Skip to main content Accessibility help
  • Print publication year: 2014
  • Online publication date: July 2014

10 - The costs of climate change



After a brief explanation of the greenhouse effect, we present some data from the 2007 assessment by the IPCC (2007a), the principal international body that is working on climate change. These data show the main anthropogenic contributions to climate change, as well as the increases in global average temperature and sea level that have been occurring since the industrial revolution. Since the impacts depend on cumulative emissions and involve long time constants, one needs to define emission scenarios before one can estimate the corresponding impacts, a topic addressed in Section 10.2. We then describe, in Section 10.3, the impacts that can be expected and discuss some of the difficulties in estimating the corresponding damage costs. In Section 10.4 we review damage cost estimates in the literature. It is also of interest to look at abatement costs, see Section 10.5. Finally, we discuss some of the implications of a CO2 tax in the light of emission reductions required to stabilize the climate at acceptable levels.

Greenhouse gases (GHG) and their effects: some data

Climate change is a vast subject and we cannot do it justice with a single chapter. Here we merely give an introduction to the problem of estimating the damage costs of GHG.

That anthropogenic emissions of CO2 would increase global temperatures had been recognized at the end of the nineteenth century, when the great chemist Arrhenius attempted a first estimate of the temperature increase that could be expected if the atmospheric CO2 concentration doubles relative to the pre-industrial level: he found that the average temperature at the surface of the earth would increase by about 5 to 6 K (Weart, 2008), not very far from current estimates, generally around 2.5 K.

Anthoff, D., Rose, S., Smith, J. B., Tol, R. S. J. and Waldhoff, S. 2010. Regional and Sectoral Estimates of the Social Cost of Carbon: An Application of FUND.Economic and Social Research Institute, Dublin, Ireland. 15 Feb. 2010.
Bernoulli, D. 1738. Reprinted as exposition of a new theory on the measurement of risk. Econometrica 22, No. 1. (Jan., 1954): 23–36.
Cline, W. R. 1992. The economics of global warming. Institute for International Economics, Washington D.C.
Dasgupta, P. 2006. Comments on the Stern Review’s Economics of Climate Change, mimeo, see .
DEFRA 2004. The Social Costs of Carbon (SCC) Review – Methodological approaches for using SCC estimates in policy assessment, Department for Environment, Food and Rural Affairs, London.
DEFRA 2005. Social Cost of Carbon: A closer look at uncertainty, Department for Environment, Food and Rural Affairs, London.
ExternE 1998. ExternE: Externalities of Energy, European Commission, DG-XII, Science Research and Development, .
ExternE 2008. With this reference we cite the methodology and results of the NEEDS (2004–2008) and CASES (2006–2008) phases of ExternE. For the damage costs per kg of pollutant and per kWh of electricity we cite the numbers of the data CD that is included in the book edited by Markandya, A., Bigano, A. and Porchia, R. in 2010: The Social Cost of Electricity: Scenarios and Policy Implications. Edward Elgar Publishing Ltd, Cheltenham, UK. They can also be downloaded from (although in the latter some numbers have changed since the data CD in the book).
Fabry, V. J., Seibel, B. A., Feely, R. A. and Orr, J. C. 2008. Impacts of ocean acidification on marine fauna and ecosystem processes. ICES Journal of Marine Science 65: 414–432.
Fankhauser, S. 1995. Valuing Climate Change: The economics of the greenhouse. Earthscan, London.
Fell, H., Li, S. J. and Paul, A. 2012. A New Look at Residential Electricity Demand Using Household Expenditure Data. Working Paper 2012–04, Colorado School of Mines, Division of Economics and Business.
Hanemann, W. M. 2008. What is the Economic Cost of Climate Change? eScholarship. University of California – Berkeley, URL: .
Hardt, M. J. and Safina, C. 2010. Threatening ocean life from the inside out. Scientific American, August: 52–59.
IPCC 2007a. Climate Change 2007: Synthesis Report. Intergovernmental Panel on Climate Change. Downloaded 1 Oct. 2010 from
IPCC. 2007b. Summary for Policymakers. In: Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment. Report of the Intergovernmental Panel on Climate Change, Metz, B., Davidson, O. R., Bosch, P. R., Dave, R., Meyer, L. A. (eds), Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA.
Manne, A. S. and Richels, R. G. 2004. MERGE: an integrated assessment model for global climate change. .
Nordhaus, W. D. 1991. To slow or not to slow: the economics of the greenhouse effect, The Economics Journal 101: 920–937.
Nordhaus, W. D. 1994. Managing the Global Commons. MIT Press, Cambridge, Massachusetts.
Nordhaus, W. and Boyer, J. 2000. Warming the World: Economic Models of Global Warming. Cambridge, MA: MIT Press.
Nordhaus, W. D. 2006. The Stern Review on the Economics of Climate Change, mimeo, see .
Plambeck, E. L. and Hope, C. W. 1996. PAGE-95: an updated valuation of the impacts of global warming. Energy Policy 24, 9: 783–794.
Roughgarden, T. and Schneider, S. H. 1999. Climate change policy: quantifying uncertainties for damages and optimal carbon taxes, Energy Policy 27: 415–429.
SRES 2000. IPCC Special Report on Emissions Scenarios. Intergovernmental Panel on Climate Change.
Stern, N. et al. 2006. The Economics of Climate Change: The Stern Review, Cambridge University Press, Cambridge, UK. Available at
Titus, J. G. 1992. The cost of climate change to the United States, in: Majumdar, S. K. et al. (Eds.), Global Climate Change: implications, challenges, and mitigation measures, Pennsylvania Academy of Science, Easton, PA.
Tol, R. S. J. 1995. The damage costs of climate change: towards more comprehensive calculations. Environmental and Resource Economics 5: 353–374.
Tol, R. S. J. 2005. The marginal damage costs of carbon dioxide emissions: an assessment of the uncertainties, Energy Policy 33, 16: 2064–2074.
Watkiss, P. and Downing, T. E. 2008. The social cost of carbon: Valuation estimates and their use in UK policy. IAJ The Integrated Assessment Journal: Bridging Sciences & Policy 8 (1): 85–105.
Weart, S. 2008. The Discovery of Global Warming, 2nd edition.
Weitzman, M. L. 2009. On modeling and interpreting the economics of catastrophic climate change. Review of Economics and Statistics 91: 1–19.
Yohe, G. 1996. Exercises in hedging against extreme consequences of global change and the expected value of information. Global Environmental Change 6, 2: 87–100.