Economic Analysis of Climate Change Policies

The economic analysis of climate change policies evaluates the costs and benefits of measures to reduce greenhouse gas emissions and to adapt to climate impacts. Central to this field is the social cost of carbon (SC-CO₂), which monetises the marginal damage of an additional tonne of emissions and informs carbon pricing, taxes and regulation. Integrated assessment models (IAMs) combine climate science with economic and demographic projections to assess optimal mitigation pathways, accounting for uncertainty in climate sensitivity, technological change and discounting. Economic studies examine the shape of damage functions, the role of discount rates in intergenerational equity, the timing and sequencing of abatement investments and the value of adaptation alongside mitigation. Recent advances have integrated improved probabilistic projections, updated damage estimates from agriculture and tipping‐point risks, and have revisited the economics of international targets such as those of the Paris Agreement. Together, these developments support policy design that balances near‐term abatement investment, long‐term carbon budgets and risk management, with clear implications for global cooperation, sectoral allocation and infrastructure planning.

Research from Nature Portfolio

Recent advances have substantially revised upwards estimates of the SC-CO₂ by integrating improved probabilistic socioeconomic scenarios, refined climate models and transparent uncertainty characterisation. Updated damage functions and discounting methods yield mean values for the SC-CO₂ that are several times higher than those used in current policy evaluations, reinforcing the case for more stringent carbon pricing and investment in mitigation.

Modelling studies have demonstrated that, when calibrated with the latest carbon cycle and energy balance science and informed by expert views on intergenerational welfare, optimal policy pathways align with the 1.5 °C and 2 °C temperature goals. These analyses show that adopting more accurate damage estimates and ethical assumptions can render ambitious international targets economically favourable, provided policies are implemented with suitably calibrated carbon prices and mitigation trajectories.

Economic Analysis of Climate Change Policies publication trend

The graph below shows the total number of articles in economic analysis of climate change policies across all publications each year (not limited to Nature Index journals).

Technical terms

Social cost of carbon (SC-CO₂): The monetised estimate of damages to society from an additional tonne of CO₂ emissions, used to set carbon prices.

Integrated assessment model (IAM): A framework combining climate science and economic analysis to evaluate policy pathways and their impacts on temperature, economy and welfare.

Damage function: A mathematical relationship linking changes in global temperature or emissions to economic losses across sectors and regions.

Discount rate: The rate at which future costs and benefits are converted into present values, reflecting intergenerational equity and time preferences.

Carbon budget: The total cumulative CO₂ emissions compatible with limiting global temperature rise to a specified target, such as 1.5 °C or 2 °C.

References

1. Comprehensive evidence implies a higher social cost of CO2. Nature (2022).
2. New science of climate change impacts on agriculture implies higher social cost of carbon. Nature Communications (2017).
3. Climate economics support for the UN climate targets. Nature Climate Change (2020).
4. Cumulative carbon emissions and economic policy: In search of general principles. Journal of Environmental Economics and Management (2019).
5. Economic impacts of tipping points in the climate system. Proceedings of the National Academy of Sciences of the United States of America (2021).
6. Endogenous Growth, Convexity of Damage and Climate Risk: How Nordhaus' Framework Supports Deep Cuts in Carbon Emissions*. The Economic Journal (2015).