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The economics of avoiding dangerous climate change

Notes on a 2008 paper by Terry Barker.

The paper looks at two different approaches to and conclusions about the economics of climate change.

The first is represented by the likes of Bjorn Lomborg and Nordhaus, which uses convention cost benefit analysis (CBA) to argue that the marginal abatement costs (MAC) currently outweight the marginal abatement benefits (MAB). Their valuation of the "carbon price" suggests relatively small abatement policies now, and waiting until technology brings abatement costs down and until we are more certain about the climactic outcomes before doing anything more radical.

The second is represented by the likes of Stern, which tries to account for the uncertainty in climate change science, and the complex interactions between climate, technology, labour, policy and different sectors of the economy. They argue that the MABs vastly outweigh the MACs for early action, and that the carbon price should be significantly higher.

The economic system

Uncertainty - conventional CBA discounts most uncertain risks as being essentially unknowable, which therefore cuts out most climate modelling (p.181).

Modelling labour and technology - neo-classical economics treats them both as exogenous - external to, and not affected by, parts of the economic model - but they are clearly affected by climate change, the economy and other complex factors (pp. 181, 183).

Simplified markets - neo-classical economics aggregates all industries into one economic unit, and assumes full employment and maximal efficiency. So it downplays the marginal non-abatement costs (as climate change would undermine employment and efficiency); ignores different market sectors (such as between fossil fuel energy-dependent or lowland-lying, versus those that achieve a high exchange value per tonne of CO2 or energy used, for example); and it overemphasises the MACs by ignoring the differential impacts between industries that will definitely suffer and those that may grow and/or become more efficient (p. 188).

Path dependence - different technologies and political solutions are often incompatible, and often one will reduce the costs of another over time (p.183).

Complexity - MACs and MABs are therefore complex and non-linear, so neo-classical models significantly distort reality (pp. 183-184).


Intergenerational ethics - neo-classical models assign value by willingness to pay and, into the future, consumer power (p.185).

Economic growth - neo-classical models assume interchangeable, unlimited resources and ever-increasing incomes, which climate change will clearly undermine (p.186).

Ethical systems - neo-classical accounts are based on an extremely narrow utilitarianism; broadening this to think about intergenerational ethics, aesthetic values and other features of typical ethical discussions seriously complicate the picture (p.187).

The politics

Welfare function - the aggregate of households as a measure of welfare is misleading and conceals issues of distributive justice, especially internationally as the poor will suffer the most, having contributed the least to the problem (p.190).

Political viability - we have a complex system of law, ethics, politicsl, science and so on; the social welfare function alone is hopelessly narrow, so distorts policy (pp. 190-191).


We need a more complex economic model that accounts for these various, non-linear aspects. Stern brought this work into the mainstream but it needs a lot more work (pp.191-192).