Economic analysis of climate change

Economic analysis of climate change uses economic tools and models to calculate the scale and distribution of damages caused by climate change. It can also give guidance for the best policies for mitigation and 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 models (IAMs) are useful. Those models link main features of society and economy with the biosphere and atmosphere into one modelling framework.

In general, climate damages increase the more the global surface temperature increases. Many effects of climate change are linked to market transactions and therefore directly affect metrics like GDP or inflation. For instance, climate change can drive inflation in food via heat and droughts, but also drives up overall inflation. There are also non-market impacts which are harder to translate into economic costs. These include the impacts of climate change on human health, biomes and ecosystem services.

Economic analysis also looks at the economics of climate change mitigation and the cost of climate adaptation. Mitigation costs will vary according to how and when emissions are cut. Early, well-planned action will minimize the costs. Globally, the benefits and co-benefits of keeping warming under 2 °C exceed the costs. 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 policies. Economists estimate the incremental cost of climate change mitigation at less than 1% of GDP. Across all developing countries, adaptation costs have been estimated to be about USD 215 billion per year up to 2030, and are expected to be higher after.