature, there is sometimes a focus on "best estimate" or "likely" values of [[climate sensitivity]].<ref>
{{Citation |author=IPCC |title=Climate Change 2007: Synthesis Report |url=http://www.ipcc.ch/publications_and_data/ar4/syr/en/contents.html |page=8 |year=2007 |editor=Core Writing Team |access-date=2022-01-20 |series=Contribution of Working Groups I, II and III to the [[IPCC Fourth Assessment Report|Fourth Assessment Report]] of the Intergovernmental Panel on Climate Change |chapter=Table SPM.1. In (book chapter) Summary for Policymakers |chapter-url=https://www.ipcc.ch/site/assets/uploads/2018/02/ar4_syr_spm.pdf |location=Geneva, Switzerland |publisher=IPCC |isbn=978-92-9169-122-7 |editor2=Pachauri, R.K |editor3=Reisinger, A.}}</ref>  However, from a [[risk management]] perspective, values outside of "likely" ranges are relevant, because, though these values are less probable, they could be associated with more severe climate impacts<ref name="schneider climate sensitivity">
{{citation |title=Climate Change 2007: Impacts, Adaptation and Vulnerability |chapter=19.4.2.2 Scenario analysis and analysis of stabilisation targets. In (book chapter) 19. Assessing Key Vulnerabilities and the Risk from Climate Change |chapter-url=https://archive.ipcc.ch/publications_and_data/ar4/wg2/en/ch19s19-4-2-2.html |display-authors=etal |author-last1=Schneider |author-first1=S. H.}}, in {{harvnb|IPCC AR4 WG2|2007|p=801}}
</ref> (the statistical definition of [[risk]] = probability of an impact × magnitude of the impact).<ref name="Yohe">{{cite book |author-last=Yohe |author-first=G.W. |url=https://www.c2es.org/wp-content/uploads/2010/05/workshop-proceedings-assessing-benefits-avoided-climate-change.pdf |title=Assessing the Benefits of Avoided Climate Change: Cost-Benefit Analysis and Beyond. Proceedings of Workshop on Assessing the Benefits of Avoided Climate Change, March 16–17, 2009 |date=May 2010 |publisher=Pew Center on Global Climate Change |editor-last1=Gulledge |editor-first1=J. |location=Arlington, Virginia, USA |chapter=Addressing Climate Change through a Risk Management Lens |access-date=18 January 2022 |editor-last2=Richardson |editor-first2=L. J. |editor-last3=Adkins |editor-first3=L. |editor-last4=Seidel |editor-first4=S.}}</ref>{{rp|208}}

Analysts have also looked at how uncertainty over climate sensitivity affects economic estimates of climate change impacts.<ref name="Nordhaus2018">{{cite journal |last1=Nordhaus |first1=William |date=August 2018 |title=Projections and Uncertainties about Climate Change in an Era of Minimal Climate Policies |journal=American Economic Journal: Economic Policy |language=en |volume=10 |issue=3 |pages=333–360 |doi=10.1257/pol.20170046 |issn=1945-7731 |s2cid=158112579 |doi-access=free }}</ref>  Policy guidance from [[cost-benefit analysis]] (CBA) can be extremely divergent depending on the assumptions employed.<ref name="Ekholm">{{cite journal |last1=Ekholm |first1=Tommi |date=December 2018 |title=Climatic Cost-benefit Analysis Under Uncertainty and Learning on Climate Sensitivity and Damages |url=https://www.researchgate.net/publication/327701655 |journal=Ecological Economics |volume=154 |pages=99–106 |doi=10.1016/j.ecolecon.2018.07.024 |bibcode=2018EcoEc.154...99E |s2cid=158212518 |access-date=21 January 2022}}</ref>  Hassler ''et al'' use [[integrated assessment modeling]] to examine a range of estimates and what happens at  extremes.<ref name="Hassler">{{cite book |last1=Hassler |first1=John |url=http://hdl.handle.net/10419/215447 |title=The consequences of uncertainty: Climate sensitivity and economic sensitivity to the climate |last2=Krusell |first2=Per |last3=Olovsson |first3=Conny |date=2019 |publisher=Sveriges Riksbank |series=Sveriges Riksbank Working Paper Series, No. 369 |hdl=10419/215447 |access-date=21 January 2022}}</ref>

==== Iterative risk management ====
Two related ways of thinking about the problem of climate change decision-making in the presence of uncertainty are iterative risk management<ref>
{{citation
|author-last1=Fisher |author-first1= B. S. |display-authors=etal |chapter=3.5.1.1 An iterative risk-management framework to articulate options. In (book chapter) 3: Issues related to mitigation in the long-term context
|chapter-url= https://archive.ipcc.ch/publications_and_data/ar4/wg3/en/ch3s3-5-1-1.html
| title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change  
|date= 10 September 2007 | editor-last1=Metz |editor-first1=B. |display-editors=etal
| publisher=Cambridge University Press  |location=Cambridge, UK, and New York, N.Y.  | isbn=978-0-521-88011-4 
| url=https://www.ipcc.ch/site/assets/uploads/2018/03/ar4_wg3_full_report-1.pdf  | access-date=2022-01-19
}}</ref><ref name="Yohe" />
and sequential [[decision making]].<ref name="toth decision uncertainty">
{{citation
 | author-last1=Toth |author-first1= F. L .|display-authors=etal
 | chapter= 10.1.4.1 Decision Making under Uncertainty. In (book chapter) 10. Decision-making Frameworks
|title=Climate Change 2001: Mitigation}}. In {{harvnb|IPCC TAR WG3|2001}}</ref>{{rp|612–614}}
Considerations in a risk-based approach might include, for example, the potential for low-probability, worst-case climate change impacts.<ref>
{{cite book
|author-last1=Barker |author-first1= T. |display-authors=etal
|chapter=Article 2 of the Convention and mitigation. In (book chapter) Technical Summary  |pages=619–690 
|chapter-url= https://archive.ipcc.ch/publications_and_data/ar4/wg3/en/tssts-ts-1-3-article-2.html
| title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change  
|date= 10 September 2007 | editor-last1=Metz |editor-first1=B. |display-editors=etal
| publisher=Cambridge University Press  |location=Cambridge, UK, and New York, N.Y.  | isbn=978-0-521-88011-4 
| url=https://www.ipcc.ch/site/assets/uploads/2018/03/ar4_wg3_full_report-1.pdf  | access-date=2022-01-19
}}</ref> One of the responses to the uncertainties of global warming is to adopt a strategy of sequential decision making.<ref name="goldemberg sequential decision making">
{{citation |author-last1=Goldemberg |author-first1=J. |title={{harvnb|IPCC SAR WG3|1996|p=26}} (32 of PDF) |chapter=1.3.2 Sequential decision making. In (book chapter) 1. Introduction: Scope of the assessment |display-authors=etal}}
</ref> Sequential decision making refers to the process in which the decision maker makes consecutive observations of the process before making a final decision.<ref>{{Citation |last=Diederich |first=A. |title=Sequential Decision Making |date=2001-01-01 |pages=13917–13922 |editor-last=Smelser |editor-first=Neil J. |url=https://www.sciencedirect.com/science/article/pii/B0080430767006367 |access-date=2023-04-27 |place=Oxford |publisher=Pergamon |language=en |isbn=978-0-08-043076-8 |editor2-last=Baltes |editor2-first=Paul B. |encyclopedia=International Encyclopedia of the Social & Behavioral Sciences}}</ref> This strategy recognizes that decisions on global warming need to be made with incomplete [[information economics|information]], and that decisions in the near term will have potentially long-term impacts. Governments may use [[risk management]] as part of their policy response to global warming.<ref>{{Cite web |title=Government publishes UK's Third Climate Change Risk Assessment |url=https://www.gov.uk/government/news/government-publishes-uks-third-climate-change-risk-assessment |access-date=2022-01-22 |website=GOV.UK |language=en}}</ref><ref name="Yohe" />{{rp|203}}

An approach based on sequential decision making recognizes that, over time, decisions related to climate change can be revised in the light of improved [[information economics|information]].<ref name="goldemberg sequential decision making" /> This is particularly important with respect to climate change, due to the long-term nature of the problem. A near-term [[Hedge (finance)|hedging]] strategy concerned with reducing future climate impacts might favor stringent, near-term emissions reductions.<ref name="toth decision uncertainty" /> As stated earlier, carbon dioxide accumulates in the atmosphere, and to stabilize the atmospheric concentration of {{co2}}, emissions would need to be drastically reduced from their present level.
Stringent near-term emissions reductions allow for greater future flexibility with regard to a low stabilization target, e.g., 450 [[parts-per notation|parts per million]] (ppm) {{CO2}}. To put it differently, stringent near-term emissions abatement can be seen as having an [[Option time value#Option value|option value]] in allowing for lower, long-term stabilization targets. This option may be lost if near-term emissions abatement is less stringent.<ref>{{citation |author=United Nations Environment Programme (UNEP) |title=The Emissions Gap Report 2012: A UNEP Synthesis Report |date=November 2012 |pages=28–29 |access-date=21 January 2022 |archive-url=http://arquivo.pt/wayback/20160513232928/http://www.unep.org/pdf/2012gapreport.pdf |archive-date=13 May 2016 |url-status=dead |chapter=3.7 Results of later action scenarios. In (book chapter) Chapter 3: The emissions gap – an update |chapter-url=http://www.unep.org/pdf/2012gapreport.pdf |location=Nairobi, Kenya |publisher=UNEP}}. Report [http://www.unep.org/publications/ebooks/emissionsgap2012/ website] {{webarchive|url=http://arquivo.pt/wayback/20160513232948/http://www.unep.org/publications/ebooks/emissionsgap2012/|date=13 May 2016}}, which includes the Appendix, and the Executive Summary in other languages.</ref>

On the other hand, a view may be taken that points to the benefits of improved information over time. This may suggest an approach where near-term emissions abatement is more modest.<ref>
{{citation |author=Defra/HM Treasury |title=Minutes of Evidence, Annex 3 |date=21 June 2005 |url=https://publications.parliament.uk/pa/ld200506/ldselect/ldeconaf/12/5030107.htm}}, in {{harvnb|House of Lords|2005}}, HL 12-II (evidence)
</ref> Another way of viewing the problem is to look at the potential irreversibility of future climate change impacts (e.g., damages to [[effects of climate change on biomes|biomes and ecosystems]]) against the irreversibility of making investments in efforts to reduce emissions.<ref name="goldemberg sequential decision making" />

===Portfolio analysis===

An example of a framework that is based on risk management is portfolio analysis. This approach is based on [[modern portfolio theory|portfolio theory]], originally applied in the areas of finance and investment. It has also been applied to the analysis of climate change.<ref name=":8">Hunt, A, and Watkiss, P (2013). [https://weadapt.org/knowledge-base/adaptation-decision-making/mediation-portfolio-analysis/ Portfolio Analysis: Decision Support Methods for Adaptation, MEDIATION Project, Briefing Note 5.] Funded by the EC's 7FWP</ref><ref name=":10">Hunt, A., & Fraschini, F. (2020). [https://www.euskadi.eus/web01-a2reveko/es/k86aEkonomiazWar/ekonomiaz/abrirArticulo?idpubl=93&registro=7 Portfolio analysis as a means of managing uncertainties in climate change adaptation: Some initial reflections]. ''Ekonomiaz'', ''97''(1), 63-81.</ref> The idea is that a reasonable response to uncertainty is to invest in a wide portfolio of options. More specifically, the aim is to minimise the variance and co-variance of the performance of investments in the portfolio. In the case of [[climate change mitigation]], performance is measured by how much GHG emissions reduction is achieved. On the other hand, [[climate change adaptation]] acts as insurance against the chance that unfavourable impacts occur.<ref>{{Cite journal |last1=Eriksen |first1=Siri |last2=Schipper |first2=E. Lisa F. |last3=Scoville-Simonds |first3=Morgan |last4=Vincent |first4=Katharine |last5=Adam |first5=Hans Nicolai |last6=Brooks |first6=Nick |last7=Harding |first7=Brian |last8=Khatri |first8=Dil |last9=Lenaerts |first9=Lutgart |last10=Liverman |first10=Diana |last11=Mills-Novoa |first11=Megan |date=2021-05-01 |title=Adaptation interventions and their effect on vulnerability in developing countries: Help, hindrance or irrelevance? |journal=World Development |language=en |volume=141 |pages=105383 |doi=10.1016/j.worlddev.2020.105383 |issn=0305-750X |s2cid=233539315 |doi-access=free |hdl-access=free |hdl=10852/85670}}</ref> The performance of adaptation options could either be defined in economic terms, e.g. revenue, or as physical metrics, e.g. the quantity of water conserved.<ref name=":8" />

It is important to compare alternative portfolios of options across different future [[climate change scenario]]s in order to take into account uncertainty in climate impacts, GHG emission trends etc. The options should ideally be diversified to be effective in different scenarios: i.e. some options suited for a no/low climate change scenario, with other options being suited for scenarios with severe climate changes.<ref name=":10" />

=== Investment and financial flows ===
Investment and financial flow (I&FF) studies typically consider how much it might cost to increase the resilience of future investments or financial flows.<ref name=":12">Hunt, A. and Watkiss, P. (2011). [http://www.paulwatkiss.co.uk/newimagesanddocs/AEA%20Method%20Tier%201%20steps%20vs%206.pdf Method for the Adaptation Economic Assessment to accompany the UK Climate Change Risk Assessment (CCRA)], DEFRA, UK</ref> They also investigate the potential sources of investment funds and the types of financing entities or actors. Aggregated studies assess the sensitivity of future investments, estimating the risk from climate change and estimating the additional investment needed to increase resilience. More detailed studies undertake investment and financial flow analysis at a sectoral level to provide detailed costing of the additional marginal costs needed for building resilience.<ref name=":12" />

== Costs of impacts of climate change ==

=== At the global level (aggregate costs) ===
[[File:2020- Climate change's projected damage to GDP growth.svg |thumb |upright=1.35 |Estimates of damage to [[Gross domestic product|GDP]] vary widely, and even this approach to predicting damage does not consider impacts of climate tipping points, climate-driven extreme events, human health impacts, resource or migration-driven conflict, geopolitical tension, nature-driven risks, or sea level rise.<ref name=Actuaries_CCandGDP>{{cite web |last1=Trust |first1=Sandy |last2=Saye |first2=Lucy |last3=Bettis |first3=Oliver |last4=Bedenham |first4=Georgina |last5=Hampshire |first5=Oliver |last6=Lenton |first6=Timothy M. |last7=Abrams |first7=Jesse F |title=Planetary Solvency–finding our balance with nature Global risk management for human prosperity |url=https://actuaries.org.uk/document-library/thought-leadership/thought-leadership-campaigns/climate-papers/planetary-solvency-finding-our-balance-with-nature/ |publisher=Institute and Faculty of Actuaries |pages=12-13 (Figure 2) |archive-url=https://web.archive.org/web/20250117012930/https://actuaries.org.uk/document-library/thought-leadership/thought-leadership-campaigns/climate-papers/planetary-solvency-finding-our-balance-with-nature/ |archive-date=17 January 2025 |date=January 2025 |url-status=live}} ● Trust ''et al.'' cite {{cite journal |last1=Kotz |first1=Maximilian |last2=Levermann |first2=Anders |last3=Wenz |first3=Leonie |title=The economic commitment of climate change |journal=Nature |date=17 April 2024 |volume=628 |issue=8020 |pages=551–557 |doi=10.1038/s41586-024-07732-2|pmid=38914865 |pmc=11236700 }}</ref>]]
[[File:Kotz 2024 global impact divergence.png|thumb|upright=1.35|After 2050, the global impacts of the high-emission scenario on economic output estimated to exceed those of the low-emission scenario at 1% [[statistical significance]]<ref name ="Kotz2024" />]]
[[File:20201211 Billion dollar events related to climate change - U.S. -en.svg|thumb|upright=1.35| There is a growing number of weather-related disasters in the United States costing above one billion dollars<ref name="BillionDollarDisastersNOAA_2023">Annual data: {{cite web |title=Billion-Dollar Weather and Climate Disasters / United States Billion-Dollar Disaster Events 1980- (CPI-Adjusted) |url=https://www.ncei.noaa.gov/access/billions/time-series/US |url-status=live |archive-url=https://web.archive.org/web/20240113044752/https://www.ncei.noaa.gov/access/billions/time-series/US |archive-date=13 January 2024 |publisher=National Centers for Environmental Information (NCEI), part of the National Oceanic and Atmospheric Administration (NOAA)}} Click "Access data".</ref><ref name="NCEI_thru202009">{{cite journal |last1=Smith |first1=Adam B. |author2=NOAA National Centers For Environmental Information |date=December 2020 |title=Billion-Dollar Weather and Climate Disasters: Overview / 2020 in Progress |url=https://www.ncdc.noaa.gov/billions/ |url-status=live |publisher=National Centers for Environmental Information (NCDC, part of NOAA) |doi=10.25921/stkw-7w73 |archive-url=https://web.archive.org/web/20201210044128/https://www.ncdc.noaa.gov/billions/ |archive-date=10 December 2020 |access-date=11 December 2020 |website=NCDC.NOAA}} and {{cite web |date=January 2021 |title=Contiguous U.S. ranked fifth warmest during 2020; Alaska experienced its coldest year since 2012 / 2020 Billion Dollar Disasters and Other Notable Extremes |url=https://www.ncei.noaa.gov/news/national-climate-202012 |url-status=live |archive-url=https://web.archive.org/web/20210108185719/https://www.ncei.noaa.gov/news/national-climate-202012 |archive-date=8 January 2021 |website=NCEI.NOAA.gov |publisher=NOAA}} For 2021 data: {{cite web |date=6 October 2017 |title=Calculating the Cost of Weather and Climate Disasters / Seven things to know about NCEI's U.S. billion-dollar disasters data |url=https://www.ncei.noaa.gov/news/calculating-cost-weather-and-climate-disasters |url-status=live |archive-url=https://web.archive.org/web/20220111143455/https://www.ncei.noaa.gov/news/calculating-cost-weather-and-climate-disasters |archive-date=11 January 2022 |website=ncei.noaa.gov}}</ref>]]Global aggregate costs (also known as global damages or losses) sum up the predicted impacts of climate change across all market sectors (e.g. including costs to agriculture, energy services and tourism) and can also include non-market impacts (e.g. on ecosystems and human health) for which it is possible to assign monetary values.<ref name=":022" />{{rp|2495}} A study in 2024 projected that by 2050, climate change will reduce average global incomes by likely 19% ([[confidence interval]] 11-29%), relative to a counterfactual where no climate change occurs. The global economy and per capita income would still grow relative to present, but the global annual damages would reach about $38 trillion (in 2005 [[International dollar]]s) by 2050, and increase a lot further under high emissions. In comparison, limiting global warming to 2&nbsp;°C would by 2050 cost about $6 trillion per year, or far less than the anticipated annual damages, emphasizing the economic benefits of proactive climate mitigation.<ref name="Kotz2024" /><ref>{{cite news |last1=Borenstein |first1=Seth |date=17 April 2024 |title=New study calculates climate change's economic bite will hit about $38 trillion a year by 2049 |url=https://apnews.com/article/climate-change-damage-economy-income-costly-3e21addee3fe328f38b771645e237ff9 |url-status=live |archive-url=https://web.archive.org/web/20240417162038/https://apnews.com/article/climate-change-damage-economy-income-costly-3e21addee3fe328f38b771645e237ff9 |archive-date=17 April 2024 |quote="These damages are compared to a baseline of no climate change and are then applied against overall expected global growth in gross domestic product, said study lead author Max Kotz, a climate scientist. So while it’s 19% globally less than it could have been with no climate change, in most places, income will still grow, just not as much because of warmer temperatures." |work=Associated Press News}}</ref>

Another study, which checked the data from the last 120 years, found that climate change has already reduced welfare by 29% and further temperature rise will bring this number to 47%. The temperature rise during the years 1960-2019 alone has already cut current GDP per capita by 18%. A rise by 1 degree in global temperature reduces global GDP by 12%. An increase of 3 degrees by 2100, will reduce capital by 50%. The effects are like experiencing the [[Great Depression|1929 Great Depression]] permanently. The appropriate social cost of carbon is 1065 dollars per tonne of CO2.<ref>{{cite book |last1=Bilal |first1=Adrien |last2=R. Känzig |first2=Diego |title=THE MACROECONOMIC IMPACT OF CLIMATE CHANGE: GLOBAL VS. LOCAL TEMPERATURE |date=August 2024 |publisher=NATIONAL BUREAU OF ECONOMIC RESEARCH |location=1050 Massachusetts Avenue Cambridge, MA 02138 |pages=1, 4, 5, 38, 39 |url=https://www.nber.org/system/files/working_papers/w32450/w32450.pdf |access-date=8 November 2024}}</ref><ref>{{cite news |title=1°C global temperature rise could slash GDP by 12%, warns environmentalists |url=https://www.indiatoday.in/information/story/1degc-global-temperature-rise-could-slash-gdp-by-12-warns-environmentalists-2617153-2024-10-15 |access-date=8 November 2024 |agency=India Today |date=15 October 2024}}</ref>

Global estimates are often based on an aggregation of independent sector and/or regional studies and results, with complex interactions modelled. For example, there is uncertainty in how physical and natural systems may respond to climate change. Potential socioeconomic changes, including how human societies might mitigate and adapt to climate change also need consideration.<ref name=":022" />{{rp|2496}} The uncertainty and complexities associated with climate change and have led analysts to develop "[[Climate change scenario|scenarios]]" with which they can explore different possibilities. 

Global warming has a continuously negative economic impact, with poorer countries being much more vulnerable than wealthier ones, according to a 2022 meta-analysis by economist Richard S. J. Tol. Additionally, the study pointed out that estimations had a large confidence interval, suggesting that uncertainty was biased towards unfavorable surprises. <ref>{{Cite journal |last=Tol |first=Richard S. J. |date=2024-02-01 |title=A meta-analysis of the total economic impact of climate change |url=https://www.sciencedirect.com/science/article/pii/S0301421523005074?via=ihub#d1e2400 |journal=Energy Policy |volume=185 |pages=113922 |doi=10.1016/j.enpol.2023.113922 |issn=0301-4215|arxiv=2207.12199 }}</ref>

Global economic losses due to extreme weather, climate and water events are increasing. Costs have increased sevenfold from the 1970s to the 2010s.<ref>World Meteorological Society (WMO) (2021). [https://library.wmo.int/idurl/4/57564 WMO Atlas of Mortality and Economic Losses from Weather, Climate and Water Extremes (1970–2019)]. https://library.wmo.int/idurl/4/57564</ref>{{rp|16}} Direct losses from disasters have averaged above US$330 billion annually between 2015 and 2021.<ref name=":132">UNDRR (2023). [https://sendaiframework-mtr.undrr.org/publication/report-midterm-review-implementation-sendai-framework-disaster-risk-reduction-2015-2030 The Report of the Midterm Review of the Implementation of the Sendai Framework for Disaster Risk Reduction 2015–2030]. UNDRR: Geneva, Switzerland.</ref>{{rp|21}} Climate change has contributed to the increased probability and magnitude of extreme events. When a vulnerable community is exposed to extreme climate or weather events, disasters can occur. [[Socioeconomics|Socio-economic]] factors have contributed to the observed trend of global disaster losses, such as population growth and increased wealth.<ref>{{Citation |last=Bouwer |first=Laurens M. |title=Observed and Projected Impacts from Extreme Weather Events: Implications for Loss and Damage |date=2019 |work=Loss and Damage from Climate Change: Concepts, Methods and Policy Options |pages=63–82 |editor-last=Mechler |editor-first=Reinhard |series=Climate Risk Management, Policy and Governance |place=Cham |publisher=Springer International Publishing |doi=10.1007/978-3-319-72026-5_3 |isbn=978-3-319-72026-5 |editor2-last=Bouwer |editor2-first=Laurens M. |editor3-last=Schinko |editor3-first=Thomas |editor4-last=Surminski |editor4-first=Swenja |doi-access=free}}</ref> This shows that increased exposure is the most important driver of losses. However, part of these are also due to human-induced climate change. [[Extreme event attribution|Extreme Event Attribution]] quantifies how climate change is altering the probability and magnitude of extreme events. On a case-by-case basis, it is feasible to estimate how the magnitude and/or probability of the extreme event has shifted due to climate change. These attributable changes have been identified for many individual extreme heat events and rainfall events.<ref>Seneviratne, S.I., X. Zhang, M. Adnan, W. Badi, C. Dereczynski, A. Di Luca, S. Ghosh, I. Iskandar, J. Kossin, S. Lewis, F. Otto, I. Pinto, M. Satoh, S.M. Vicente-Serrano, M. Wehner, and B. Zhou, 2021: [[doi:10.1017/9781009157896.013|Weather and Climate Extreme Events in a Changing Climate. In Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change]] [Masson-Delmotte, V., P. Zhai, A. Pirani, S.L. Connors, C. Péan, S. Berger, N. Caud, Y. Chen, L. Goldfarb, M.I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R. Matthews, T.K. Maycock, T. Waterfield, O. Yelekçi, R. Yu, and B. Zhou (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 1513–1766, {{doi|10.1017/9781009157896.013}}</ref>{{rp|1611}}<ref name=":1">Newman, R., Noy, I. [[doi:10.1038/s41467-023-41888-1|The global costs of extreme weather that are attributable to climate change]]. ''Nat Commun'' 14, 6103 (2023). {{doi|10.1038/s41467-023-41888-1}}</ref> Using all available data on attributable changes, one study estimated the global losses to average US$143 billion per year between 2000 and 2019. This includes a statistical loss of life value of 90 billion and economic damages of 53 billion per year.<ref name=":1" />

Estimates of the economic impacts from climate change in future years are most often measured as percent global GDP change, relative to GDP without additional climate change.<ref name=":022" />{{rp|2495}} The [[IPCC Sixth Assessment Report|2022 IPCC report]] compared the latest estimates of many modelling and [[meta-analysis]] studies. It found wide variety in the results. These vary depending on the assumptions used in the IPCC [[Shared Socioeconomic Pathways|socioeconomic scenarios]]. The same set of scenarios are used in all of the climate models.

Estimates are found to increase non-linearly with global average temperature change. Global temperature change projection ranges (corresponding to each cost estimate) are based on IPCC assessment on the physical science in the same report. It finds that with high warming (~4&nbsp;°C) and low adaptation, annual global GDP might be reduced by 10–23% by 2100 because of climate change. The same assessment finds smaller GDP changes with reductions of 1–8%, assuming low warming, more adaptation, and using different models.<ref name=":022" />{{rp|2459}} These global economic cost estimates do not take into account impacts on social well-being or welfare or distributional effects.<ref name=":022" />{{rp|2495}} Nor do they fully consider climate change adaptation responses.

One 2020 study estimated economic losses due to climate change could be between 127 and 616&nbsp;trillion dollars extra until 2100 with current commitments, compared to 1.5&nbsp;°C or well below 2&nbsp;°C compatible action. Failure to implement current commitments raises economic losses to 150–792&nbsp;trillion dollars until 2100.<ref>{{cite journal |last1=Wei |first1=Yi-Ming |last2=Han |first2=Rong |last3=Wang |first3=Ce |last4=Yu |first4=Biying |last5=Liang |first5=Qiao-Mei |last6=Yuan |first6=Xiao-Chen |last7=Chang |first7=Junjie |last8=Zhao |first8=Qingyu |last9=Liao |first9=Hua |last10=Tang |first10=Baojun |last11=Yan |first11=Jinyue |last12=Cheng |first12=Lijing |last13=Yang |first13=Zili |display-authors=etal |year=2020 |title=Self-preservation strategy for approaching global warming targets in the post-Paris Agreement era. |journal=Nat Commun |volume=11 |issue=1 |pages=1624 |bibcode=2020NatCo..11.1624W |doi=10.1038/s41467-020-15453-z |pmc=7156390 |pmid=32286257}}</ref>

Economic impacts also include [[inflation]] from rising [[Climate change and insurance in the United States|insurance premiums]],<ref name=":22">{{Cite web |last=Becker |first=William S. |date=2024-07-22 |title=Opinion: Climate inflation is eating your paycheck — and it's only going to get worse |url=https://thehill.com/opinion/energy-environment/4782252-climate-inflation-economic-impact/ |access-date=2024-07-24 |website=The Hill |language=en-US}}</ref><ref>{{Cite news |date=July 23, 2024 |title=Home insurance rates are rising due to climate change. What could break that cycle? |url=https://www.npr.org/2024/07/18/1198912918/home-insurance-rates-are-rising-due-to-climate-change-what-could-break-that-cycl |work=NPR}}</ref> [[Carbon price|energy costs]] and [[food prices]].<ref name=":23">{{Cite web |last=Becker |first=William S. |date=2024-07-22 |title=Opinion: Climate inflation is eating your paycheck — and it's only going to get worse |url=https://thehill.com/opinion/energy-environment/4782252-climate-inflation-economic-impact/ |access-date=2024-07-24 |website=The Hill |language=en-US}}</ref><ref>{{Cite web |date=July 11, 2024 |title=How is climate change affecting food prices and inflation? |url=https://www.aljazeera.com/program/inside-story/2024/7/11/how-is-climate-change-affecting-food-prices-and-inflation |access-date=2024-07-24 |website=Al Jazeera |language=en}}</ref><ref>{{Cite web |last=Borenstein |first=Seth |date=2024-03-21 |title=Higher temperatures mean higher food and other prices. A new study links climate shocks to inflation |url=https://apnews.com/article/inflation-climate-change-food-prices-heat-6e5297e12868aaf797529bb755268818 |access-date=2024-07-24 |website=AP News |language=en}}</ref>

==== High emissions scenarios ====
The total economic impacts from climate change increase for higher temperature changes.<ref name=":0" /> For instance, total damages are estimated to be 90% less if global warming is limited to 1.5&nbsp;°C compared to 3.66&nbsp;°C, a warming level chosen to represent no mitigation.<ref name=":9">{{Cite book |last1=Hoegh-Guldberg |first1=O. |title={{Harvnb|IPCC SR15|2018}} |last2=Jacob |first2=D. |last3=Taylor |first3=M. |last4=Bindi |first4=M. |last5=Brown |first5=S. |last6=Camilloni |first6=I. |last7=Diedhiou |first7=A. |last8=Djalante |first8=R. |last9=Ebi |first9=K. |year=2018 |page=256 |chapter=Chapter 3: Impacts of 1.5 °C Global Warming on Natural and Human Systems |ref={{harvid|IPCC SR15 Ch3|2018}} |display-authors=4 |access-date=15 December 2019 |chapter-url=https://www.ipcc.ch/site/assets/uploads/sites/2/2019/05/SR15_Chapter3_Low_Res.pdf |archive-url=https://web.archive.org/web/20191115022743/https://www.ipcc.ch/site/assets/uploads/sites/2/2019/05/SR15_Chapter3_Low_Res.pdf |archive-date=15 November 2019 |url-status=live |first14=A. |last10=Engelbrecht |last12=Hijioka |first13=S. |last13=Mehrotra |first10=F. |last11=Guiot |first17=R. |first11=J. |last14=Payne |last18=Zhou |first18=G. |first16=A. |first12=Y. |last16=Thomas |last15=Seneviratne |first15=S. I. |last17=Warren}}</ref> In an Oxford Economics study high emission scenario, a temperature rise of 2 degrees by the year 2050 would reduce global GDP by 2.5–7.5%. By the year 2100 in this case, the temperature would rise by 4 degrees, which could reduce the global GDP by 30% in the worst case.<ref>{{cite web |last1=Koning Beals |first1=Rachel |title=Global GDP will suffer at least a 3% hit by 2050 from unchecked climate change, say economists |url=https://www.marketwatch.com/story/global-gdp-will-suffer-at-least-a-3-hit-by-2050-from-unchecked-climate-change-say-economists-2019-11-20 |url-status=live |archive-url=https://web.archive.org/web/20200329094156/https://www.marketwatch.com/story/global-gdp-will-suffer-at-least-a-3-hit-by-2050-from-unchecked-climate-change-say-economists-2019-11-20 |archive-date=29 March 2020 |access-date=29 March 2020 |website=MarketWatch}}</ref>

One 2018 study found that potential global economic gains if countries implement mitigation strategies to comply with the 2&nbsp;°C target set at the [[Paris Agreement]] are in the vicinity of US$17&nbsp;trillion per year up to 2100, compared to a very high emission scenario.<ref>{{Cite journal |last1=Kompas |first1=Tom |last2=Pham |first2=Van Ha |last3=Che |first3=Tuong Nhu |date=2018 |title=The Effects of Climate Change on GDP by Country and the Global Economic Gains From Complying With the Paris Climate Accord |journal=Earth's Future |volume=6 |issue=8 |pages=1153–1173 |bibcode=2018EaFut...6.1153K |doi=10.1029/2018EF000922 |issn=2328-4277 |doi-access=free |hdl-access=free |hdl=1885/265534}}</ref>

===Underestimation of economic impacts===
[[File:2010-2070-2100 Climate change threatens venues of Olympic Winter Games.svg|thumb|The amount by which greenhouse gas emissions are reduced is forecast to substantially affect the number of Winter Olympic Game venues that will have reliably cold conditions.<ref name="Forbes_20220204">{{cite news |last1=Buchholz |first1=Katharina |date=4 February 2022 |title=Will Climate Change End The Winter Olympics? |url=https://www.forbes.com/sites/katharinabuchholz/2022/02/04/will-climate-change-end-the-winter-olympics-infographic/ |url-status=live |archive-url=https://web.archive.org/web/20230112112106/https://www.forbes.com/sites/katharinabuchholz/2022/02/04/will-climate-change-end-the-winter-olympics-infographic/ |archive-date=12 January 2023 |work=Forbes}} —  Bucholz cites {{cite journal |last1=Scott |first1=Daniel |last2=Knowles |first2=Natalie L. B. |last3=Ma |first3=Siyao |last4=Rutty |first4=Michelle |last5=Steiger |first5=Robert |date=10 January 2022 |title=Climate change and the future of the Olympic Winter Games: athlete and coach perspectives |url=https://www.tandfonline.com/doi/full/10.1080/13683500.2021.2023480 |journal=Current Issues in Tourism |volume=26 |issue=3 |pages=480–495 |doi=10.1080/13683500.2021.2023480 |s2cid=245865532}}</ref>]]Studies in 2019 suggested that economic damages due to climate change have been underestimated, and may be severe, with the probability of disastrous [[Black swan theory|tail-risk events]].<ref name="DeFries_etal_2019">{{cite report |url=https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2019/09/The-missing-economic-risks-in-assessments-of-climate-change-impacts-2.pdf |title=The missing economic risks in assessments of climate change impacts |last1=DeFries |first1=Ruth |last2=Edenhofer |first2=Ottmar |date=September 2019 |publisher=Grantham Research Institute on Climate Change and the Environment, London School of Economics and Political Science |last3=Halliday |first3=Alex |last4=Heal |first4=Geoffrey |author-link1=Ruth DeFries |display-authors=etal}}</ref><ref name="Krogstrup_Oman_2019">{{cite report |url=https://www.elibrary.imf.org/doc/IMF001/28337-9781513511955/28337-9781513511955/Other_formats/Source_PDF/28337-9781513512938.pdf |title=Macroeconomic and Financial Policies for Climate Change Mitigation: A Review of the Literature |last1=Krogstrup |first1=Signe |last2=Oman |first2=William |date=4 September 2019 |doi=10.5089/9781513511955.001 |isbn=978-1-5135-1195-5 |issn=1018-5941 |doi-access=free |series=IMF working papers |s2cid=203245445}}</ref>

[[Tipping points in the climate system|Tipping points]] are critical thresholds that, when crossed, lead to large, accelerating and often irreversible changes in the [[climate system]]. The science of tipping points is complex and there is great uncertainty as to how they might unfold.<ref>{{Cite news |last=Carrington |first=Damian |date=27 November 2019 |title=Climate emergency: world "may have crossed tipping points" |url=http://www.theguardian.com/environment/2019/nov/27/climate-emergency-world-may-have-crossed-tipping-points |newspaper=[[the Guardian]]}}</ref> Economic analyses often exclude the potential effect of tipping points. A 2018 study noted that the global economic impact is underestimated by a factor of two to eight, when tipping points are excluded from consideration.<ref name=":9" />

The [[Stern Review]] from 2006 for the British Government predicted that world GDP would be reduced by several percent due to climate related costs. However, their calculations may omit ecological effects that are difficult to quantify economically (such as human deaths or [[loss of biodiversity]]) or whose economic consequences will manifest slowly.<ref>{{Cite web |author-last1=Harris |author-first1=Jonathan M. |date=2015 |title=The Economics of Global Climate Change |url=https://www.sciencetheearth.com/uploads/2/4/6/5/24658156/2015_harris_the_economics_of_global_climate_change.pdf |website=Global Development and Environment Institute, Tufts University |author-last2=Roach |author-first2=Brian |author-last3=Codur |author-first3=Anne-Marie}}</ref> Therefore, their calculations may be an underestimate. The study has received both criticism and support from other economists.

=== By region ===
[[File:Kotz 2024 impact vs responsibility.png|thumb|Countries with the lowest GDPs per capita (yellow) and the lowest cumulative emissions will often suffer the greatest declines in their income relative to a hypothetical future where the impacts of climate change were not happening<ref name ="Kotz2024" />]]
Other studies investigate economic losses by GDP change per country or by per country per capita. Findings show large differences among countries and within countries. The estimated GDP changes in some [[Developing country|developing countries]] are similar to some of the worst country-level losses during historical economic recessions.<ref name=":022" />{{rp|2459}} Economic losses are risks to living standards, which are more likely to be severe in developing countries. Climate change can push more people into extreme poverty or keep people poor, especially through particularly climate-sensitive sectors such as agriculture and fisheries. Climate change may also increase income inequality within countries as well as between them, particularly affecting low-income groups.<ref name=":022" />{{rp|2461}}

The economic impact of changes in annual mean temperature is estimated to be lower at higher latitudes despite higher temperature changes due to lower estimated economic vulnerability to temperature changes.<ref name ="Kotz2024" /> Reduced daily temperature variability at high latitudes shows positive estimated economic impact, with opposite effects at lower latitudes and Europe.<ref name ="Kotz2024" /> Economic effects due to changes in total annual precipitation show regional patterns generally opposite to changes in the number of wet days.<ref name ="Kotz2024" /> 

According to a study by [[reinsurance]] company [[Swiss Re]] in 2021 the economies of wealthy countries like the US would likely shrink by approximately 7%, while some developing nations would be devastated, losing around 20% or in some cases 40% of their economic output.<ref name="Swiss Re 2021">[https://www.nytimes.com/2021/04/22/climate/climate-change-economy.html "Climate Change Could Cut World Economy by $23 Trillion in 2050, Insurance Giant Warns: Poor Nations Would Be Particularly Hard Hit, But Few Would Escape, Swiss Re Said"]</ref>

A [[United States]] government report in November 2018 raised the possibility of US GDP going down 10% as a result of the warming climate, including huge shifts in geography, demographics and technology.<ref>{{Cite news |last=Irwin |first=Neil |date=2019-01-17 |title=Climate Change's Giant Impact on the Economy: 4 Key Issues |url=https://www.nytimes.com/2019/01/17/upshot/how-to-think-about-the-costs-of-climate-change.html |access-date=2019-01-22 |work=The New York Times |language=en-US |issn=0362-4331}}</ref>
[[File:Kotz 2024 RCP divergence Asia.png|thumb|right|Economic impacts differ by region, North Africa, Middle East, South, Southeast and East Asia show [[statistical significance]], with no statistical difference for Central Asia/Russia<ref>{{cite journal |last1=Kotz |first1=Maximilian |last2=Levermann |first2=Anders |last3=Wenz |first3=Leonie |title=The economic commitment of climate change |journal=Nature |date=17 April 2024 |volume=628 |issue=8008 |pages=551–557 |doi=10.1038/s41586-024-07219-0 |pmid=38632481 |pmc=11023931 |bibcode=2024Natur.628..551K }}</ref>]]

===By sector===
{{Main|Climate change in Africa|Climate change in Asia|Climate change in the Americas|Climate change in Europe}}

[[File:20220712 Global economic damage due to greenhouse gas emissions - by country.svg|thumb|upright=1.35 |The distribution of warming impacts from emitters has been unequal, with high-income, high-emitting countries benefitting while harming low-income, low-emitting countries.<ref name="Guardian_20220712">Chart based on: {{cite news |last1=Milman |first1=Oliver |date=12 July 2022 |title=Nearly $2tn of damage inflicted on other countries by US emissions |url=https://www.theguardian.com/environment/2022/jul/12/us-carbon-emissions-greenhouse-gases-climate-crisis |url-status=live |archive-url=https://web.archive.org/web/20220712091602/https://www.theguardian.com/environment/2022/jul/12/us-carbon-emissions-greenhouse-gases-climate-crisis |archive-date=12 July 2022 |newspaper=The Guardian}} ''Guardian'' cites {{cite journal |last1=Callahan |first1=Christopher W. |last2=Mankin |first2=Justin S. |date=12 July 2022 |title=National attribution of historical climate damages |journal=Climatic Change |volume=172 |issue=40 |page=40 |bibcode=2022ClCh..172...40C |doi=10.1007/s10584-022-03387-y |s2cid=250430339 |doi-access=free}} Graphic's caption is from Callahan ''et al.''</ref>]]

A number of economic sectors will be affected by climate change, including the [[livestock]], [[forestry]], and [[fishery|fisheries]] industries. Other sectors sensitive to climate change include the [[energy industry|energy]], [[insurance]], [[tourism]] and [[recreation]] industries.<ref name=":022" />{{rp|2496}}

====Health and productivity====
{{See also|Effects of climate change on human health}}

Among the [[Effects of climate change on human health|health impacts]] that have been studied, aggregate costs of heat stress (through loss of work time) have been estimated, as have the costs of malnutrition.<ref name=":142">Cissé, G., R. McLeman, H. Adams, P. Aldunce, K. Bowen, D. Campbell-Lendrum, S. Clayton, K.L. Ebi, J. Hess, C. Huang, Q. Liu, G. McGregor, J. Semenza, and M.C. Tirado, 2022: [https://www.ipcc.ch/report/ar6/wg2/downloads/report/IPCC_AR6_WGII_Chapter07.pdf Health, Wellbeing, and the Changing Structure of Communities.] In: [https://www.ipcc.ch/report/ar6/wg2/ Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change] [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 1041–1170, {{doi|10.1017/9781009325844.009}}</ref>{{rp|1074–5}} However, it is usual for studies to aggregate the number of 'years of life lost' adjusted for years living with disability to measure effects on health.<ref name=":142" />{{rp|1060}}

In 2019 the [[International Labour Organization]] published a report titled: "Working on a warmer planet: The impact of heat stress on labour productivity and decent work", in which it claims that even if the rise in temperature will be limited to 1.5 degree, by the year 2030, Climate Change will cause losses in productivity reaching 2.2% of all the working hours, every year. This is equivalent to 80&nbsp;million full-time jobs, or 2,400&nbsp;billion dollars. The sector expected to be most [[Effects of climate change on agriculture|affected is agriculture]], which is projected to account for 60% of this loss. The construction sector is also projected to be severely impacted and accounts for 19% of projected losses. Other sectors that are most at risk are environmental goods and services, refuse collection, emergency, repair work, transport, tourism, sports and some forms of industrial work.<ref>{{cite book |url=https://www.ilo.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/publication/wcms_711919.pdf |title=Working on a warmer planet The impact of heat stress on labour productivity and decent work |date=2019 |publisher=International Labour Organization |access-date=7 July 2019}}</ref><ref>{{cite web |title=International Labour Organization Warns of Heat-Related Job Losses |url=https://unfccc.int/news/international-labour-organization-warns-of-heat-related-job-losses |access-date=7 July 2019 |website=United Nations Climate Change}}</ref>

It has been estimated that 3.5&nbsp;million people die prematurely each year from air pollution from fossil fuels.<ref>{{Cite web |date=1 April 2019 |title=Rapid global switch to renewable energy estimated to save millions of lives annually |url=https://www.lshtm.ac.uk/newsevents/news/2019/rapid-global-switch-renewable-energy-estimated-save-millions-lives-annually |access-date=2019-06-02 |website=London School of Hygiene & Tropical Medicine}}</ref> The health benefits of meeting climate goals substantially outweigh the costs of action.<ref>{{cite book |url=https://apps.who.int/iris/bitstream/handle/10665/276405/9789241514972-eng.pdf |title=COP24 special report: health and climate change |publisher=[[World Health Organization]] |year=2018 |isbn=978-92-4-151497-2 |page=52}}</ref> The health benefits of phasing out fossil fuels measured in money (estimated by economists using the [[value of life]] for each country) are substantially more than the cost of achieving the 2 degree C goal of the Paris Agreement.<ref>{{Cite news |date=2019-05-09 |title=Letters to the editor |url=https://www.economist.com/letters/2019/05/11/letters-to-the-editor |access-date=2019-06-02 |newspaper=The Economist |issn=0013-0613}}</ref>

====Agriculture====
{{excerpt|Effects of climate change on agriculture#Labour and economic effects|Paragraphs=1-3}}

==== Industry ====
Carbon-intensive industries and investors are expected to experience a significant increase in [[stranded assets]]<ref>{{Cite news |last1=Watts |first1=Jonathan |last2=Kirk |first2=Ashley |last3=McIntyre |first3=Niamh |last4=Gutiérrez |first4=Pablo |last5=Kommenda |first5=Niko |title=Half world's fossil fuel assets could become worthless by 2036 in net zero transition |url=https://www.theguardian.com/environment/ng-interactive/2021/nov/04/fossil-fuel-assets-worthless-2036-net-zero-transition |access-date=2022-02-02 |website=the Guardian |language=en}}</ref> with a potential ripple affect throughout the world economy.<ref name="Eryn2" /><ref name="Rezai2" />
=== Impacts on living costs ===
The [[effects of climate change]] contribute to [[inflation]] due to additional costs.<ref>{{Cite web |last=Horowitz |first=Julia |date=2022-12-13 |title=Analysis: Inflation is finally falling. But the days when prices rose just 2% may never return {{!}} CNN Business |url=https://www.cnn.com/2022/12/13/economy/inflation-2-demographics-climate-deglobalization/index.html |access-date=2024-08-18 |website=CNN |language=en}}</ref><ref>{{Cite web |last=Ritchie |first=Greg |date=July 1, 2024 |title=Carmignac Sees Energy Transition Fueling Inflation This Decade |url=https://www.bloomberg.com/news/articles/2024-07-01/carmignac-sees-energy-transition-fueling-inflation-this-decade |access-date=2024-08-18 |website=Bloomberg}}</ref><ref name=":02">{{Cite web |last=Borenstein |first=Seth |date=2024-03-21 |title=Higher temperatures mean higher food and other prices. A new study links climate shocks to inflation |url=https://apnews.com/article/inflation-climate-change-food-prices-heat-6e5297e12868aaf797529bb755268818 |access-date=2024-08-18 |website=AP News |language=en |quote=[[Gernot Wagner]], a climate economist at Columbia University’s business school who wasn’t part of the research, said what he calls 'climateflation' is 'all too real and the numbers are rather striking.'}}</ref> For example, [[food prices]] could rise by as much as 3% per year due to climate change impacts.<ref>{{Cite news |last=Freedman |first=Andrew |date=Mar 25, 2024 |title=The era of "climateflation" is here, study shows |url=https://www.axios.com/2024/03/25/climate-change-inflation |work=Axios}}</ref><ref>{{Cite news |last=Budryk |first=Zack |date=March 25, 2024 |title=Climate change driving up inflation in food prices: Study |url=https://thehill.com/policy/energy-environment/4554700-climate-change-driving-up-inflation-in-food-prices-study/ |work=The Hill}}</ref><ref name=":02" /> Climate change was one of the factors involved in the [[world food crises (2022–2023)]], which led to higher food prices.

[[Natural disaster|Natural disasters]] fueled by climate change have increased housing costs through insurance<ref>{{Cite news |date=July 23, 2024 |title=Home insurance rates are rising due to climate change. What could break that cycle? |url=https://www.npr.org/2024/07/18/1198912918/home-insurance-rates-are-rising-due-to-climate-change-what-could-break-that-cycl |work=NPR}}</ref><ref name=":222">{{Cite web |last=Becker |first=William S. |date=2024-07-22 |title=Opinion: Climate inflation is eating your paycheck — and it's only going to get worse |url=https://thehill.com/opinion/energy-environment/4782252-climate-inflation-economic-impact/ |access-date=2024-07-24 |website=The Hill |language=en-US}}</ref> and by exacerbating [[Housing shortage|housing shortages]] when those events make homes unlivable.<ref>{{Cite web |last=Cohen |first=Rachel M. |date=2022-04-17 |title=How to fight the affordable housing and climate crises at once |url=https://www.vox.com/23025378/energy-efficiency-utilities-repairs |access-date=2024-08-18 |website=Vox |language=en-US |quote=A warming planet also threatens to put more homes into disrepair or wipe them out from the existing housing stock altogether, exacerbating our housing shortage. For example, if a fire or natural disaster doesn’t completely destroy a unit, the owner has to decide whether to then repair or demolish it.}}</ref>
=== Utility of aggregated assessment ===
[[File:Projected economic impact of 2°C global warming on Senegal, OWID.png|thumb|Projected economic impacts of 2 degrees of [[Climate change in Senegal|global warming on Senegal]]]]There are a number of benefits of using aggregated assessments to measure economic impacts of climate change.<ref name="smith" />{{rp|954}} They allow impacts to be directly compared between different regions and times. Impacts can be compared with other environmental problems and also with the costs of avoiding those impacts. A problem of aggregated analyses is that they often reduce different types of impacts into a small number of indicators. It can be argued that some impacts are not well-suited to this, e.g., the monetization of mortality and loss of species diversity. On the other hand, where there are monetary costs of avoiding impacts, it may not be possible to avoid monetary valuation of those impacts.<ref>{{cite journal |author=Pearce, D. |date=November 2003 |title=The Social Cost of Carbon and its Policy Implications |url=http://www.climateactionproject.com/docs/SOCIAL_COST_OF_CARBON.pdf |url-status=dead |journal=[[Oxford Review of Economic Policy]] |volume=19 |issue=3 |pages=362–384 |doi=10.1093/oxrep/19.3.362 |archive-url=https://web.archive.org/web/20090219235126/http://www.climateactionproject.com/docs/SOCIAL_COST_OF_CARBON.pdf |archive-date=2009-02-19 |access-date=2009-01-10}}</ref>{{rp|364}}

== Costs of climate change mitigation measures ==

[[Climate change mitigation]] consist of human actions to reduce [[greenhouse gas emissions]] or to enhance [[carbon sink]]s that absorb [[greenhouse gas]]es from the [[atmosphere]].<ref name="IPCC AR6 WGI Glossary">IPCC, 2021: [https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_AnnexVII.pdf Annex VII: Glossary] [Matthews, J.B.R., V. Möller, R. van Diemen, J.S. Fuglestvedt, V. Masson-Delmotte, C. Méndez, S. Semenov, A. Reisinger (eds.)]. In [https://www.ipcc.ch/report/ar6/wg1/ Climate Change 2021: The Physical Science Basis. Contribution of Working Group I to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change] [Masson-Delmotte, V., P. Zhai, A. Pirani, S.L. Connors, C. Péan, S. Berger, N. Caud, Y. Chen, L. Goldfarb, M.I. Gomis, M. Huang, K. Leitzell, E. Lonnoy, J.B.R. Matthews, T.K. Maycock, T. Waterfield, O. Yelekçi, R. Yu, and B. Zhou (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 2215–2256, {{doi|10.1017/9781009157896.022}}</ref>{{rp|2239}}{{excerpt|Climate change mitigation|Costs and funding}}

=== Global costs of mitigation ===
Mitigation cost estimates depend critically on the baseline (in this case, a reference scenario that the alternative scenario is compared with), the way costs are modelled, and assumptions about future government policy.<ref>{{cite book |author=Barker, T. |url=http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch11.html |title=In: Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change |publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A. |year=2007 |editor=B. Metz |contribution=Mitigation from a cross-sectoral perspective. |display-authors=etal |access-date=2009-05-20 |display-editors=etal |archive-url=https://web.archive.org/web/20110608063706/http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch11.html |archive-date=8 June 2011 |url-status=dead}}</ref>{{rp|622}} Macroeconomic costs in 2030 were estimated for multi-gas mitigation (reducing emissions of carbon dioxide and other GHGs, such as [[methane]]) as between a 3% decrease in global GDP to a small increase, relative to baseline.<ref name="fisher" /> This was for an emissions pathway consistent with atmospheric stabilization of GHGs between 445 and 710 ppm CO<sub>2</sub>-eq. In 2050, the estimated costs for stabilization between 710 and 445 ppm CO<sub>2</sub>-eq ranged between a 1% gain to a 5.5% decrease in global GDP, relative to baseline. These cost estimates were supported by a moderate amount of evidence and much agreement in the literature.<ref name="wg3">{{cite web |author=IPCC |date=2007b |title=Summary for Policymakers. In: Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz ''et al''. Eds.] |url=http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |url-status=dead |archive-url=https://web.archive.org/web/20181005032403/http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |archive-date=5 October 2018 |access-date=2009-05-20 |publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A.}}</ref>{{rp|11, 18}}

Macroeconomic cost estimates were mostly based on models that assumed transparent markets, no transaction costs, and perfect implementation of cost-effective policy measures across all regions throughout the 21st century.<ref name="fisher" />{{rp|204}} Relaxation of some or all these assumptions would lead to an appreciable increase in cost estimates. On the other hand, cost estimates could be reduced by allowing for accelerated technological learning, or the possible use of carbon tax/emission permit revenues to reform national tax systems.<ref name="wg3" />{{rp|8}}

In most of the assessed studies, costs rose for increasingly stringent stabilization targets. In scenarios that had high baseline emissions, mitigation costs were generally higher for comparable stabilization targets. In scenarios with low emissions baselines, mitigation costs were generally lower for comparable stabilization targets.

{{multiple image
| total_width       = 450
| image1            = 20210818 Greenhouse gas emissions by income category - UN Emissions Gap Report.svg
| caption1          = The emissions of the richest 1% of the global population account for more than twice the combined share of the poorest 50%. Compliance with the 1.5°C goal of the Paris Agreement would require the richest 1% to reduce their current emissions by at least a factor of 30, while per-person emissions of the poorest 50% could increase by a factor of about three.<ref name=EmissionGapReport2020a>{{cite web |title=Emissions Gap Report 2020 / Executive Summary |url=https://wedocs.unep.org/bitstream/handle/20.500.11822/34438/EGR20ESE.pdf |website=UNEP.org |publisher=United Nations Environment Programme |archive-url=https://web.archive.org/web/20210731143517/https://wedocs.unep.org/bitstream/handle/20.500.11822/34438/EGR20ESE.pdf |archive-date=31 July 2021 |location=Fig. ES.8 |page=XV |date=2021 |url-status=live}}</ref>
| image2            = 2019 Carbon dioxide emissions by income group - Oxfam data.svg
| caption2          = This pie chart illustrates both total emissions for each income group, and emissions ''per person'' within each income group. For example, the 10% with the highest incomes are responsible for half of carbon emissions, and its members emit an average of more than five times as much ''per person'' as members of the lowest half of the income scale.<ref name=OxfamClimateEquality_202311>{{cite book |title=Climate Equality: a Climate for the 99% |date=November 2023 |publisher=Oxfam International |url=https://webassets.oxfamamerica.org/media/documents/cr-climate-equality-201123-en.pdf |archive-url=https://web.archive.org/web/20231123191311/https://webassets.oxfamamerica.org/media/documents/cr-climate-equality-201123-en.pdf |archive-date=23 November 2023 |url-status=live }} Fig. ES.2, Fig. ES.3, Box 1.2.</ref>
}}

=== Regional costs of mitigation ===
Several studies have estimated regional mitigation costs. The conclusions of these studies are as follows:<ref>{{citation |author=Gupta, S. |title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change |year=2007 |editor=B. Metz |display-editors=etal |url=http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |access-date=2009-05-20 |archive-url=https://web.archive.org/web/20181005032403/http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |archive-date=5 October 2018 |url-status=dead |contribution=Policies, Instruments and Co-operative Arrangements. |publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A. |display-authors=etal}}</ref>{{rp|776}}
* Regional abatement costs are largely dependent on the assumed stabilization level and baseline scenario. The allocation of emission allowances/permits is also an important factor, but for most countries, is less important than the stabilization level.
* Other costs arise from changes in [[international trade]]. Fossil fuel-exporting regions are likely to be affected by losses in coal and oil exports compared to baseline, while some regions might experience increased bio-energy (energy derived from [[biomass]]) exports.
* Allocation schemes based on current emissions (i.e., where the most allowances/permits are given to the largest current polluters, and the fewest allowances are given to smallest current polluters) lead to welfare losses for developing countries, while allocation schemes based on a per capita convergence of emissions (i.e., where per capita emissions are equalized) lead to welfare gains for developing countries.

===Sharing of mitigation costs===
There have been different proposals on how to allocate responsibility for cutting emissions:<ref name="banuri">{{cite book |author=Banuri, T. |url=https://archive.org/details/climatechange1990000unse_h1m9 |title=Equity and Social Considerations. In: Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change (J. P. Bruce et al. eds.) |publisher=Cambridge University Press |year=1996 |isbn=978-0521568548 |location=Cambridge and New York |display-authors=etal |url-access=registration}}  PDF version: IPCC website.</ref>{{rp|103}}
* [[Egalitarianism]]: this system interprets the problem as one where each person has equal rights to a global resource, i.e., polluting the atmosphere.
* Basic needs: this system would have emissions allocated according to basic needs, as defined according to a minimum level of [[Consumption (economics)|consumption]]. Consumption above basic needs would require countries to buy more emission rights. From this viewpoint, developing countries would need to be at least as well off under an emissions control regime as they would be outside the regime.
* Proportionality and polluter-pays principle: Proportionality reflects the ancient [[Aristotelianism|Aristotelian]] principle that people should receive in proportion to what they put in, and pay in proportion to the damages they cause. This has a potential relationship with the "polluter-pays principle", which can be interpreted in a number of ways:
** ''Historical responsibilities'': this asserts that allocation of emission rights should be based on patterns of past emissions. Two-thirds of the stock of GHGs in the atmosphere at present is due to the past actions of developed countries.<ref name="goldemberg2">{{cite book |author=Goldemberg, J. |url=https://archive.org/details/climatechange1990000unse_h1m9 |title=Introduction: scope of the assessment. In: Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change (J. P. Bruce et al. eds.) |publisher=Cambridge University Press |year=1996 |isbn=978-0521568548 |location=Cambridge and New York |display-authors=etal |url-access=registration}} Web version: IPCC website.</ref>{{rp|29}}
** ''Comparable burdens and ability to pay'': with this approach, countries would reduce emissions based on comparable burdens and their ability to take on the costs of reduction. Ways to assess burdens include monetary costs per head of population, as well as other, more complex measures, like the [[UNDP]]'s [[Human Development Index]].
** ''[[Willingness to pay]]'': with this approach, countries take on emission reductions based on their ability to pay along with how much they benefit<ref>{{Cite web |author=Longo, Albert |author2=Hoyos, David |author3=Markandya, Anil |date=Jan 2011 |title=Willingness to Pay for Ancillary Benefits of Climate Change Mitigation |url=https://www.researchgate.net/publication/227148742 |website=ResearchGate}}</ref> from reducing their emissions.

* Equal per capita entitlements: this is the most widely cited method of distributing abatement costs, and is derived from egalitarianism.<ref name="banuri" />{{rp|106}} This approach can be divided into two categories. In the first category, emissions are allocated according to national population. In the second category, emissions are allocated in a way that attempts to account for historical (cumulative) emissions.
* Status quo: with this approach, historical emissions are ignored, and current emission levels are taken as a status quo right to emit.<ref name="banuri" />{{rp|107}} An analogy for this approach can be made with [[Fishery|fisheries]], which is a common, limited resource. The analogy would be with the atmosphere, which can be viewed as an exhaustible [[natural resource]].<ref name="goldemberg2" />{{rp|27}} In [[international law]], one state recognized the long-established use of another state's use of the fisheries resource. It was also recognized by the state that part of the other state's economy was dependent on that resource.

== Costs of climate change adaptation measures ==
{{excerpt|Climate finance|Adaptation costs and adaptation financing needs}}

== Challenges and debates ==
=== Efficiency and equity ===
No consensus exists on who should bear the burden of adaptation and mitigation costs.<ref name="goldemberg" />{{rp|29}} Several different arguments have been made over how to spread the costs and benefits of taxes or systems based on emissions trading.

One approach considers the problem from the perspective of who benefits most from the public good. This approach is sensitive to the fact that different preferences exist between different income classes. The public good is viewed in a similar way as a private good, where those who use the public good must pay for it. Some people will benefit more from the public good than others, thus creating inequalities in the absence of benefit taxes. A difficulty with public goods is determining who exactly benefits from the public good, although some estimates of the distribution of the costs and benefits of global warming have been made – [[#Distribution of impacts|see above]]. Additionally, this approach does not provide guidance as to how the surplus of benefits from climate policy should be shared.

A second approach has been suggested based on economics and the [[social welfare function]]. To calculate the social welfare function requires an aggregation of the impacts of climate change policies and climate change itself across all affected individuals. This calculation involves a number of complexities and controversial equity issues.<ref name="Markandya">{{cite book |date=2001 
|author-last1=Markandya |author-first1= A.|display-authors=etal 
|chapter=  7. Costing Methodologies.
|title= Climate Change 2001: Mitigation. Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change
|editor-last1=Metz  |editor-first1=B. 
|editor-last2= Davidson  |editor-first2=O 
|editor-last3=Swart  |editor-first3=R.
|editor-last4= Pan  |editor-first4=J. 
|publisher=Cambridge University Press  |location=Cambridge
|url=https://www.ipcc.ch/site/assets/uploads/2018/03/WGIII_TAR_full_report.pdf 
|access-date=2022-01-10 }}</ref>{{rp|460}} 
For example, the monetization of certain impacts on human health. There is also controversy over the issue of benefits affecting one individual offsetting negative impacts on another.<ref name="smith" /> {{rp|958}} These issues to do with equity and aggregation cannot be fully resolved by economics.<ref name="Equity and Social Considerations">{{cite book
|date=1996
|author-last=Banuri |author-first= T. |display-authors=etal
|chapter=3. Equity and Social Considerations |pages=79–124
|title=Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change
|editor-first1=J. P. |editor-last1= Bruce |display-editors=etal
|publisher= Cambridge University Press |location= Cambridge, UK, and New York, N.Y. |url=https://www.ipcc.ch/site/assets/uploads/2018/03/ipcc_sar_wg_III_full_report.pdf
|isbn=978-0-521-56854-8 |access-date=2022-01-19
}}</ref>{{rp|87}}

On a [[utilitarian]] basis, which has traditionally been used in welfare economics, an argument can be made for richer countries taking on most of the burdens of mitigation.<ref>{{cite book |date=2007 
|author-last1=Halsnæs |author-first1= K.|display-authors=etal
|chapter=2.6.4 Equity consequences of different policy instruments. In (book chapter) 2. Framing issues |pages= 117–168
|chapter-url=  https://www.ipcc.ch/site/assets/uploads/2018/02/ar4-wg3-chapter2-1.pdf 
| title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change  
| editor-last1=Metz |editor-first1=B. |display-editors=etal
| publisher=Cambridge University Press  |location=Cambridge, UK, and New York, N.Y.  | isbn=978-0-521-88011-4 
| url=https://www.ipcc.ch/site/assets/uploads/2018/03/ar4_wg3_full_report-1.pdf  | access-date=2022-01-19
}}</ref> However, another result is possible with a different modeling of impacts. If an approach is taken where the interests of poorer people have lower weighting, the result is that there is a much weaker argument in favour of mitigation action in rich countries. Valuing climate change impacts in poorer countries less than domestic climate change impacts (both in terms of policy and the impacts of climate change) would be consistent with observed spending in rich countries on foreign aid<ref>{{Cite book
|author=Hepburn, C.
|date=28 February 2005 |contribution=Memorandum by Dr Cameron Hepburn, St Hugh's College, University of Oxford. |title=The Economics of Climate Change |series=Second Report of 2005–2006 Volume II, HL Paper No. 12-II  |publisher=House of Lords Economic Affairs Select Committee
|url=https://publications.parliament.uk/pa/ld200506/ldselect/ldeconaf/12/12we10.htm
|access-date=2010-04-06
|isbn=978-0-19-957328-8}}</ref><ref>{{Cite journal
|date=1 November 2008
|author=Helm, D.
|title=Climate-change policy: why has so little been achieved?
|journal=Oxford Review of Economic Policy
|volume=24
|issue=2
|pages=211–238
|url=http://www.dieterhelm.co.uk/node/671
|access-date=2010-04-06
|doi=10.1093/oxrep/grn014
|archive-date=1 May 2011
|archive-url=https://web.archive.org/web/20110501072338/http://www.dieterhelm.co.uk/node/671
|url-status=dead
}}</ref>{{rp|229}}

A third approach looks at the problem from the perspective of who has contributed most to the problem. Because the industrialized countries have contributed more than two-thirds of the stock of human-induced GHGs in the atmosphere, this approach suggests that they should bear the largest share of the costs. This stock of emissions has been described as an "environmental debt".<ref name="Munasinghe">{{cite book |date=1996 |author-last1=Munasinghe |author-first1= M. |display-authors=etal 
|chapter=5. Applicability of Techniques of Cost-Benefit Analysis to Climate Change |pages=145–178 
|title=Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change
|editor-first1=J. P. |editor-last1= Bruce |display-editors=etal 
|publisher= Cambridge University Press |location= Cambridge, UK, and New York, N.Y. |url=https://www.ipcc.ch/site/assets/uploads/2018/03/ipcc_sar_wg_III_full_report.pdf  |isbn=978-0-521-56854-8   }}</ref>{{rp|167}} 
In terms of efficiency, this view is not supported. This is because efficiency requires incentives to be forward-looking, and not retrospective.<ref name="goldemberg" />{{rp|29}} The question of historical responsibility is a matter of [[ethics]]. It has been suggested that developed countries could address the issue by making side-payments to [[Developing country|developing countries]].<ref name="Munasinghe" />{{rp|167}}

A 2019 modelling study found climate change had contributed towards global [[economic inequality]]. Wealthy countries in colder regions had either felt little overall economic impact from climate change, or possibly benefited, whereas poor hotter countries very likely grew less than if global warming had not occurred.<ref>{{Cite journal |last1=Diffenbaugh |first1=Noah S. |last2=Burke |first2=Marshall |date=2019 |title=Global warming has increased global economic inequality |journal=Proceedings of the National Academy of Sciences |volume=116 |issue=20 |pages=9808–9813 |bibcode=2019PNAS..116.9808D |doi=10.1073/pnas.1816020116 |issn=0027-8424 |pmc=6525504 |pmid=31010922 |doi-access=free}}</ref> Part of this observation stems from the fact that greenhouse gas emissions come mainly from high-income countries, while low-income countries are affected by it negatively.<ref>{{Cite journal |last=Tol |first=Richard S. J |date=2009-04-01 |title=The Economic Effects of Climate Change |journal=Journal of Economic Perspectives |language=en |volume=23 |issue=2 |pages=29–51 |doi=10.1257/jep.23.2.29 |issn=0895-3309 |s2cid=15530729 |doi-access=free}}</ref> So, high-income countries are producing significant amounts of emissions, but the impacts are unequally threatening low-income countries, who do not have access to the resources to recover from such impacts. This further deepens the inequalities within the poor and the rich, hindering sustainability efforts. Impacts of climate change could even push millions of people into poverty.<ref>{{Cite web |title=Linking Climate and Inequality |url=https://www.imf.org/en/Publications/fandd/issues/2021/09/climate-change-and-inequality-guivarch-mejean-taconet |access-date=2023-04-27 |website=IMF |language=en}}</ref>

=== Insurance and markets ===
{{See also|Climate change and insurance in the United States}}
Traditional insurance works by transferring risk to those better able or more willing to bear risk, and also by the pooling of risk.<ref name="goldemberg" />{{rp|25}} Since the risks of climate change are, to some extent, [[correlated]], this reduces the effectiveness of pooling. However, there is reason to believe that different regions will be affected differently by climate change. This suggests that pooling might be effective. Since developing countries appear to be potentially most at risk from the effects of climate change, [[developed countries]] could provide insurance against these risks.<ref>{{Cite journal |last1=Herweijer |first1=Celine |last2=Ranger |first2=Nicola |last3=Ward |first3=Robert E T |date=2009-07-01 |title=Adaptation to Climate Change: Threats and Opportunities for the Insurance Industry |journal=The Geneva Papers on Risk and Insurance - Issues and Practice |language=en |volume=34 |issue=3 |pages=360–380 |doi=10.1057/gpp.2009.13 |issn=1468-0440 |s2cid=154387945|doi-access=free }}</ref>

Disease, rising seas, reduced crop yields, and other harms driven by climate change will likely have a major deleterious impact on the economy by 2050 unless the world sharply reduces greenhouse gas emissions in the near term, according to a number of studies, including a study by the [[Carbon Disclosure Project]] and a study by insurance giant [[Swiss Re]]. The Swiss Re assessment found that annual output by the [[world economy]] will be reduced by $23&nbsp;trillion annually, unless greenhouse gas emissions are adequately mitigated. As a consequence, according to the Swiss Re study, climate change will impact how the [[insurance industry]] prices a variety of risks.<ref name="Flavelle">{{cite news |last1=Flavelle |first1=Christopher |date=22 April 2021 |title=Climate Change Could Cut World Economy by $23 Trillion in 2050, Insurance Giant Warns |work=The New York Times |url=https://www.nytimes.com/2021/04/22/climate/climate-change-economy.html |access-date=20 January 2022}}</ref><ref>{{cite web |date=22 April 2021 |title=The economics of climate change |url=https://www.swissre.com/institute/research/topics-and-risk-dialogues/climate-and-natural-catastrophe-risk/expertise-publication-economics-of-climate-change.html |access-date=20 January 2022 |website=Swiss Re Institute |language=en}}</ref><ref name="Cho">{{cite news |last1=Cho |first1=Renee |date=20 June 2019 |title=How Climate Change Impacts the Economy |language=en |work=State of the Planet |publisher=Columbia University, Columbia Climate School, Climate, Earth, Society |url=https://news.climate.columbia.edu/2019/06/20/climate-change-economy-impacts/ |access-date=20 January 2022}}</ref>

===Effects of economic growth and degrowth scenarios on emissions===
[[File:20210818 Greenhouse gas emissions by income category - UN Emissions Gap Report.svg|thumb|upright=1.35| The emissions of the richest 1% of the global population account for more than twice the combined share of the poorest 50%. Compliance with the 1.5&nbsp;°C goal of the Paris Agreement would require the richest 1% to reduce their current emissions by at least a factor of 30, while per-person emissions of the poorest 50% could increase by a factor of about three.<ref name="EmissionGapReport2020">{{cite book |last1=UNEP |url=https://www.unep.org/emissions-gap-report-2020 |title=Emissions Gap Report 2020 |date=1 December 2020 |publisher=United Nations Environment Programme |page=xxv |chapter=Figure ES.8. Per capita and absolute CO 2 consumption emissions by four global income groups for 2015. In (book chapter) Executive Summary |access-date=21 January 2022}}</ref>]][[File:2021 CO2 emissions by income decile - International Energy Agency IEA.svg |thumb|upright=1.35 |Though total {{CO2}} emissions (size of pie charts) differ substantially among high-emitting regions, the pattern of higher income classes emitting more than lower income classes is consistent across regions.<ref name="IEA_20230222">{{cite web |last1=Cozzi |first1=Laura |last2=Chen |first2=Olivia |last3=Kim |first3=Hyeji |date=22 February 2023 |title=The world's top 1% of emitters produce over 1000 times more CO2 than the bottom 1% |url=https://www.iea.org/commentaries/the-world-s-top-1-of-emitters-produce-over-1000-times-more-co2-than-the-bottom-1 |url-status=live |archive-url=https://web.archive.org/web/20230303032020/https://www.iea.org/commentaries/the-world-s-top-1-of-emitters-produce-over-1000-times-more-co2-than-the-bottom-1 |archive-date=3 March 2023 |website=iea.org |publisher=International Energy Agency (IEA)}} "Methodological note: ... The analysis accounts for energy-related CO2, and not other greenhouse gases, nor those related to land use and agriculture."</ref> The world's top 1% of emitters emit over 1000 times more than the bottom 1%.<ref name="IEA_20230222" />]]{{See also|Degrowth|Eco-economic decoupling|Ecological economics}}
[[Economic growth#Environmental impact|Economic growth]] is one of the causes of increasing greenhouse gas emissions.<ref>{{cite journal |last1=Ripple |first1=William J |author-link1=William J. Ripple |last2=Wolf |first2=Christopher |last3=Newsome |first3=Thomas M |last4=Barnard |first4=Phoebe |last5=Moomaw |first5=William R |date=5 November 2019 |title=World Scientists' Warning of a Climate Emergency |url=https://academic.oup.com/bioscience/advance-article/doi/10.1093/biosci/biz088/5610806 |journal=[[BioScience]] |volume=70 |pages=8–12 |doi=10.1093/biosci/biz088 |access-date=25 November 2022 |quote=Economic and population growth are among the most important drivers of increases in CO2 emissions from fossil fuel combustion... |hdl-access=free |hdl=1808/30278}}</ref><ref>{{cite journal |last1=Wiedmann |first1=Thomas |last2=Lenzen |first2=Manfred |last3=Keyßer |first3=Lorenz T. |last4=Steinberger |first4=Julia K. |date=2020 |title=Scientists' warning on affluence |journal=[[Nature Communications]] |volume=11 |issue=3107 |page=3107 |bibcode=2020NatCo..11.3107W |doi=10.1038/s41467-020-16941-y |pmc=7305220 |pmid=32561753}}</ref> As the economy expands, demand for energy and energy-intensive goods increases, pushing up CO<sub>2</sub> emissions. On the other hand, economic growth may drive technological change and increase energy efficiency. Economic growth may be associated with specialization in certain economic sectors. If specialization is in energy-intensive sectors, then there will be a strong link between economic growth and emissions growth. If specialization is in less energy-intensive sectors, e.g. the services sector, then there might be a weak link between economic growth and emissions growth. In general, there is some degree of flexibility between economic growth and emissions growth.<ref name=":25">{{Cite web |title=2021-2022 EIB Climate Survey, part 3 of 3: The economic and social impact of the green transition |url=https://www.eib.org/en/surveys/climate-survey/4th-climate-survey/green-transition-jobs-lifestyle-adaptation.htm |access-date=4 April 2022 |website=EIB.org |language=en}}</ref>

Some studies found that [[degrowth]] scenarios, where economic output either declines or declines in terms of contemporary [[Economic indicator|economic metrics]] such as current [[GDP]], have been neglected in considerations of [[Special Report on Global Warming of 1.5 °C|1.5 °C scenarios]] reported by the [[Intergovernmental Panel on Climate Change]] (IPCC). They find that some degrowth scenarios "minimize many key risks for feasibility and sustainability compared to technology-driven pathways" with a core problem of such being feasibility in the context of contemporary decision-making of [[politics]] and [[Economic globalization|globalized]] rebound- and relocation-effects.<ref>{{cite news |title=1.5&nbsp;°C degrowth scenarios suggest need for new mitigation pathways |url=https://phys.org/news/2021-05-degrowth-scenarios-mitigation-pathways.html |access-date=14 June 2021 |work=phys.org |language=en }}[https://scienmag.com/1-5c-degrowth-scenarios-suggest-need-for-new-mitigation-pathways-research/ Alternative Link] {{Webarchive|url=https://web.archive.org/web/20230410002250/https://scienmag.com/1-5c-degrowth-scenarios-suggest-need-for-new-mitigation-pathways-research/ |date=10 April 2023 }}</ref><ref name="10.1038/s41467-021-22884-9">{{cite journal |last1=Keyßer |first1=Lorenz T. |last2=Lenzen |first2=Manfred |date=2021-05-11 |title=1.5 °C degrowth scenarios suggest the need for new mitigation pathways |journal=Nature Communications |language=en |volume=12 |issue=1 |pages=2676 |bibcode=2021NatCo..12.2676K |doi=10.1038/s41467-021-22884-9 |issn=2041-1723 |pmc=8113441 |pmid=33976156}} [[File:CC-BY_icon.svg|50x50px]] Available under [[creativecommons:by/4.0/|CC BY 4.0]].</ref> This is supported by other studies which state that absolute [[Eco-economic decoupling|decoupling]] is highly unlikely to be achieved fast enough to prevent [[global warming]] over 1.5&nbsp;°C or 2&nbsp;°C, even under optimistic policy conditions.<ref>{{Cite journal |last1=Hickel |first1=Jason |last2=Kallis |first2=Giorgos |date=2020-06-06 |title=Is Green Growth Possible? |url=https://doi.org/10.1080/13563467.2019.1598964 |journal=New Political Economy |volume=25 |issue=4 |pages=469–486 |doi=10.1080/13563467.2019.1598964 |issn=1356-3467 |s2cid=159148524}}</ref>

== Economics of climate change mitigation ==

[[File:20210119 Renewable energy investment - 2004- BloombergNEF.svg|thumb|upright=1.35|Companies, governments and households have committed increasing amounts to decarbonization, including renewable energy (solar, wind), electric vehicles and associated charging infrastructure, energy storage, energy-efficient heating systems, carbon capture and storage, and hydrogen.<ref name=BloombergNEF_20210119>{{cite news |title=Energy Transition Investment Hit $500 Billion in 2020 – For First Time |url=https://about.bnef.com/blog/energy-transition-investment-hit-500-billion-in-2020-for-first-time/ |work=BloombergNEF |publisher=(Bloomberg New Energy Finance) |date=19 January 2021 |archive-url=https://web.archive.org/web/20210119134344/https://about.bnef.com/blog/energy-transition-investment-hit-500-billion-in-2020-for-first-time/ |archive-date=19 January 2021 |url-status=live }}</ref><ref name=BloombergNEF_20230126>{{cite news |last1=Catsaros |first1=Oktavia |title=Global Low-Carbon Energy Technology Investment Surges Past $1 Trillion for the First Time |url=https://about.bnef.com/blog/global-low-carbon-energy-technology-investment-surges-past-1-trillion-for-the-first-time/ |publisher=Bloomberg NEF (New Energy Finance) |date=26 January 2023 |archive-url=https://web.archive.org/web/20230522001857/https://about.bnef.com/blog/global-low-carbon-energy-technology-investment-surges-past-1-trillion-for-the-first-time/ |archive-date=22 May 2023 |location=Figure 1 |quote=Defying supply chain disruptions and macroeconomic headwinds, 2022 energy transition investment jumped 31% to draw level with fossil fuels |url-status=live }}</ref><ref name=BNEF_20240130>{{cite web |title=Global Clean Energy Investment Jumps 17%, Hits $1.8 Trillion in 2023, According to BloombergNEF Report |url=https://about.bnef.com/blog/global-clean-energy-investment-jumps-17-hits-1-8-trillion-in-2023-according-to-bloombergnef-report/ |website=BNEF.com |publisher=Bloomberg NEF |archive-url=https://web.archive.org/web/20240628232137/https://about.bnef.com/blog/global-clean-energy-investment-jumps-17-hits-1-8-trillion-in-2023-according-to-bloombergnef-report/ |archive-date=June 28, 2024 |date=30 January 2024 |quote=Start years differ by sector but all sectors are present from 2020 onwards. |url-status=live}}</ref><ref name=BloombergNEF_20250131>''2024 data:'' {{cite web |title=Energy Transition Investment Trends 2025 / Abridged report |url=https://assets.bbhub.io/professional/sites/24/951623_BNEF-Energy-Transition-Trends-2025-Abridged.pdf |publisher=BloombergNEF |archive-url=https://web.archive.org/web/20250202002640/https://assets.bbhub.io/professional/sites/24/951623_BNEF-Energy-Transition-Trends-2025-Abridged.pdf |archive-date=2 February 2025 |page=9 |date=30 January 2025 |url-status=live}}</ref>]]
{{Economics sidebar}}

The economics of climate change mitigation is a contentious part of [[climate change mitigation]] – action aimed to limit the dangerous socio-economic and environmental consequences of [[climate change]].<ref name=fisher>{{cite book
|year=2007
|contribution=Issues related to mitigation in the long term context.
|title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change
|editor=B. Metz
|publisher=[[Cambridge University Press]]
|author=Fisher, B.S.
|url=http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch3.html
|access-date=2009-05-20
|display-authors=etal
|display-editors=etal
|archive-date=16 November 2018
|archive-url=https://web.archive.org/web/20181116144321/http://www.ipcc.ch/publications_and_data/ar4/wg3/en/ch3.html
|url-status=dead
}}</ref>

Climate change mitigation centres on two main strategies: the reduction of [[greenhouse gas emissions|greenhouse gas (GHG) emissions]] and the preservation and expansion of [[carbon sink|sinks]] which absorb greenhouse gases, including the sea and forests.

The economics of climate change mitigation are a central point of contention whose considerations significantly affect the level of climate action at every level from local to global.

For example, higher [[interest rate]]s are slowing [[solar panel]] installation in [[Developing country|developing countries]].<ref>{{Cite news |title=The global backlash against climate policies has begun |newspaper=The Economist |url=https://www.economist.com/international/2023/10/11/the-global-backlash-against-climate-policies-has-begun |access-date=2023-11-11 |issn=0013-0613}}</ref>

{{TOC limit|3}}

===Policies and approaches to reduce emissions===
{{Main|Climate change mitigation}}
====Price signals====
A [[carbon price]] is a system of applying a price to carbon emissions, as a method of emissions mitigation.<ref name=":42">{{Cite web|url=http://www.lse.ac.uk/GranthamInstitute/faqs/what-is-a-carbon-price-and-why-do-we-need-one/|title=What is a carbon price and why do we need one?|website=Grantham Research Institute on climate change and the environment|language=en-US|access-date=2020-03-12}}</ref> Potential methods of pricing include [[carbon emission trading]], results-based [[climate finance]], crediting mechanisms and more.<ref>{{Cite web|url=https://www.carbonpricingleadership.org/what|title=Understanding carbon pricing|website=Carbon Pricing Leadership Coalition|language=en-US|access-date=2020-03-12}}</ref> Carbon pricing can lend itself to the creation of carbon taxes, which allows governments to tax emissions.<ref name=":42" />

[[Carbon tax]]es are considered useful because, once a number{{Clarify|date=December 2023}} has been created, it will benefit the government either with currency or with a lowering in emissions or both, and therefore benefit the environment.<ref name=":5a">{{Cite web|url=http://www.lse.ac.uk/GranthamInstitute/faqs/which-is-better-carbon-tax-or-cap-and-trade/|title=Which is better: carbon tax or cap-and-trade?|website=Grantham Research Institute on climate change and the environment|language=en-US|access-date=2020-03-12}}</ref> It is almost a consensus that carbon taxing is the most cost-effective method of having a substantial and rapid response to climate change and carbon emissions.<ref>{{Cite book|title=Implementing a US carbon tax : challenges and debates|others=Parry, Ian W. H. (Ian William Holmes), 1965-, Morris, Adele Cecile, 1963-, Williams, Roberton C., 1972-|year = 2015|isbn=978-1-138-81415-8|location=New York|oclc=891001377}}</ref> However, backlash to the tax includes that it can be considered regressive, as the impact can be damaging disproportionately to the poor who spend much of their income on energy for their homes.<ref>{{Cite web|url=https://www.yaleclimateconnections.org/2016/07/pros-and-cons-of-a-carbon-tax-key-issues/|title=Pros and cons of a carbon tax » Yale Climate Connections|date=2016-07-20|website=Yale Climate Connections|language=en-US|access-date=2020-03-12}}</ref> Still, even with near universal approval, there are issues regarding both the collection and redistribution of the taxes. One of the central questions being how the newly collected taxes will be redistributed.<ref>{{Cite journal|last1=Chen|first1=Zi-yue|last2=Nie|first2=Pu-yan|date=2016-12-01|title=Effects of carbon tax on social welfare: A case study of China|url=http://www.sciencedirect.com/science/article/pii/S0306261916314209|journal=Applied Energy|language=en|volume=183|pages=1607–1615|doi=10.1016/j.apenergy.2016.09.111|bibcode=2016ApEn..183.1607C |issn=0306-2619}}</ref>

Some or all of the proceeds of a carbon tax can be used to stop it disadvantaging the poor.<ref name=":0aa">{{Cite web |last=Irfan |first=Umair |date=2019-05-17 |title=Fossil fuels are underpriced by a whopping $5.2 trillion |url=https://www.vox.com/2019/5/17/18624740/fossil-fuel-subsidies-climate-imf |access-date=2019-11-23 |website=Vox |language=en}}</ref>

====Structural market reforms====
{{See also|Emissions trading}}

In addition to the implementation of [[Command and control regulation|command-and-control regulations]] (as with a carbon tax), governments can also use [[Market-based environmental policy instruments|market-based]] approaches to mitigate emissions. One such method is emissions trading where governments set the total emissions of all polluters to a maximum and distribute permits, through auction or allocation, that allow entities to emit a portion, typically one ton of carbon dioxide equivalent (CO<sub>2</sub>e), of the mandated total emissions.<ref name="glossary23">{{cite web|date=January 2011|title=Cap and Trade: Key Terms Glossary|url=http://www.c2es.org/docUploads/climate101-captrade.pdf|url-status=dead|archive-url=https://web.archive.org/web/20171005153958/http://www.c2es.org/docUploads/climate101-captrade.pdf|archive-date=2017-10-05|access-date=27 October 2014|work=Climate Change 101|publisher=Center for Climate and Energy Solutions}}</ref> In other words, the amount of pollution an entity can emit in an emissions trading system is limited by the number of permits they have. If a polluter wants to increase their emissions, they can only do so after buying permits from those who are willing to sell them.<ref name=":54">{{Cite web|title=Which is better: carbon tax or cap-and-trade?|url=http://www.lse.ac.uk/GranthamInstitute/faqs/which-is-better-carbon-tax-or-cap-and-trade/|access-date=2020-03-12|website=Grantham Research Institute on climate change and the environment|language=en-US}}</ref> Many economists prefer this method of reducing emissions as it is market based and highly cost effective.<ref name="glossary23" /> That being said, emissions trading alone is not perfect since it fails to place a clear price on emissions. Without this price, emissions prices are volatile due to the supply of permits being fixed, meaning their price is entirely determined by shifts in demand.<ref name=":05">{{Cite journal|last1=Goulder|first1=Lawrence|last2=Schein|first2=Andrew|date=August 2013|title=Carbon Taxes vs. Cap and Trade: A Critical Review|journal=NBER Working Paper Series|location=Cambridge, MA|doi=10.3386/w19338|s2cid=158104668|doi-access=free}}</ref> This uncertainty in price is especially disliked by businesses since it prevents them from investing in abatement technologies with confidence which hinders efforts for mitigating emissions.<ref name=":05" /> Regardless, while emissions trading alone has its problems and cannot reduce pollutants to the point of stabilizing the global [[climate]], it remains an important tool for addressing climate change.

==== Degrowth ====
There is a debate about a potentially critical need for new ways of economic accounting, including directly monitoring and [[Value (economics)|quantifying]] positive real-world environmental effects such as air quality improvements and related unprofitable [[Work (human activity)|work]] like forest protection, alongside far-reaching structural changes of lifestyles<ref>{{cite journal |author1=Thomas Wiedmann |author2=Manfred Lenzen |author3=Lorenz T. Keyßer |author4=[[Julia Steinberger]] |date=19 June 2020 |title=Scientists' warning on affluence |journal=Nature Communications |volume=11 |issue=1 |page=3107 |bibcode=2020NatCo..11.3107W |doi=10.1038/s41467-020-16941-y |pmc=7305220 |pmid=32561753 |doi-access=free}}</ref><ref>{{cite web |title=Why GDP is no longer the most effective measure of economic success |url=https://www.worldfinance.com/strategy/why-gdp-is-no-longer-the-most-effective-measure-of-economic-success |access-date=17 September 2020 |website=www.worldfinance.com}}</ref> as well as acknowledging and moving beyond the limits of current economics such as GDP.<ref>{{cite journal |last1=Kapoor |first1=Amit |last2=Debroy |first2=Bibek |author-link2=Bibek Debroy |date=4 October 2019 |title=GDP Is Not a Measure of Human Well-Being |url=https://hbr.org/2019/10/gdp-is-not-a-measure-of-human-well-being |journal=Harvard Business Review |access-date=20 September 2020}}</ref> Some argue that for effective climate change mitigation [[degrowth]] has to occur, while some argue that [[eco-economic decoupling]] could limit climate change enough while continuing high rates of traditional GDP growth.<ref>{{cite journal |last1=Hickel |first1=Jason |last2=Hallegatte |first2=Stéphane |year=2021 |title=Can we live within environmental limits and still reduce poverty? Degrowth or decoupling? |journal=Development Policy Review |language=en |volume=40 |doi=10.1111/dpr.12584 |issn=1467-7679 |s2cid=239636388|doi-access=free }}</ref><ref>{{cite news |last1=Landler |first1=Mark |last2=Sengupta |first2=Somini |date=21 January 2020 |title=Trump and the Teenager: A Climate Showdown at Davos |newspaper=The New York Times |url=https://www.nytimes.com/2020/01/21/climate/greta-thunberg-trump-davos.html |access-date=20 September 2020}}</ref> There is also research and debate about requirements of how [[economic system]]s could be transformed for [[sustainability]] – such as how their jobs could transition harmoniously into [[green job]]s – a [[just transition]] – and how relevant sectors of the economy – like the [[renewable energy industry]] and the [[bioeconomy]] – could be adequately supported.<ref>{{cite web |title=Skills for Green Jobs: A Global View |url=http://www.oit.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/article/wcms_165282.pdf |access-date=8 November 2021}}</ref><ref>{{cite journal |last1=van der Ree |first1=Kees |date=1 June 2019 |title=Promoting Green Jobs: Decent Work in the Transition to Low-Carbon, Green Economies |journal=International Development Policy {{!}} Revue internationale de politique de développement |language=en |issue=11 |pages=248–271 |doi=10.4000/poldev.3107 |issn=1663-9375 |s2cid=197784487|doi-access=free }}</ref>

While degrowth is often believed to be associated with decreased [[living standard]]s and [[austerity]] measures, many of its proponents seek to expand universal public goods<ref>{{cite journal |last1=Hickel|first1=Jason|author-link1=Jason Hickel|last2=Kallis|first2=Giorgos|author-link2=Giorgos Kallis|last3=Jackson|first3=Tim|author-link3=Tim Jackson (economist)|last4=O'Neill|first4=Daniel W.|last5=Schor|first5=Juliet B.|author-link5=Juliet Schor|last6=Steinberger|first6=Julia K.|author-link6=Julia Steinberger|display-authors=etal.|date=December 12, 2022|title=Degrowth can work — here's how science can help|url= |journal=[[Nature (journal)|Nature]]|volume=612|issue=7940|pages=400–403|doi=10.1038/d41586-022-04412-x|pmid=36510013 |bibcode=2022Natur.612..400H |s2cid=254614532 |access-date=|quote=Researchers in ecological economics call for a different approach — degrowth. Wealthy economies should abandon growth of gross domestic product (GDP) as a goal, scale down destructive and unnecessary forms of production to reduce energy and material use, and focus economic activity around securing human needs and well-being.|doi-access=free}}</ref><ref>{{cite web |url=https://monthlyreview.org/2023/07/01/planned-degrowth/|title=Planned Degrowth: Ecosocialism and Sustainable Human Development|last=Foster|first=John Bellamy|author-link=John Bellamy Foster|date=July 1, 2023 |website=[[Monthly Review]] |publisher= |access-date=August 24, 2023 |quote=Degrowth, in this sense, is not aimed at austerity, but at finding a "prosperous way down" from our current extractivist, wasteful, ecologically unsustainable, maldeveloped, exploitative, and unequal, class-hierarchical world. Continued growth would occur in some areas of the economy, made possible by reductions elsewhere. Spending on fossil fuels, armaments, private jets, sport utility vehicles, second homes, and advertising would need to be cut in order to provide room for growth in such areas as regenerative agriculture, food production, decent housing, clean energy, accessible health care, universal education, community welfare, public transportation, digital connectivity, and other areas related to green production and social needs.}}</ref> (such as public transport), increase health<ref name="10.1057/s41285-017-0032-7">{{cite journal |last1=Borowy |first1=Iris |last2=Aillon |first2=Jean-Louis |date=1 August 2017 |title=Sustainable health and degrowth: Health, health care and society beyond the growth paradigm |journal=Social Theory & Health |language=en |volume=15 |issue=3 |pages=346–368 |doi=10.1057/s41285-017-0032-7 |issn=1477-822X |s2cid=152144759}}</ref><ref>{{cite web |last1=Aillon |first1=J. |last2=Cardito |first2=M. |date=2020 |title=Health and Degrowth in times of Pandemic |url=https://www.ojs.unito.it/index.php/visions/issue/download/495/Visions%20for%20Sustainability%20%2314%20-%20Full%20Issue#page=3 |language=en}}</ref><ref>{{cite journal |last1=Missoni |first1=Eduardo |author-link1=Eduardo Missoni |date=1 July 2015 |title=Degrowth and health: local action should be linked to global policies and governance for health |url=https://link.springer.com/article/10.1007/s11625-015-0300-1 |journal=Sustainability Science |language=en |volume=10 |issue=3 |pages=439–450 |doi=10.1007/s11625-015-0300-1 |bibcode=2015SuSc...10..439M |issn=1862-4057 |quote=Volume and increase of spending in the health sector contribute to economic growth, but do not consistently relate with better health. Instead, unsatisfactory health trends, health systems' inefficiencies, and high costs are linked to the globalization of a growth society dominated by neoliberal economic ideas and policies of privatization, deregulation, and liberalization. A degrowth approach, understood as frame that connects diverse ideas, concepts, and proposals alternative to growth as a societal objective, can contribute to better health and a more efficient use of health systems. |s2cid=55806403}}</ref> (fitness, wellbeing<ref>{{cite journal |last1=Büchs |first1=Milena |last2=Koch |first2=Max |date=1 January 2019 |title=Challenges for the degrowth transition: The debate about wellbeing |journal=Futures |language=en |volume=105 |pages=155–165 |doi=10.1016/j.futures.2018.09.002 |issn=0016-3287 |quote=The first part reviews the arguments that degrowth proponents have put forward on the ways in which degrowth can maintain or even improve wellbeing. It also outlines why the basic needs approach is most suitable for conceptualising wellbeing in a degrowth context. The second part considers additional challenges to maintaining or even improving current levels of wellbeing under degrowth |s2cid=149731503|doi-access=free }}</ref> and freedom from diseases) and increase various forms of, often unconventional commons-oriented,<ref>{{cite journal |last1=Kostakis |first1=Vasilis |last2=Latoufis |first2=Kostas |last3=Liarokapis |first3=Minas |last4=Bauwens |first4=Michel |date=1 October 2018 |title=The convergence of digital commons with local manufacturing from a degrowth perspective: Two illustrative cases |journal=Journal of Cleaner Production |language=en |volume=197 |pages=1684–1693 |doi=10.1016/j.jclepro.2016.09.077 |bibcode=2018JCPro.197.1684K |issn=0959-6526 |quote=A large part of the activity taking place under the CBPP umbrella presents a lot of similarities with the degrowth concept of unpaid work and decommodification (Nierling, 2012). The majority of "peers" engaged in commons-oriented projects are motivated by passion, communication, learning and enrichment (Benkler, 2006, 2011). Kostakis et al. (2015, 2016) have only theoretically and conceptually explored the contours of an emerging productive model that builds on the convergence of the digital commons of knowledge, software and design with local manufacturing technologies. They tentatively call it "design global, manufacture local" |s2cid=43975556}}</ref> labor. To this end, the application of both advanced technologies and reductions in various demands, including via overall reduced labor time<ref>{{cite journal |last1=Scarrow |first1=Ryan |date=April 2018 |title=Work and degrowth |journal=Nature Sustainability |language=en |volume=1 |issue=4 |pages=159 |doi=10.1038/s41893-018-0057-5 |bibcode=2018NatSu...1..159S |issn=2398-9629 |s2cid=149576398}}</ref> or sufficiency-oriented strategies,<ref>{{cite journal |last1=Haberl |first1=Helmut |last2=Wiedenhofer |first2=Dominik |last3=Virág |first3=Doris |last4=Kalt |first4=Gerald |last5=Plank |first5=Barbara |last6=Brockway |first6=Paul |last7=Fishman |first7=Tomer |last8=Hausknost |first8=Daniel |last9=Krausmann |first9=Fridolin |last10=Leon-Gruchalski |first10=Bartholomäus |last11=Mayer |first11=Andreas |last12=Pichler |first12=Melanie |last13=Schaffartzik |first13=Anke |last14=Sousa |first14=Tânia |last15=Streeck |first15=Jan |date=10 June 2020 |title=A systematic review of the evidence on decoupling of GDP, resource use and GHG emissions, part II: synthesizing the insights |journal=Environmental Research Letters |language=en |volume=15 |issue=6 |pages=065003 |bibcode=2020ERL....15f5003H |doi=10.1088/1748-9326/ab842a |issn=1748-9326 |last16=Creutzig |first16=Felix |author16-link=Felix Creutzig |s2cid=216453887|doi-access=free }}</ref> are considered to be important by some.<ref>{{cite journal |last1=Hickel |first1=Jason|author-link1=Jason Hickel|date=3 October 2021 |title=What does degrowth mean? A few points of clarification |journal=Globalizations |volume=18 |issue=7 |pages=1105–1111 |doi=10.1080/14747731.2020.1812222 |issn=1474-7731 |s2cid=221800076|doi-access=free |bibcode=2021Glob...18.1105H }}</ref><ref name="10.1016/j.gloenvcha.2020.102168">{{cite journal |last1=Millward-Hopkins |first1=Joel |last2=Steinberger |first2=Julia K. |last3=Rao |first3=Narasimha D. |last4=Oswald |first4=Yannick |date=1 November 2020 |title=Providing decent living with minimum energy: A global scenario |journal=Global Environmental Change |language=en |volume=65 |pages=102168 |doi=10.1016/j.gloenvcha.2020.102168 |issn=0959-3780 |s2cid=224977493|doi-access=free |bibcode=2020GEC....6502168M }}</ref>

===Assessing costs and benefits===
====GDP====

The costs of mitigation and adaptation policies can be measured as a percentage of GDP. A problem with this method of assessing costs is that GDP is an imperfect measure of welfare.<ref name=markandya />{{Rp|page=478}} There are [[externality|externalities]] in the economy which mean that some prices might not be truly reflective of their [[social cost]]s.

Corrections can be made to GDP estimates to allow for these problems, but they are difficult to calculate. In response to this problem, some have suggested using other methods to assess policy. For example, the [[Earth Summit#Commission for Sustainable Development (CSD)|United Nations Commission for Sustainable Development]] has developed a system for [[green gross domestic product|"Green" GDP]] accounting and a list of [[sustainable development]] indicators.

====Baselines====

{{See also|Climate change scenario#Baseline scenarios}}

The emissions baseline is, by definition, the emissions that would occur in the absence of policy intervention. Definition of the baseline scenario is critical in the assessment of mitigation costs.<ref name=markandya />{{Rp|page=469}} This because the baseline determines the potential for emissions reductions, and the costs of implementing emission reduction policies.

There are several concepts used in the literature over baselines, including the "efficient" and "business-as-usual" (BAU) baseline cases. In the efficient baseline, it is assumed that all resources are being employed efficiently. In the BAU case, it is assumed that future development trends follow those of the past, and no changes in policies will take place. The BAU baseline is often associated with high GHG emissions, and may reflect the continuation of current energy-subsidy policies, or other market failures.

Some high emission BAU baselines imply relatively low net mitigation costs per unit of emissions. If the BAU scenario projects a large growth in emissions, total mitigation costs can be relatively high. Conversely, in an efficient baseline, mitigation costs per unit of emissions can be relatively high, but total mitigation costs low.{{clarify|date=November 2019}}

====Ancillary impacts====

These are the secondary or side effects of mitigation policies, and including them in studies can result in higher or lower mitigation cost estimates.<ref name=markandya />{{Rp|page=455}} Reduced mortality and morbidity costs are potentially a major ancillary benefit of mitigation. This benefit is associated with reduced use of fossil fuels, thereby resulting in less air pollution, which might even just by itself be a benefit greater than the cost.<ref>{{cite journal |year=2022 |title=Chapter 2: Emissions trends and drivers |url=https://report.ipcc.ch/ar6wg3/pdf/IPCC_AR6_WGIII_FinalDraft_Chapter02.pdf |journal=Ipcc_Ar6_Wgiii |access-date=10 April 2022 |archive-date=4 April 2022 |archive-url=https://web.archive.org/web/20220404150655/https://report.ipcc.ch/ar6wg3/pdf/IPCC_AR6_WGIII_FinalDraft_Chapter02.pdf |url-status=dead }}</ref>{{Rp|page=48}} There may also be ancillary costs.

====Flexibility====

Flexibility is the ability to reduce emissions at the lowest cost. The greater the flexibility that governments allow in their regulatory framework to reduce emissions, the lower the potential costs are for achieving emissions reductions (Markandya ''et al.'', 2001:455).<ref name=markandya />
* "Where" flexibility allows costs to be reduced by allowing emissions to be cut at locations where it is most efficient to do so. For example, the Flexibility Mechanisms of the Kyoto Protocol allow "where" flexibility (Toth ''et al.'', 2001:660).<ref name="toth2001">{{cite book |author=Toth, F.L. |url=http://www.grida.no/climate/ipcc_tar/wg3/379.htm |title=Climate Change 2001: Mitigation. Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change |publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A. |year=2001 |editor=B. Metz |pages=607–609 |contribution=Decision-making Frameworks |display-authors=etal |access-date=2010-01-10 |display-editors=etal |archive-url=https://web.archive.org/web/20121013065501/http://www.grida.no/climate/ipcc_tar/wg3/379.htm |archive-date=13 October 2012 |url-status=dead}}</ref>
* "When" flexibility potentially lowers costs by allowing reductions to be made at a time when it is most efficient to do so.
Including carbon sinks in a policy framework is another source of flexibility. Tree planting and forestry management actions can increase the capacity of sinks. [[Soil]]s and other types of vegetation are also potential sinks. There is, however, uncertainty over how net emissions are affected by activities in this area.<ref name="markandya" />{{clarify|date=November 2019}}

====Discount rates====
{{See also|Discounting|Social discount rate}}
Assessing climate change impacts and mitigation policies involves a comparison of economic flows that occur in different points in time. The discount rate is used by economists to compare economic effects occurring at different times. Discounting converts future economic impacts into their present-day value. The discount rate is generally positive because resources invested today can, on average, be transformed into more resources later. If climate change mitigation is viewed as an [[investment]], then the return on investment can be used to decide how much should be spent on mitigation.

[[Integrated assessment modelling|Integrated assessment models (IAM)]] are used to estimate the [[social cost of carbon]]. The discount rate is one of the factors used in these models. The IAM frequently used is the [[DICE model|Dynamic Integrated Climate-Economy (DICE) model]] developed by [[William Nordhaus]]. The DICE model uses discount rates, uncertainty, and risks to make benefit and cost estimations of climate policies and adapt to the current economic behavior.<ref name="oup.silverchair-cdn.com">[[John Weyant]]. (2017) [https://oup.silverchair-cdn.com/oup/backfile/Content_public/Journal/reep/11/1/10.1093_reep_rew018/7/rew018.pdf?Expires=1494110549&Signature=Lv3DqKLajltHUzGI~F1fYQIemZvLeq1xPb0EHJGpb5KbN-BFGp0impzD~p2OcgDoqekaOkvsCvaPYxcuOK9xQS3hb4Vi3IL0UqMUgwYW2~c3MHClTJLwSCXhfZ8uMAfT2Afozsh8AUECa~tw9T7kg8yYpHRa6WwVf-AmxI6pNDUa0KQheVvVYi0rkUNINSPw4hvoB~djKxRren5YhkLKTA~62Jv3yKRfQaSkvgSUk4OMV2y7apcpVIZa7oA4yeoKMIo8owCz5DnI2KM4W61sxIMl3SVjRdSJCF5iT6l~0zmAyBSJmrddleGsXu~2FtS1qu9b-Z0SatFwE5eC5CxgoQ__&Key-Pair-Id=APKAIUCZBIA4LVPAVW3Q Some Contributions of Integrated Assessment Models of Global Climate Change.] ''Review of Environmental Economics and Policy'' 11:1, 115-137</ref>

The choice of discount rate has a large effect on the result of any climate change cost analysis (Halsnæs ''et al.'', 2007:136).<ref name="halsnaes">{{cite book |author=Halsnæs, K. |url=http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |title=Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change |publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A. |year=2007 |editor=B. Metz |pages=127 |contribution=Framing issues |display-authors=etal |access-date=2009-05-20 |display-editors=etal |archive-url=https://web.archive.org/web/20181005032403/http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |archive-date=5 October 2018 |url-status=dead}}</ref> Using too high a discount rate will result in too little investment in mitigation, but using too low a rate will result in too much investment in mitigation. In other words, a high discount rate implies that the present-value of a dollar is worth more than the future-value of a dollar.

Discounting can either be prescriptive or descriptive. The descriptive approach is based on what discount rates are observed in the behaviour of people making every day decisions (the private [[discounted cash flow|discount rate]]) (IPCC, 2007c:813).<ref name="glossary">{{cite web |author=IPCC |date=2007c |title=Annex. In: Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (B. Metz ''et al''. Eds.) |url=http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |url-status=dead |archive-url=https://web.archive.org/web/20181005032403/http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm |archive-date=5 October 2018 |access-date=2009-05-20 |publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A. |page=819}}</ref> In the prescriptive approach, a discount rate is chosen based on what is thought to be in the best interests of future generations (the [[social discount rate]]).

The descriptive approach can be interpreted{{clarify|date=November 2019}} as an effort to maximize the economic resources available to future generations, allowing them to decide how to use those resources (Arrow ''et al.'', 1996b:133–134).<ref name=arrow>
{{cite book
|date=1996b
|author=Arrow, K.J.
|title=Intertemporal Equity, Discounting, and Economic Efficiency. In: Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change (J.P. Bruce ''et al''. (eds.))
|publisher=This version: Printed by Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A.. PDF version: Prof. [[Joseph Stiglitz]]'s web page at [[Columbia University]]
|isbn=978-0-521-56854-8
|url=https://archive.org/details/climatechange1990000unse_h1m9/page/125
|pages=[https://archive.org/details/climatechange1990000unse_h1m9/page/125 125–144]
|access-date=2010-02-11
|display-authors=etal
}}
</ref> The prescriptive approach can be interpreted as an effort to do as much as is economically justified{{clarify|date=November 2019}} to reduce the risk of climate change.

The DICE model incorporates a descriptive approach, in which discounting reflects actual economic conditions. In a recent{{when|date=November 2019}} DICE model, DICE-2013R Model, the social cost of carbon is estimated based on the following alternative scenarios: (1) a baseline scenario, when climate change policies have not changed since 2010, (2) an optimal scenario, when climate change policies are optimal (fully implemented and followed), (3) when the optimal scenario does not exceed 2˚C limit after 1900 data, (4) when the 2˚C limit is an average and not the optimum, (5) when a near-zero (low) discount rate of 0.1% is used (as assumed in the [[Stern Review]]), (6) when a near-zero discount rate is also used but with calibrated interest rates, and (7) when a high discount rate of 3.5% is used.<ref>{{Cite journal |doi = 10.1086/676035|title = Estimates of the Social Cost of Carbon: Concepts and Results from the DICE-2013R Model and Alternative Approaches|year = 2014|last1 = Nordhaus|first1 = William|journal = Journal of the Association of Environmental and Resource Economists|volume = 1|pages = 273–312|s2cid = 155012348}}</ref>{{update inline|date=November 2019}}

According to Markandya ''et al.'' (2001:466), discount rates used in assessing mitigation programmes need to at least partly reflect the [[opportunity cost]]s of capital.<ref name="markandya">{{cite web|author=Markandya, A.|display-authors=etal|year=2001|title=Costing Methodologies. In: Climate Change 2001: Mitigation. Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz ''et al''. Eds.]|url=http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm|url-status=dead|access-date=2010-01-10|publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A.|pages=474–476|archive-date=5 October 2018|archive-url=https://web.archive.org/web/20181005032403/http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm}}</ref> In developed countries, Markandya ''et al.'' (2001:466) thought that a discount rate of around 4–6% was probably justified, while in developing countries, a rate of 10–12% was cited. The discount rates used in assessing private projects were found to be higher – with potential rates of between 10% and 25%.

When deciding how to discount future climate change impacts, value judgements are necessary (Arrow ''et al.'', 1996b:130). IPCC (2001a:9) found that there was no consensus on the use of long-term discount rates in this area.<ref>{{cite web
|date=2001a
|title=Summary for Policymakers. In: Climate Change 2001: Mitigation. Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz ''et al''. Eds.]
|publisher=Cambridge University Press, Cambridge, UK, and New York, N.Y., U.S.A.
|author=IPCC
|url=http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm
|access-date=2010-01-10
|archive-date=5 October 2018
|archive-url=https://web.archive.org/web/20181005032403/http://www.ipcc.ch/publications_and_data/publications_and_data_reports.htm
|url-status=dead
}}</ref> The prescriptive approach to discounting leads to long-term discount rates of 2–3% in real terms, while the descriptive approach leads to rates of at least 4% after tax – sometimes much higher (Halsnæs ''et al.'', 2007:136).

Even today, it is difficult to agree on an appropriate discount rate. The approach of discounting to be either prescriptive or descriptive stemmed from the views of Nordhaus and [[Nicholas Stern, Baron Stern of Brentford|Stern]]. Nordhaus takes on a descriptive approach which "assumes that investments to slow climate change must compete with investments in other areas". While Stern takes on a prescriptive approach in which "leads to the conclusion that any positive pure rate of time preference is unethical".<ref name="oup.silverchair-cdn.com"/>

In Nordhaus' view, his descriptive approach translates that the impact of climate change is slow, thus investments in climate change should be on the same level of competition with other investments. He defines the discount rate to be the rate of return on capital investments. The DICE model uses the estimated market return on capital as the discount rate, around an average of 4%. He argues that a higher discount rate will make future damages look small, thus have less effort to reduce emissions today. A lower discount rate will make future damages look larger, thus put more effort to reduce emissions today.<ref>Nordhaus, W. (2008) [http://www.econ.yale.edu/~nordhaus/homepage/Balance_2nd_proofs.pdf A Question of Balance: Weighing the Options on Global Warming Policies] {{Webarchive|url=https://web.archive.org/web/20170525133215/http://www.econ.yale.edu/~nordhaus/homepage/Balance_2nd_proofs.pdf |date=25 May 2017 }} ''Yale University Press'' pp. 10-11</ref>

In Stern's view, the pure rate of time preference is defined as the discount rate in a scenario where present and future generations have equal resources and opportunities.<ref>Ackerman, F. (2007) [http://sei-us.org/Publications_PDF/SEI-FOE-DebatingClimateEcon-07.pdf Debating Climate Economics: The Stern Review vs. Its Critics] {{Webarchive|url=https://web.archive.org/web/20161003132506/http://sei-us.org/Publications_PDF/SEI-FOE-DebatingClimateEcon-07.pdf |date=3 October 2016 }} ''Global Development and Environment Institute''</ref> A zero pure rate of time preference in this case would indicate that all generations are treated equally. The future generation do not have a "voice" on today's current policies, so the present generation are morally responsible to treat the future generation in the same manner. He suggests for a lower discount rate in which the present generation should invest in the future to reduce the risks of climate change.

Assumptions are made to support estimating high and low discount rates. These estimates depend on future emissions, [[climate sensitivity]] relative to increase in greenhouse gas concentrations, and the seriousness of impacts over time.<ref>Anthoff, D., R.S.J.Tol, and G.W.Yohe (2009), 'Discounting for Climate Change', ''[http://www.economics-ejournal.org/economics/journalarticles/2009-24 Economics -- the Open-Access, Open-Assessment E-Journal]'', 3, (2009-24), pp. 1-24.</ref> Long-term climate policies will significantly impact future generations and this is called intergenerational discounting. Factors that make intergenerational discounting complicated include the great uncertainty of economic growth, future generations are affected by today's policies, and private discounting will be affected due to a longer "investment horizon".<ref>''U.S. Environmental Protection Agency (EPA) December 2010, [https://yosemite.epa.gov/ee/epa/eerm.nsf/vwan/ee-0568-06.pdf/$file/ee-0568-06.pdf Guidelines for Preparing Economic Analyses: Discounting Future Benefits and Costs]''</ref>

Discounting is a relatively controversial issue in both climate change mitigation and environmental economics due to the ethical implications of valuing future generations less than present ones. Non-economists often find it difficult to grapple with the idea that thousands of dollars of future costs and benefits can be valued at less than a cent in the present after discounting.<ref>{{Cite web|title=The Use of Discount Rates|url=https://ec.europa.eu/info/sites/info/files/file_import/better-regulation-toolbox-61_en_0.pdf|access-date=2020-08-24|website=European Commission - European Commission|language=en}}</ref>

===Economic barriers to addressing climate change mitigation===
Economic components like the [[stock market]] underestimate or cannot value social benefits of climate change mitigation.<ref>{{cite SSRN |title=The Limits of Portfolio Primacy |last1=Tallarita |first1=Roberto |date=9 August 2021 |language=en |ssrn=3912977}}</ref> Climate change is largely an [[externality]],<ref>{{cite web |title=Paying the Cost of Climate Change |url=https://www.brookings.edu/articles/paying-the-cost-of-climate-change/ |website=Brookings |access-date=7 December 2023}}</ref><ref>{{cite journal |last1=Mintz-Woo |first1=Kian |last2=Leroux |first2=Justin |title=What do climate change winners owe, and to whom? |journal=Economics & Philosophy |date=November 2021 |volume=37 |issue=3 |pages=462–483 |doi=10.1017/S0266267120000449 |language=en |issn=0266-2671|doi-access=free |hdl=10468/11123 |hdl-access=free }}</ref><ref>{{cite journal |last1=Rosenbloom |first1=Daniel |last2=Markard |first2=Jochen |last3=Geels |first3=Frank W. |last4=Fuenfschilling |first4=Lea |title=Why carbon pricing is not sufficient to mitigate climate change—and how "sustainability transition policy" can help |journal=Proceedings of the National Academy of Sciences |date=21 April 2020 |volume=117 |issue=16 |pages=8664–8668 |doi=10.1073/pnas.2004093117 |language=en |issn=0027-8424|doi-access=free |pmid=32269079 |pmc=7183151 |bibcode=2020PNAS..117.8664R }}</ref> despite a limited recent internalization of impacts that previously were fully 'external' to the economy.<ref>{{cite journal |last1=Bartolomeo |first1=Giovanni Di |last2=Fard |first2=Behnaz Minooei |last3=Semmler |first3=Willi |title=Greenhouse gases mitigation: global externalities and short-termism |journal=Environment and Development Economics |date=June 2023 |volume=28 |issue=3 |pages=230–241 |doi=10.1017/S1355770X22000249 |bibcode=2023EDevE..28..230D |language=en |issn=1355-770X|url=https://web.uniroma1.it/dip_ecodir/sites/default/files/wpapers/wp196.pdf }}</ref>

Consumers can be and are affected by policies that relate to e.g. ethical consumer literacy,<ref>{{cite journal |last1=Papaoikonomou |first1=Eleni |last2=Ginieis |first2=Matías |last3=Alarcón |first3=Amado Alarcón |title=The Problematics of Being an Ethical Consumer in the Marketplace: Unpacking the Concept of Ethical Consumer Literacy |journal=Journal of Public Policy & Marketing |date=15 November 2023 |volume=43 |issue=2 |pages=133–150 |doi=10.1177/07439156231202746 |language=en |issn=0743-9156 |quote=Instead of placing the responsibility on individual consumers, governments should increase ethical consumer literacy.}}</ref> the available choices they have, transportation policy,<ref>{{cite web |title=AR6 Synthesis Report: Climate Change 2023 — IPCC |url=https://www.ipcc.ch/report/sixth-assessment-report-cycle/ |access-date=18 April 2023}}</ref> [[Product information|product transparency]] policies,<ref>{{cite journal |last1=Hoang |first1=Nguyen Tien |last2=Kanemoto |first2=Keiichiro |title=Mapping the deforestation footprint of nations reveals growing threat to tropical forests |journal=Nature Ecology & Evolution |date=June 2021 |volume=5 |issue=6 |pages=845–853 |doi=10.1038/s41559-021-01417-z |pmid=33782576 |bibcode=2021NatEE...5..845H |language=en |issn=2397-334X}}</ref><ref>{{cite news |title=Supermarket food could soon carry eco-labels, says study |url=https://www.bbc.com/news/science-environment-62460551 |access-date=7 December 2023 |date=9 August 2022}}</ref><ref>{{cite journal |last1=Clark |first1=Michael |last2=Springmann |first2=Marco |last3=Rayner |first3=Mike |last4=Scarborough |first4=Peter |last5=Hill |first5=Jason |last6=Tilman |first6=David |last7=Macdiarmid |first7=Jennie I. |last8=Fanzo |first8=Jessica |last9=Bandy |first9=Lauren |last10=Harrington |first10=Richard A. |title=Estimating the environmental impacts of 57,000 food products |journal=Proceedings of the National Academy of Sciences |date=16 August 2022 |volume=119 |issue=33 |pages=e2120584119 |doi=10.1073/pnas.2120584119 |language=en |issn=0027-8424|doi-access=free |pmid=35939701 |pmc=9388151 |bibcode=2022PNAS..11920584C |hdl=2164/20863 |hdl-access=free }}</ref><ref>{{cite journal |last1=Kolcava |first1=Dennis |last2=Smith |first2=E. Keith |last3=Bernauer |first3=Thomas |author-link3=Thomas Bernauer |title=Cross-national public acceptance of sustainable global supply chain policy instruments |journal=Nature Sustainability |date=January 2023 |volume=6 |issue=1 |pages=69–80 |doi=10.1038/s41893-022-00984-8 |language=en |issn=2398-9629}}</ref> and larger-order [[Green economy|economic policies]] that for example facilitate large-scale shifts of jobs.<ref>{{cite web |title=Skills for Green Jobs: A Global View |url=http://www.oit.org/wcmsp5/groups/public/---dgreports/---dcomm/---publ/documents/article/wcms_165282.pdf |access-date=8 November 2021}}</ref><ref>{{cite journal |last1=van der Ree |first1=Kees |title=Promoting Green Jobs: Decent Work in the Transition to Low-Carbon, Green Economies |journal=International Development Policy {{!}} Revue internationale de politique de développement |date=1 June 2019 |issue=11 |pages=248–271 |doi=10.4000/poldev.3107 |s2cid=197784487 |language=en |issn=1663-9375|doi-access=free }}</ref> Such policies or measures are sometimes unpopular with the population. Therefore, they may be difficult for politicians to enact directly or help facilitate indirectly. 

Climate policies-induced future lost financial profits from global [[Stranded asset|stranded]] [[Fossil fuel divestment|fossil-fuel]] [[asset]]s would lead to major losses for freely managed wealth of investors in advanced economies in current economics.<ref>{{cite journal |last1=Semieniuk |first1=Gregor |last2=Holden |first2=Philip B. |last3=Mercure |first3=Jean-Francois |last4=Salas |first4=Pablo |last5=Pollitt |first5=Hector |last6=Jobson |first6=Katharine |last7=Vercoulen |first7=Pim |last8=Chewpreecha |first8=Unnada |last9=Edwards |first9=Neil R. |last10=Viñuales |first10=Jorge E. |date=June 2022 |title=Stranded fossil-fuel assets translate to major losses for investors in advanced economies |journal=Nature Climate Change |language=en |volume=12 |issue=6 |pages=532–538 |bibcode=2022NatCC..12..532S |doi=10.1038/s41558-022-01356-y |issn=1758-6798 |s2cid=249069181|doi-access=free |hdl=11385/223918 |hdl-access=free }}
* News article: {{cite news |date=26 May 2022 |title=People in US and UK face huge financial hit if fossil fuels lose value, study shows |language=en |work=The Guardian |url=https://www.theguardian.com/environment/2022/may/26/people-in-us-and-uk-face-huge-financial-hit-if-fossil-fuels-lose-value-study-shows |access-date=22 June 2022}}</ref>

==See also==
{{Portal|Environment|Climate change}}
{{div col|colwidth=20em}}
* [[Carbon price]]
* [[Circular economy]]
* [[Climate change and poverty]]
* [[Climate finance]]
* [[Climate justice]]
* [[Climate security]]
* [[Ecological economics]]
* [[Effects of climate change on agriculture]]
* [[Effects of climate change on livestock]]
* [[Energy transition]]
* [[Environmental economics]]
* [[Environmental justice]]
* [[European Green Deal]]
* [[Green economy]]
* [[Social cost of carbon]]
{{div col end}}

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==External links==
{{Wikisource|The Economics of Climate Change: a Primer}}
* [https://www.cccep.ac.uk/ Centre for Climate Change Economics and Policy] at [[University of Leeds]] and [[London School of Economics]].
* [https://www.youtube.com/watch?v=5DG5i8BGaXo "The economics of climate change"]. 2020 lecture by [[William Nordhaus]], Sterling Professor of Economics at [[Yale University]]
* [https://www.bbc.co.uk/programmes/m000qkms "From Climate Crisis to Real Prosperity"]. 2020 [[Reith lecture]] by [[Mark Carney]], [[COP26]] finance advisor

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{{World topic|Economic impacts of climate change in|noredlinks=yes|title=Economic impacts of climate change by country}}

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