Climate Change and Economic Development

In a NY Times article, “Building a Green Economy,” Paul Krugman asks, “. . . is it possible to make drastic cuts in greenhouse-gas emissions without destroying our economy?” and answers,

. . . there is widespread agreement among environmental economists that a market-based program to deal with the threat of climate change — one that limits carbon emissions by putting a price on them — can achieve large results at modest, though not trivial, cost. There is, however, much less agreement on how fast we should move, whether major conservation efforts should start almost immediately or be gradually increased over the course of many decades.

In what follows, I will offer a brief survey of the economics of climate change or, more precisely, the economics of lessening climate change. I’ll try to lay out the areas of broad agreement as well as those that remain in major dispute. First, though, a primer in the basic economics of environmental protection.

Krugman has that astonishing ability to explain complex matters simply. You can do worse than read his article in the NYTimes.[3] Read it first. He includes in his article a primer on “Environmental Econ 101.” Here’s a bit:

. . . what if a deal between consenting adults imposes costs on people who are not part of the exchange? What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window. So what should we do? Environmental economics is all about answering that question.

One way to deal with negative externalities is to make rules that prohibit or at least limit behavior that imposes especially high costs on others. That’s what we did in the first major wave of environmental legislation in the early 1970s: cars were required to meet emission standards for the chemicals that cause smog, factories were required to limit the volume of effluent they dumped into waterways and so on. And this approach yielded results; America’s air and water became a lot cleaner in the decades that followed.

He goes on to explain Pigovian taxes and other interesting things. Go read it all.

Next we read “The Economics of Climate Change” by Professor Sir Nicholas Stern, Adviser to the UK Government on the economics of climate change and development and Head of the Government Economic Service. He writes,

The problem is global in its cause; greenhouse gases have broadly the same impact on the climate wherever in the world they are emitted. Effective action will require international collaboration. No region will be left untouched. But effects will differ widely around the world. Some of the greatest impacts will be felt in the poorest countries that are most vulnerable to the changes.

. . .

Climate change, like other environmental problems, involves an externality: the emission of greenhouse gases damages others at no cost to the agent responsible for the emissions. The standard theory of externalities, under certainty, perfect competition, and with a single government, points to one of: taxation of the emitter equivalent to marginal social cost (Pigou); the allocation of property rights with trading (Coase); and direct regulation. But here we have many jurisdictions, weak representation of those most affected (future generations), long-term horizons, a global scale, major uncertainties, and important interactions with other market failures. Thus, whilst the standard theory can provide useful initial insights, we have a much deeper and more complex economic policy problem. We have a problem of intertemporal international collective action with major uncertainty and linked market failures.

See also the articles by Mendelsohn and the article about Bjorn Lomborg.

We will discuss global climate change in class on Tuesday 26th. Here are the references.


  1. Climate Change and  Economic Growth. Robert Mendelsohn. © 2009 The International Bank for Reconstruction and Development / The World Bank
  2. What is the Economics of Climate Change? Nicholas Stern. WORLD ECONOMICS • April–June 2006.
  3. Building a Green Economy. Paul Krugman. New York Times. April 7, 2010.
  4. Bjorn Lomborg, Climate Skeptic, Calls for Massive Global Warming Investment. August 2010.
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