The Economics of Global
Climate Change
Resource
• Hackett, S., Environmental and Natural Resources Economics: Theory, Policy,
and the Sustainable Society, 3rd Edition (New York: M.E. Sharpe, 2006).
• Chapter 11
Content
• Climate Change- Science
• Climate Change – Economics
• Climate Change – Policy
Sustainable development
• In 1987, the United Nations Brundtland Commission defined sustainability as “meeting the
needs of the present without compromising the ability of future generations to meet their
own needs.” Today, there are almost 140 developing countries in the world seeking ways of
meeting their development needs, but with the increasing threat of climate change,
concrete efforts must be made to ensure development today does not negatively affect
future generations.
• The Sustainable Development Goals form the framework for improving the lives of
populations around the world and mitigating the hazardous man-made effects of climate
change. SDG 13: Climate Action, calls for integrating measures to prevent climate change
within development frameworks. SDG 14: Life Below Water, and SDG 15: Life on Land, also
call for more sustainable practices in using the earth’s natural resources.
Greenhouse Effect
Step 1 Step 2 Step 3 Step 4 Step 5 Step 6
Solar radiation The rest of the Heat radiates Some of this Human This is
reaches the sun's energy is from Earth heat is activities such trapping extra
Earth's absorbed by towards trapped by as burning heat and
atmosphere - the land and space. greenhouse fossil fuels, causing the
some of this is the oceans, gases in the agriculture Earth's
reflected back heating the atmosphere, and land temperature
into space. Earth. keeping the clearing are to rise.
Earth warm increasing the
enough to amount of
sustain life. greenhouse
gases released
into the
atmosphere.
Climate Change-Science
• Greenhouse gases absorb infrared radiation, trapping heat that would
otherwise radiate into space.
• Carbon dioxide most abundant
• Emissions of these gases increasing over time
• Intergovernmental Panel on Climate change (IPCC) reported in 2007
that most warming over last 250 years can be attributable to human
activity.
IPCC found:
• CO2 increases due to use of fossil fuels and land-use change, methane/NO2 due to agriculture
• Warming is unequivocal
• Human-induced warming and sea-level rise will continue for centuries, even if stabilized
• Projected impacts are contracting snow cover, shrinking sea ice, increasing weather events
Impacts of rising temps, rising seas, and more severe weather?:
• Effects on physical and biological systems
• Natural systems (rain forests, coral reefs) vulnerable
• Developing countries to feel most severe effects
• Adaptation is necessary now
What are
greenhouse gases
What has been the
trend in
atmospheric
carbon dioxide
concentrations?
Observation of relationship
between atmospheric carbon
dioxide concentration and global
average temperature
Climate Change –Economics
Economic
Modeling
Climate Change - Policy
• In 1988, the Montreal Protocol required 24 signatory nations to restrict the
production and consumption of the chief responsible gases to 50 percent of their
1986 levels by 1998.
• 96 chemicals are currently controlled by agreements.
• In 1990, the parties agreed to establish a Multilateral Fund to facilitate the phase-
out of chemicals. Industrialized countries contribute to the fund to cover the
costs of developing countries in eliminating the production of ozone-depleting
chemicals.
The Evolution of International Agreements on Climate Change
• The Kyoto Protocol became effective in February 2005.
• The Kyoto Protocol allows for implementation mechanisms that involve tradable permits.
• (a) Emissions Trading allows trading of the national quotas among countries listed in
Annex B.
• (b) Joint Implementation allows Annex B countries to receive emission reduction credits
when they help finance projects in another Annex B country.
• (c) The Clean Development Mechanism allows Annex B parties to finance emission
reduction projects in non-Annex B countries (e.g., developing countries) and receive
certified emission reductions for doing so.
Complementary Strategies
• The Prototype Carbon Fund (PCF) was established by the World Bank. The
PCF acts as a “greenhouse gas mutual fund.” Investors receive a pro rata
share of the emission reductions.
• The Global Environmental Facility (GEF) funds projects designed to reduce
the impacts of climate change through loans or grants. The GEF uses a
marginal-external-cost rule when evaluating a project.
Creating Incentives for Participation in
Climate Change Agreements
• Game theory has been used to study participation in agreements with public
good problems.
• Policies can make participation more likely by increasing the net benefits from
participation.
• “Issue linkage” is a strategy where countries simultaneously negotiate a
climate change agreement and another economic agreement on a linked
issue, e.g., trade for example.
• A final strategy involves transfers from gainers to losers or a redistribution of
net benefits.
