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Climate Change, Economic Costs of

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Encyclopedia of Complexity and Systems Science

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Definition of the Subject

The economic costs of climate change include all positive and negative impacts of the enhanced greenhouse effect and the resulting changes in theatmosphere and ocean on all human consumers and producers. Total costs refer to the difference in human welfare between a scenario with climatechange and a scenario without climate change. Marginal costs refer to the difference in human welfare between two scenarios with a slightlydifferent climate, normalized by the amount of greenhouse gas emissions that would induce that difference. Estimates of the economic costs of climatechange are important to assess the size of the climate problem relative to other problems, and to compare the costs of climate change to the costs ofgreenhouse gas emission reduction.

Introduction

Calls for greenhouse gas emission reduction are often phrased as a moral imperative. While tempting, this is wrong. Firstly, there is no moralagreement. Emission reduction could save polar bears but it...

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Abbreviations

Direct costs:

The direct cost equals quantity times price.

Discount factor:

The discount factor t years into the future equals one over one plus the discount rate, raised to the power t.

Discount rate:

The discount rate is the annual rate of decline of the value of consumption. It is roughly equal to the rate of interest, or the opportunity cost of capital. The discount rate consists of two components: the rate at which consumers get better off, and the rate of pure time preference (or impatience). The discount rate is not related to the rate of inflation, which is the annual rate of decline of the value of money.

Economics:

Economics is the social science which studies human behavior with regard to the relationship between ends and scarce means which have alternative uses.

Equity weights:

Equity weights are applied to aggregate national impacts to a global total. Equity weights are often set to unity, but sometimes equity weights equal the ratio of nationally average per capita income over global average per capita income.

Indirect costs:

The indirect costs equal all costs that are not direct costs. This includes the price change induced by the change in quantity (partial equilibrium effects), the changes in other markets (general equilibrium effects), and the changes at later times (dynamic effects).

Marginal costs:

The marginal cost of greenhouse gas emissions equals the first partial derivative of the net present value of the total costs of climate change to emissions.

Monetary valuation:

Monetary valuation is a set of techniques and their application that attempts to express in monetary terms the value to humans of changes in environmental goods and services. Negative impacts are typically expressed as an income loss that would give an equivalent loss in welfare.

Neo‐classical economics:

Although historians would refer to neo‐classical economics as the dominant form of economic research between 1860 and 1910, common usage has neo‐classical economics as a synonym for mainstream or orthodox economics. In that sense, neo‐classical economics is a style of research, characterized by empirical rigour, mathematical rigour, and micro‐founded macro‐relationships.

Net present value:

The net present value is the sum of all future costs and benefits, weighted by the discount factor.

Total costs:

The total cost of climate change equals the direct and the indirect costs of climate change, that is, the difference in welfare between a scenario with climate and a scenario without.

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Acknowledgments

My thoughts on this subject were shaped by discussions with Hadi Dowlatabadi, Tom Downing, Sam Fankhauser, David Maddison, Rob Mendelsohn, BillNordhaus, David Pearce, Steve Schneider, Joel Smith, and Gary Yohe.

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Authors and Affiliations

  1. Economic and Social Research Institute, Dublin, Ireland

    Richard S. J. Tol

  2. Institute for Environmental Studies, Vrije Universiteit, Amsterdam, The Netherlands

    Richard S. J. Tol

  3. Department of Spatial Economics, Vrije Universiteit, Amsterdam, The Netherlands

    Richard S. J. Tol

  4. Department of Engineering and Public Policy, Carnegie Mellon University, Pittsburgh, USA

    Richard S. J. Tol

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  1. RAMTECH LIMITED, 122 Escalle Lane, Larkspur, CA, 94939, USA

    Robert A. Meyers Ph. D. (Editor-in-Chief) (Editor-in-Chief)

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Tol, R.S.J. (2009). Climate Change, Economic Costs of. In: Meyers, R. (eds) Encyclopedia of Complexity and Systems Science. Springer, New York, NY. https://doi.org/10.1007/978-0-387-30440-3_71

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