What is the economic cost of climate change

Much of the economic analysis of climate change revolves around two big questions: What is the economic cost associated with the impacts of climate change under alternative GHG emissions scenarios? What is the economic cost of reducing GHG emissions? The economic aspect of the policy debate intensified with the publication in the UK of the Stern Review of the Economics of Climate Change (Stern, 2006). Stern concluded that, if no mitigative action is taken, “the overall costs and risks of climate change will be equivalent to losing at least 5% of global Gross Domestic Product (GDP) each year, now and forever.” This conclusion has been criticized by many economists, particularly in the United States, where Professor William Nordhaus of Yale, the leading American expert on climate economics, concludes that the economically optimal policy involves only a modest rate of emission reduction in the near term, followed by larger reductions later (Nordhaus 2008). The disagreement between Stern and Nordhaus has aroused considerable interest. Much of the existing discussion focuses on the difference in the discount rate – Stern uses a consumption rate of discount average 1.4% per annum, while Nordhaus uses one averaging 4%. 1 However, I believe that another important factor is the difference in the raw assessment of undiscounted damages from climate change. Because of limited space, that difference is the focus of this chapter. 2