When I began my PhD a decade ago, climate change economics was an extremely niche area. Just a few topics dominated — especially discounting and the relative merits of different climate policy instruments — and the number of researchers was small, incommensurate with the scale of the environmental, economic or policy challenges that climate change presents. However, since then, the field has broadened, deepened and strengthened links to climate science.
Notably, there has been an explosion of studies documenting the sensitivity of social and economic systems to temperature. This literature, using statistical approaches designed to identify causal relationships in non-experimental data, has uncovered the effects of temperature across a wide range of outcomes: conflict risk, pre-term birth, classroom learning as well as overall economic productivity across many sectors. This discovery of pervasive and, in some cases, large temperature impacts, even in wealthy countries, is a sharp break with previous work, which understood effects to be mostly limited to a few highly exposed sectors, such as agriculture and coastal infrastructure.
Important advances have come from questioning assumptions underlying the cost–benefit assessment of climate policy. Ten years ago, conventional wisdom held that substantial emissions reductions by 2050, required to limit warming to less than 2 °C, could not be justified on a cost–benefit basis. Many studies now show that this finding is overturned under alternate but justifiable models of how climate change affects the economy and human welfare. Two prominent examples are the question of whether climate change affects the underlying growth rate of the economy, and disentangling risk and time preferences in the utility function.
A welcome development has been growing interest across the entire economics discipline, with scholars from labour, development, macro, health and financial economics working on questions of weather and climate. Even more important has been recognition of systemic climate risk within major financial institutions. Central banks, institutional investors and credit rating agencies direct capital investment flows and manage economic risks, and will play a critical role in structuring future adaptive transitions. Markets, communities, households and businesses will have to adapt both to a continuously changing climate, and to a low-carbon economy. Forward-looking regulations and investments that anticipate these changes will lower the costs of these transitions.
I see several important areas still in need of substantive work. Firstly, an assessment of alternative policy instruments that better incorporates the political and technological feedbacks that will accompany major climate policy. Economists tend to favour carbon pricing because of its cost-effectiveness. But how do pricing policies perform given a richer representation of other relevant market failures or real political constraints? Examples include subsidy-driven declines in technology costs or strategic interest group dynamics, where policies themselves create or undermine powerful interest groups and therefore alter the space of political possibility. Collaboration with engineers and political scientists can help address these questions. An expanded focus on desirable policies for low- and middle-income countries, essential to meet ambitious decarbonization goals and which present distinct challenges, is also critical.
More work is needed on understanding climate damages, particularly those that fall outside of traditional market measures, such as losses of cultural heritage, conflict risk or biodiversity loss. These are extremely difficult to value and are not adequately incorporated into current estimates of aggregate climate damages, such as the social cost of carbon. Also critical is understanding the transition and adjustment costs associated with a continuously changing climate. Too many studies estimate equilibrium damages or assume costless adjustment. But infrastructure is long-lived, and natural hazards are already under-priced in many property markets. In this context, climate change risks creating stranded assets, price bubbles and unsustainable liabilities for local or even national governments, all of which could add substantially to climate change cost estimates.
Credit: Peter Cade/Stone/Getty
Source: Ecology - nature.com
