The Economics of Climate Change

Greenhouse gas (GHG) emissions are externalities and represent the biggest market failure the world has seen. We all produce emissions, people around the world are already suffering from past emissions, and current emissions will have potentially catastrophic impacts in the future. Thus, these emissions are not ordinary, localized externalities. Risk on a global scale is at the core of the issue. These basic features of the problem must shape the economic analysis we bring to bear; failure to do this will produce, and has produced, approaches to policy that are profoundly misleading and indeed dangerous. The purpose of this chapter is to set out what I think is an appropriate way to examine the economics of…