Chapter 15 - Climate Policy and Development: An Economic Analysis

Summary

We use the Climate and Regional Economics of Development (CRED) model to explore the interconnections between climate and development policy. CRED scenarios, based on high and low projections of climate damages, and high and low discount rates, are used to analyze the effects of varying levels of assistance to the poorest regions of the world. We find that climate and development choices are nearly independent of each other if the climate threat is seen as either very mild or very serious. The optimal climate policy is to do very little in the former case, and a lot in the latter case, regardless of development. In the latter case, however, assistance may be required for the poorest regions to respond to serious climate threats in the globally “optimal” manner. Under intermediate assumptions about the severity of climate risks, development policy plays a greater role. In one scenario, which falls within the range of current debate, a high level of development assistance makes the difference between success and failure in long-term stabilization of the global climate.

Introduction: An Economic Analysis of Climate Policy and Development

Climate change is the ultimate global public good (or public bad): the severity of the problem depends on total world emissions, so anyone's greenhouse gas emissions affect everyone. The impacts, however, are unevenly distributed, often falling most heavily on the hottest and poorest countries. The capacity to deal with the problem may be even more unequally distributed, since significant investments in mitigation and adaptation will be required.

The trade off between investment in climate protection and investment in economic growth will be evaluated differently by countries at different income levels. At higher incomes, additional economic growth is less urgent, and climate investments will often be more acceptable (although in practice, highincome countries differ greatly in their willingness to make such investments, for reasons beyond the scope of this chapter). At lower incomes, it is more urgent to raise average standards of living, so countries may be less willing to sacrifice immediate growth for long-run climate goals. This argument rests on the declining marginal utility of income, a thoroughly orthodox (and intuitively plausible) principle of economic theory.