Climate change will have economic consequences. The damage it causes plus the measures people
take to adapt to a new climate regime will impose quantifiable market costs as well as
non-quantifiable, non-market costs. The fact that some important types of damages cannot be easily
monetized makes current damage estimates highly uncertain.
Damages will be unevenly distributed and sometimes irreversible. Although developed countries
are responsible for the bulk of historical greenhouse gas emissions, their strong economies and
institutions leave them better positioned than developing countries to cope with changes in climate.
Quantifying the economic costs of climate change involves many uncertainties and caveats;
nevertheless, some analysts estimate that damages resulting from a moderate climate change
(+2.5°C warming) could cut the US’s current GDP by 0.5%, the EU’s by 2.8%,
Africa’s by 3.9%, and India’s by 4.9%. Again, it must be emphasized that these estimates
include only readily monetized damages and thus understate the likely costs.
Policies for minimizing risks by reducing greenhouse gas emissions will also come with a
price-tag. Estimates of how much such policies will cost vary widely because of differing
assumptions and large uncertainties. For countries with economies in transition, the enormous
opportunities for improving energy efficiency could ensure negligible costs or even net GDP gains of
several percentage points. The highly industrialized countries of the OECD could rely on the Kyoto
Protocol’s emissions trading system to limit costs to a 0.1 – 1.1% reduction in projected
GDP for the year 2010; or, expressed another way, the rate of annual economic growth over the next 10
years could be 0.1% lower than it would be otherwise. If reduced air pollution costs, the removal of
market imperfections, and other factors are included, the costs are reduced even further.
Many cost-effective policies and technologies for cutting emissions are already available
… Some of the more recent technological breakthroughs include the market introduction of
efficient hybrid engine cars and wind turbines, the demonstration of underground carbon dioxide
storage, and advances in fuel cell technology. Hundreds of existing technologies and practices for
end-use energy efficiency in buildings, transport and manufacturing industry could also be more fully
exploited to reduce emissions – often with a net financial benefit.
… but governments will need to promote these solutions actively. In many cases
governments will have to address a range of institutional, behavioral and other barriers before
climate-friendly policies and technologies can gain widespread acceptance. These can include market
prices that do not incorporate externalities such as pollution, misplaced incentives, vested
interests, lack of effective regulatory agencies, imperfect information, and so on.
Energy policies hold the key to the cost and effectiveness of efforts to cut emissions. The
choice of energy mix and associated investments will determine whether atmospheric concentrations of
greenhouse gases can be stabilized, and at what level and cost. Currently most such investment is
directed towards discovering and developing more fossil resources, including both conventional and
unconventional. But the progress over the last few years on developing technologies that reduce
greenhouse gas emissions has been faster than anticipated.
"No regrets" measures for tackling emissions can have multiple benefits. Many
researchers believe it will be possible to reduce emissions while generating economic benefits, such
as more cost-effective energy systems and greater technological innovation. Some climate change
policies can also bring local and regional environmental benefits, such as reductions in air
pollution and increased protection for forests and thus biodiversity. The scientific, technical, and
socio-economic literature shows that such "no regrets" opportunities are available in most
countries. It also suggests that the risk of net damage, a concern for risk aversion, and the
precautionary principle together provide a rationale for actions that go beyond "no
regrets" – that is, for actions that do indeed have net costs.
Policymakers should not overlook the importance of equity. Choosing policies that are both
cost-efficient and fair is not easy. Traditional economics rigorously explores how to formulate
flexible and cost-effective policies; it has less to say about equity. Because countries differ
considerably in their vulnerability to climate change, the costs of damage and adaptation will vary
widely unless special efforts are made to redistribute them. Policymakers can pursue equitable
solutions by promoting capacity building in poorer countries and reaching collective decisions in a
credible and transparent manner. They could also develop financial and institutional mechanisms for
sharing risks among countries.
To be effective, policies will require support from the public and from key interest groups.
Governments cannot act alone to cut emissions - individuals, communities, and businesses must also
cooperate. Education and public information is vital. For example, increased energy consciousness
would encourage people to adopt any number of minor changes in their lifestyles, such as riding
public transport, using more efficient lighting and appliances, and re-using materials to reduce the
need for exploiting natural resources. Local authorities could introduce standards that encourage
building designs that take maximum advantage of sunlight and solar heating. Many other changes in the
high-consumption lifestyles of the rich countries are also possible.
The prudent response to climate change is to adopt a portfolio of actions aimed at mitigation,
adaptation, and research. The economic literature suggests that the optimal policy mix will
necessarily differ among countries and over time. The challenge is not for all countries to agree on
what is the single best policy and to maintain it for the next 100 years. Rather, each country should
select a prudent strategy and adjust it over time in light of new information and changing
circumstances. By constructing a balanced portfolio of policy options aimed at reducing emissions,
adapting to climate change, and improving the knowledge base, national policymakers can reduce the
risks of rapid climate change while promoting sustainable development.