5 - Climate Economics

Summary

Our review of climate economics begins with the Kaya identity, which portrays our emissions pathway not as a smooth glideslope to net zero but as a tug of war between opposing forces. We then review the stunning impact that continued compounded economic growth could have on the ability of future generations to adapt to climate change, particularly in the Global South. The concepts of externalities and market failures are considered, along with the widely held view that a significant element in any climate solution will need to be some form of carbon tax. The recognition that mitigation comes at a cost leads to the question of climate cost/benefit analysis and the notion that the economically optimal quantum of further climate change that rational actors might prefer would not necessarily be zero. We close by pivoting to fat tails and the extent to which opting for some economically optimal amount of climate change may expose the future to small probabilities of utterly unacceptable outcomes and therefore unjustifiable risks.