Skip to main content Accessibility help
  • Print publication year: 2011
  • Online publication date: April 2011

12 - Economic approaches and instruments


‘Business-as-usual is dead’


Climate change is now understood as a central issue for economic prosperity and development. The Stern Review (Stern et al., 2006) can be seen as the turning point after which climate change has been considered an important economic issue, in addition to being an environmental one. In-depth reviews of the economics of climate change have been conducted for various countries and regions, for example for Australia (Garnaut, 2008) and South-East Asia (Asian Development Bank, 2009), and the development community now sees climate change as one of its main challenges (Chapter 15; World Bank, 2009).

Climate change could affect the fundamentals of economic systems. Meanwhile, curbing greenhouse gas emissions by the extent required to limit the risk of dangerous climate change (e.g. the 2 °C guardrail; Chapter 8) will require comprehensive changes in technologies, energy systems, industrial production practices and locations, and consumption patterns.

Countries will strive to effect such change with the minimum of economic cost; that is, keeping any sacrifices in economic prosperity as small as possible. While it can be argued that excessive consumption is one of the root causes of high greenhouse gas emissions, it is equally clear that few, if any, societies will readily make big cuts to their levels of material well-being. To achieve emissions cuts effectively and efficiently will require sound economic policies, integrated across different sectors of the economy and harmonised with other objectives of economic policy.

Ackerman, F., DeCanio, S. J., Howarth, R. B. and Sheeran, K. (2009). Limitations of integrated assessment models of climate change. Climatic Change, 95, 297–315.
Aldy, J. E. and Stavins, R. N. (eds.) (2007). Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World. Cambridge, UK: Cambridge University Press.
Anthoff, D., Hepburn, C. and Tol, R. S. J. (2009). Equity weighting and the marginal damage costs of climate change. Ecological Economics, 68, 836–49.
Bank, Asian Development (2009). The Economics of Climate Change in Southeast Asia: A Regional Review. n.p.: Asian Development Bank.
Babiker, M. H., Reilly, J. M. and Viguier, L. L. (2004). Is international emissions trading always beneficial?Energy Journal, 25, 33–56.
Barker, T., Qureshi, M. S. and Köhler, J. (2006). The Costs of Greenhouse Gas Mitigation with Induced Technological Change: A Meta-analysis of Estimates in the Literature. Cambridge, UK: Cambridge Centre for Climate Change Mitigation Research.
Barker, T., Scrieciu, Ş. S. and Foxon, T. (2008). Achieving the G8 50% target: Modelling induced and accelerated technological change using the macro-econometric model E3MG. Climate Policy, Special Issue on ‘Modelling long-term scenarios for low-carbon societies’, 8, S30–S45.
Barker, T., Dagoumas, A. and Rubin, J. (2009). The macroeconomic rebound effect and the world economy. Energy Efficiency, 2, 411–27.
Baumol, W. J. and Oates, W. E. (1971). The use of standards and prices for protection of the environment. Swedish Journal of Economics, 73, 42–54.
Beckerman, W. and Hepburn, C. J. (2007). Ethics of the discount rate in the Stern Review on the economics of climate change. World Economics, 8, 187–210.
Bowen, A. and Stern, N. (2010). Environmental policy and the economic downturn. Oxford Review of Environmental Economics and Policy, forthcoming.
,California Public Utilities Commission (2009). California's Renewable Energy Programs. San Francisco: California Public Utilities Commission.
Christiansen, A. C. and Wettestad, J. (2003). The EU as a frontrunner on greenhouse gas emissions trading: how did it happen and will the EU succeed?Climate Policy, 3, 3–18.
Ciscar, J.-C., Iglesias, A., Feyen, al. (2009). Climate Change Impacts in Europe. Final Report of the PESETA Research Project. Seville: European Commission Joint Research Centre.
Dellink, R., Elzen, M., Aiking, al. (2009). Sharing the burden of financing adaptation to climate change. Global Environmental Change, 19, 411–21.
Dietz, S. and Hepburn, C. (2010). On non-marginal cost-benefit analysis. Mimeo. London School of Economics, Grantham Research Institute on Climate Change and the Environment, Working Paper No. 18, March 2010.
Enkvist, P.-A., Nauclér, T. and Rosander, J. (2007). A cost curve for greenhouse gas reduction. McKinsey Quarterly, 1, 35–45.
Esteban, M., Webersick, C. and Shibayama, T. (2009). Estimation of the economic costs of non adapting Japanese port infrastructure to a potential increase in tropical cyclone intensity. IOP Conference Series: Earth and Environmental Science, 6, 322003.
,European Commission (2009). Stepping Up International Climate Finance: A European Blueprint for the Copenhagen Deal. COM(2009) 475/3. Brussels: Commission of the European Communities.
,European Commission (2010). EU Energy in Figures 2010: Electricity Generation from Renewables. Extended Time Series. Brussels: European Commission Directorate-General for Energy and Transport.
,Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (2008). Act Revising the Legislation on Renewable Energy Sources in the Electricity Sector and Amending Related Provisions. Berlin: German Federal Ministry of Economics and Technology.
Garnaut, R. (2008). The Garnaut Climate Change Review. Melbourne: Cambridge University Press.
Goulder, L. H., Hafstead, M. A. C. and Dworsky, M. S. (2009). Impacts of Alternative Emissions Allowance Allocation Methods under a Federal Cap-and-Trade Program. NBER Working Paper No. 15293, August. Cambridge, MA: National Bureau of Economic Research.
Grubb, M. J. and Neuhoff, K. (2006). Allocation and competitiveness in the EU emissions trading scheme: Policy overview. Climate Policy, 6, 7–30.
Hallegatte, S. (2009). A roadmap to assess the economic cost of climate change with an application to hurricanes in the United States. IOP Conference Series: Earth and Environmental Science, 6, 322001.
Held, A., Haas, R. and Ragwitz, M. (2006). On the success of policy strategies for the promotion of electricity from renewable energy sources in the EU. Energy and Environment, 17, 849–68.
Hepburn, C. (2006). Regulation by prices, quantities, or both: A review of instrument choice. Oxford Review of Economic Policy, 22, 226–47.
Hepburn, C., Grubb, M., Neuhoff, K., Matthes, F. and Tse, M. (2006). Auctioning of EU ETS phase II allowances: How and why?Climate Policy, 6, 137–60.
Hoel, M. and Karp, L. S. (2001). Taxes and quotas for a stock pollutant with multiplicative uncertainty. Journal of Public Economics, 82, 91–114.
Hof, A. F., Elzen, M. G. J. and Vuuren, D. P. (2010). Including adaptation costs and climate change damages in evaluating post-2012 burden-sharing regimes. Mitigation and Adaptation Strategies for Global Change, 15, 19–40.
Hulme, M. (2009). Why We Disagree About Climate Change: Understanding Controversy, Inaction and Opportunity. Cambridge, UK: Cambridge University Press.
Hunt, A. (2008). Informing adaptation to climate change in the UK: Some sectoral impact costs. Integrated Assessment, 8, 41–71.
,International Energy Agency (2009a). Addressing Climate Change. Policies and Measures Database. December 2009 version. Paris: International Energy Agency.
,International Energy Agency (2009b). Electricity Information 2009. Paris: International Energy Agency.
,Intergovernmental Panel on Climate Change (IPCC) (2001). Mitigation. Contribution of Working Group III to the Third Assessment Report of the Intergovernmental Panel on Climate Change, eds. Metz, B., Davidson, O., Swart, R. and Pan, J.. Cambridge, UK: Cambridge University Press.
,Intergovernmental Panel on Climate Change (IPCC) (2007). Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Cambridge, UK and New York, NY: Cambridge University Press.
Isoard, S. and Swart, R. (2008). Adaptation to climate change. In Impacts of Europe's Changing Climate – 2008 Indicator-based Assessment. Copenhagen: European Environment Agency, pp. 161–66.
Jacobsson, S. and Lauber, V. (2006). The politics and policy of energy system transformation – explaining the German diffusion of renewable energy technology. Energy Policy, 34, 256–76.
Jaffe, A. B., Newell, R. G. and Stavins, R. N. (2005). A tale of two market failures: technology and environmental policy. Ecological Economics, 54, 164–74.
Jänicke, M. and Jacob, K. (2004). Lead markets for environmental innovations: A new role for the nation state. Global Environmental Politics, 4, 29–46.
Joskow, P. L. and Schmalensee, R. (1998). The political economy of market-based environmental policy: the U. S. acid rain program. Journal of Law and Economics, 41, 37–83.
Jotzo, F. and Pezzey, J. C. V. (2007). Optimal intensity targets for greenhouse emissions trading under uncertainty. Environmental and Resource Economics, 38, 259–84.
Lewis, M. C. and Curien, I. (2010). The Crying of Lot 2013: Phase-3 Auctions and the EUA Price Outlook. London: Deutsche Bank.
Markussen, P. and Svendsen, G. T. (2003). Industry lobbying and the political economy of GHG trade in the European Union. Energy Policy, 33, 245–55.
McKibbin, W. J. and Wilcoxen, P. (2007). A credible foundation for long term international cooperation on climate change. In Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World, eds. Aldy, J. E. and Stavins, R. N.. Cambridge University Press, pp. 185–208.
McKibbin, W. J. and Wilcoxen, P. J. (2002). Climate Change Policy after Kyoto: Blueprint for a Realistic Approach. Washington, D.C.: Brookings Institution Press.
McKibbin, W. J., Morris, A. and Wilcoxen, P. (2009). A Copenhagen Price Collar: Achieving Comparable Effort through Carbon Price Agreements. Washington, D.C.: Brookings Institution Press.
Mendonça, M. (2007). Feed-in Tariffs: Accelerating the Deployment of Renewable Energy. London: Earthscan.
Nielsen, L. and Jeppesen, T. (2003). Tradable green certificates in selected European countries – overview and assessment. Energy Policy, 31, 3–14.
Nordhaus, W. (2001). Climate change: global warming economics. Science, 294, 1283–84.
Nordhaus, W. D. (1991). Economic Approaches to Greenhouse Warming. Cambridge, MA: MIT Press.
Nordhaus, W. D. (2007). To tax or not to tax: Alternative approaches to slowing global warming. Review of Environmental Economics and Policy, 1, 26–44.
,OECD (2007). Instrument Mixes for Environmental Policy. Paris: OECD.
,OECD (2010). International Development Statistics (IDS) online databases on aid and other resource flows, Paris: OECD,
Parker, C., Brown, J., Pickering, al. (2009a). The Little Climate Finance Book. Oxford: Global Canopy Foundation.
Parker, C., Mitchell, A., Trivedi, M., Mardas, N. and Sosis, K. (2009b). The Little REDD+ Book. Oxford: Global Canopy Foundation.
Parry, M., Arnell, N., Berry, al. (2009). Assessing the Costs of Adaptation to Climate Change: A Critique of the UNFCCC Estimates. London: IIED.
Pearce, D. (1991). The role of carbon taxes in adjusting to global warming. The Economic Journal, 101, 938–48.
Pendleton, A. and Retallack, S. (2009). Fairness in Global Climate Change Finance. London: Institute for Public Policy Research,
Persson, Å., Klein, R. J. T., Siebert, C. al. (2009). Adaptation Finance Under a Copenhagen Agreed Outcome. Research Report. Stockholm: Stockholm Environment Institute.
Pezzey, J. (1992). The symmetry between controlling pollution by price and controlling it by quantity. Canadian Journal of Economics, 25, 983–91.
Pezzey, J. C. V., Jotzo, F. and Quiggin, J. (2008). Fiddling while carbon burns: Why climate policy needs pervasive emission pricing as well as technology promotion. Australian Journal of Agricultural and Resource Economics, 52, 97–110.
Pezzey, J. C. V., Mazouz, S. and Jotzo, F. (2009). The Logic of Collective Action and Australia's Climate Policy. EERH Research Report No. 24. Canberra: The Australian National University.
Pigou, A. C. (1938). The Economics of Welfare. London: Weidenfeld and Nicolsen.
Pizer, W. A. (2002). Combining price and quantity controls to mitigate global climate change. Journal of Public Economics, 85, 409–34.
,Project Catalyst (2009). Potential Uses of ‘Fast Start’ Funding in 2010–12. Briefing Paper, December 2009. San Francisco: Project Catalyst,
,Renewable Energy Policy Network (2009). Renewables Global Status Report: 2009 Update. Paris: Renewable Energy Policy Network.
Sijm, J., Neuhoff, K. and Chen, Y. (2006). CO2 cost pass-through and windfall profits in the power sector. Climate Policy, 6, 49–72.
Sorrell, S. (2007). The Rebound Effect: An Assessment of the Evidence for Economy-wide Energy Savings from Improved Energy Efficiency. London: UK Energy Research Centre.
Stern, N., Peters, S., Bakhshi, al. (2006). Stern Review: The Economics of Climate Change. London: HM Treasury.
Stern, N. H. (2007). The Economics of Climate Change: The Stern Review. Cambridge, UK: Cambridge University Press.
,UNFCCC (2007). Investment and Financial Flows to Address Climate Change. Bonn: UNFCCC,
,UNFCCC (2009). Copenhagen Accord,
,United Nations (2008). World Population Prospects: The 2008 Revision Population Database. United Nations Population Division.
,US Energy Information Administration (2010). Official Energy Statistics from the US Government: Electricity. Washington, D.C.: US Energy Information Administration.
Linden, N. H., Uyterlinde, M. A., Vrolijk, al. (2005). Review of International Experience with Renewable Energy Obligation Support Mechanisms. Amsterdam: Energieonderzoek Centrum Nederland.
Wara, M. and Victor, D. G. (2008). A Realistic Policy on International Carbon Offsets. Program on Energy and Sustainable Development Working Paper #74. Stanford: Stanford University.
Ward, M. (ed.) (2008). The Role of Sectoral No-lose Targets in Scaling Up Finance for Climate Change Mitigation Activities in Developing Countries. UK: Department for Environment, Food and Rural Affairs.
Ward, J., Fankhauser, S., Hepburn, C., Jackson, H. and Rajan, R. (2009). Catalysing Low-carbon Growth in Developing Economies: Public Finance Mechanisms to Scale Up Private Sector Investment in Climate Solutions. Report for UNEP and Partners,
Weitzman, M. (2009a). On modeling and interpreting the economics of catastrophic climate change. The Review of Economics and Statistics, 91, 1–19.
Weitzman, M. L. (1974). Prices vs quantities. Review of Economic Studies, 41, 477–91.
Weitzman, M. L. (2009b). What is the ‘damages function’ for global warming and what difference might it make? Mimeo, Harvard University.
Wiser, R. and Bolinger, M. (2008). Annual Report on US Wind Power Installation, Cost, and Performance Trends: 2007. Washington, D.C.: US Department of Energy – Energy Efficiency and Renewable Energy.
,World Bank (2009). World Development Report 2010: Development and Climate Change. Washington, D.C.: The World Bank,–1226014527953/WDR10-Full-Text.pdf.
,World Resources Institute (2009). Climate Analysis Indicators Tool. Washington, D.C.: World Resources Institute.