Economics of Climate Change and Policy

Advancing public and private policymakers’ understanding of the complex interactions between climate change and the economy is critical to taking the most cost-effective action to reduce greenhouse gas emissions. The Pew Center works to inform this understanding by bringing sound, credible analysis to the discussion of potential costs and benefits of climate change policy.

Any effort to significantly limit greenhouse gas emissions will require changes in economic activity that will likely impose costs on society. The costs of climate change mitigation reflect the magnitude of the emissions reduction, the timing of these reductions, and the means of implementation. But left unaddressed, climate change will also impose costs on society. These costs are likely to increase over time, making it important – economically and environmentally – to take immediate action on climate change.

The Pew Center’s economics program has analyzed several commonly used models to determine how they work, what inputs and assumptions influence their results, and what important elements are missing. Differences among economic modeling results are often explained by the way the following factors are represented in each model:

1. The economy’s and environment’s assumed baselines (i.e., how the economy will perform in the absence of climate policies);
2. The precise climate policies employed (e.g., emissions trading, inclusion of non-CO₂ gases, etc.);
3. Whether estimates of damage resulting from climate change are included;
4. The economy’s flexibility when subject to sudden price shocks or government regulation; and
5. How technological change is characterized.

If models adequately address all five of these “drivers” – and few currently do – the projected costs of climate policies would likely be lower than they are now.

Effectively understanding the potential costs and benefits of mitigating climate change allows policymakers to develop policies that achieve the greatest emissions abatement for the resources expended, secure greater participation and compliance, and maximize the environmental effectiveness of the mitigation effort.