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The economically optimal warming limit of the planet
Both climate-change damages and climate-change mitigation will incur economic costs. While the risk of severe damages increases with the level of global warming (Dell et al., 2014; IPCC, 2014b, 2018; Lenton et al., 2008), mitigating costs increase steeply with more stringent warming limits (IPCC, 2014a; Luderer et al., 2013; Rogelj et al., 2015). Here, we show that the global warming limit that minimizes this century's total economic costs of climate change lies between 1.9 and 2°C, if temperature changes continue to impact national economic growth rates as observed in the past and if instantaneous growth effects are neither compensated nor amplified by additional growth effects in the following years. The result is robust across a wide range of normative assumptions on the valuation of future welfare and inequality aversion. We combine estimates of climate-change impacts on economic growth for 186 countries (applying an empirical damage function from Burke et al., 2015) with mitigation costs derived from a state-of-the-art energy-economy-climate model with a wide range of highly resolved mitigation options (Kriegler et al., 2017; Luderer et al., 2013, 2015). Our purely economic assessment, even though it omits non-market damages, provides support for the international Paris Agreement on climate change. The political goal of limiting global warming to "well below 2 degrees" is thus also an economically optimal goal given above assumptions on adaptation and damage persistence. © 2019 Copernicus GmbH. All rights reserved.
Paris Climate Agreement passes the cost-benefit test
The Paris Climate Agreement aims to keep temperature rise well below 2 °C. This implies mitigation costs as well as avoided climate damages. Here we show that independent of the normative assumptions of inequality aversion and time preferences, the agreement constitutes the economically optimal policy pathway for the century. To this end we consistently incorporate a damage-cost curve reproducing the observed relation between temperature and economic growth into the integrated assessment model DICE. We thus provide an inter-temporally optimizing cost-benefit analysis of this century’s climate problem. We account for uncertainties regarding the damage curve, climate sensitivity, socioeconomic future, and mitigation costs. The resulting optimal temperature is robust as can be understood from the generic temperature-dependence of the mitigation costs and the level of damages inferred from the observed temperature-growth relationship. Our results show that the politically motivated Paris Climate Agreement also represents the economically favourable pathway, if carried out properly.
Investment incentive reduced by climate damages can be restored by optimal policy
Increasing greenhouse gas emissions are likely to impact not only natural systems but economies worldwide. If these impacts alter future economic development, the financial losses will be significantly higher than the mere direct damages. So far, potentially aggravating investment responses were considered negligible. Here we consistently incorporate an empirically derived temperature-growth relation into the simple integrated assessment model DICE. In this framework we show that, if in the next eight decades varying temperatures impact economic growth as has been observed in the past three decades, income is reduced by ~ 20% compared to an economy unaffected by climate change. Hereof ~ 40% are losses due to growth effects of which ~ 50% result from reduced incentive to invest. This additional income loss arises from a reduced incentive for future investment in anticipation of a reduced return and not from an explicit climate protection policy. Under economically optimal climate-change mitigation, however, optimal investment would only be reduced marginally as mitigation efforts keep returns high.