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Economics of Climate Change


Economics is helpful in different aspects of the climate change debate. First, it helps us to formalize the idea and the potential solutions by formulating climate change as a market failure. Second, economic ideas can be used to address climate protection by examining costs and benefits. Third, economic ideas help us to identify a set of mitigation and adaptation strategies. Fourth, economics is critical in designing climate change mitigation and adaptation policy instruments such as taxes and tradable permits. Fifth, it helps us rationalize the international architecture of climate policies. Finally, it helps us understand the political economy at work behind domestic and international climate policy negotiations.[1]

There are two separate paradigms for studying environmental issues: ecological and economic. The ecological paradigm, based on the science of ecology, stresses the health and survival ofecosystems. The economic paradigm emphasizes environmental economics—the application of economic theory to environmental issues—and emphasizes maximizing the welfare of humans (even if this means harming the environment). Contrary to popular belief, they are not incompatible. Bonds et al. show that ecological problems give rise to a reduction in biodiversity which in turn impacts per capita income.[2] Thus, ecological and economic concerns are intertwined.

This chapter begins with an examination of environmental economics. We then apply the concepts of environmental economics to the problem of climate change. In earlier chapters, we have made the case for using unilateral measures to address climate change and to create incentives for multilateral action. In this chapter, we highlight the fact that unilateral measures represent only a partial solution because they will not achieve the desired level of emissions reductions. However, they can still be used to create incentives for multilateral action, which is what is needed to effectively address the risks associated with climate change. In Chapter 2, we criticized the division of countries into developed and developing as an ineffective approach to addressing climate change. In this chapter, we critique this approach in economic terms, and further develop the idea of an index that would categorize countries more appropriately.

  • [1] These ideas were set forth by Jason Shogren in “Climate protection: What insight can economicsoffer?” in Anthony D. Owen and Nick Hanley (eds.), Economics of Climate Change (Routledge,London 2004).
  • [2] Matthew H. Bonds, Andrew P. Dobson, and Donald C. Keenan, “Disease Ecology, Biodiversity,and the Latitudinal Gradient in Income” (2012) 10 PLOS Biology e1001456.
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