The Economics of Climate Change Design

The Economics of Climate Change Design

Introduction

The prospect of global climate change has emerged as a major scientific and public policy issue. Scientific studies indicate that accumulated carbon dioxide emitted from the burning of fossil fuels, along with contributions from other human-induced greenhouse gas emissions, is leading to warmer surface temperatures. Possible current-century consequences of this temperature increase include increased frequency of extreme temperature events (such as heat waves), heightened storm intensity, altered precipitation patterns, sea level rise, and reversal of ocean currents.

These changes, in turn, can have significant impacts on the functioning of ecosystems, the viability of wildlife, and the wellbeing of humans. There is considerable disagreement within and among nations as to what policies, if any, should be introduced to mitigate and perhaps prevent climate change and its various impacts. Despite the disagreements, in recent years we have witnessed the gradual emergence of a range of international and domestic climate-change policies, including emissions trading programs, emissions taxes, performance standards, and technology promoting programs. Beginning with William Nordhaus's (1982) “How Fast Shall We Graze the Global Commons?” climate-change economics has focused on diagnosing the economic underpinnings of climate change and offering positive and normative analyses of policies to confront the problem. While overlapping with other areas of environmental economics, it has a unique focus because of distinctive features of the climate problem - including the long time-scale, the extent and nature of uncertainties, the international scope of the issue, and the uneven distribution of policy benefits and costs across space and time.

Assessing the Benefits and Costs of Climate Change Mitigation in London city

As noted, the potential consequences of climate change include increased average temperatures, greater frequency of extreme temperature events, altered precipitation patterns, and sea level rise in London. These biophysical changes affect human welfare. While the distinction is imperfect, economists divide the (often negative) welfare impacts into two main categories: market and non-market damages.

Market damages. As the name suggests, market damages are the welfare impacts stemming from changes in prices or quantities of marketed goods. Changes in productivity typically underlie these impacts. Often researchers have employed climate-dependent production functions to model these changes, specifying wheat production, for example, as a function of climate variables such as temperature and precipitation. In addition to agriculture, this approach has been applied in other industries including forestry, energy services, water utilities and coastal flooding from sea-level rise in London city (see, for example, Smith and Tirpak 1989; Yohe et al. 1996; Mansur et al. 2005).

The production function approach tends to ignore possibilities for substitution across products, which motivates an alternative, hedonic approach (see, for example, Mendelsohn et al. 1994, and Schlenker et al. forthcoming;). Applied to agriculture, the hedonic approach aims to embrace a wider range of substitution options, employing cross-section data to examine how geographical, physical, and climate variables are related to the prices of agricultural land in London. Assuming that crops are chosen to maximize rents, that rents reflect the productivity ...