Economics: Welfare impacts of climate change

28-01-2015 | Publication

The impacts of climate change include, but are not limited to, increased heat stress, land loss due to sea level rise, and changes in agricultural productivity. These impacts have consequences for the welfare of populations across the world. The emission of CO2 is the major cause of climate change; the value of the total welfare impact of climate change that is caused by one extra tonne of CO2 emissions can be estimated and is known as the social cost of carbon (SCC). The SCC is of great importance for policymakers, as it provides guidance on how to value the benefits of CO2 reductions.

Currently, SCC estimates are based on the assumption that climate change affects economic output, but not the rate at which an economy grows over time. Although this difference may sound trivial, research shows that considering a direct effect of climate change on economic growth would lead to an SCC estimate that may be several times larger than previously thought. Historical data about the effects of temperature shocks on economic growth suggest a much higher negative welfare impact, particularly on poor economies — a result that calls for paying increased attention to the most vulnerable nations in the world.