Department of Economics

Economic Impacts of Climate Change

Climate change is often described as the largest problem, or the largest environmental problem of the 21st century.

Through the lens of economics, greenhouse gas emissions can be viewed as an externality, albeit one that is global, pervasive, long-term, and uncertain. Even though the scale and complexity of this externality is unprecedented, economic theory is well equipped to deal such problems and can help to understand of the issues and direct appropriate action.

Findings

Tol graphA 2.5ºC global warming feels like losing 1% of your income.

Initial warming is positive on net, but this is a sunk benefit.

There are only 27 estimates of the total economic impact of climate change, and few for pronounced warming.

A century of climate change is no worse than losing a decade of economic growth.

Tol graphThe majority of countries and people experience impacts worse that the world average.

Poor countries are more vulnerable due to

  • Greater exposure
  • Tropical climate
  • Lower adaptive capacity

Greenhouse gas emission reduction that hampers growth in poor countries may worsen the impacts of climate change.

Tol graphThe social cost of carbon estimates the damage done by emitting an additional tonne of carbon dioxide.

It is the price we should put on carbon if we want to maximise human welfare.

The lower the pure rate of time preference, the more we care about the future, the higher the social cost of carbon – and the more uncertain as we peer further into the future.

Sources

Arent, D.J., R.S.J. Tol , E. Faust, J.P. Hella, S. Kumar, K.M. Strzepek, F.L. Toth and D. Yan (2014), ‘Key Economic Sectors and Services’, in C.B. Field, V.R. Barros, D.J. Dokken, K.J. Mach, M.D. Mastandrea, T.E. Bilir, M. Chatterjee, K.L. Ebi, Y.O. Estrada, R.C. Genova, B. Girma, E.S. Kissel, A.N. Levy, S. MacCracken, P.R. Mastandrea and LL. White (eds.), Climate Change 2014: Impacts, Adaptation, and Vulnerability, Part A: Global and Sectoral Aspects – Contribution of Working Group II to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change, Cambridge, Cambridge University Press.

Tol, R.S.J. (2009), ‘The Economic Impact of Climate Change’, Journal of Economic Perspectives, 23 (2), 29-51. ‘Corrigendum and Update’, Journal of Economic Perspectives, 28 (2), 221-226.

Tol, R.S.J. (2013), ‘Targets for Global Climate Policy: An Overview’, Journal of Economic Dynamics and Control, 37, 911-928.

Tol, R.S.J. (2014), Climate Economics – Economic Analysis of Climate, Climate Change, and Climate Policy, Cheltenham, Edward Elgar.

Tol, R.S.J. (2015), Economic Impacts of Climate Change, Working Paper 7515, Department of Economics, University of Sussex, Brighton.