Economics of climate change

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Concern has grown in recent years over the issue of global climate change. In terms of economic analysis, greenhouse gas emissions, which cause planetary climate changes, represent both an environmental externality and the overuse of a common property resource.

The atmosphere is a global commons into which individuals and firms can release pollution. Global pollution creates a “public bad” borne by all — a negative externality with a wide impact. In many countries, environmental protection laws limit the release of local and regional air pollutants. In economic terminology, the negative externalities associated with local and regional pollutants have to some degree been internalized. Few controls exist for carbon dioxide (CO2), the major greenhouse gas, which has no short-term damaging effects at ground level. Atmospheric accumulations of carbon dioxide and other greenhouse gases, however, will have significant effects on world weather, although there is uncertainty about the probable scale and timing of these effects.

If indeed the effects of climate change are likely to be severe, it is in everyone’s interest to lower their emissions for the common good. But where no agreement or rules on emissions exist, no individual firm, city, or nation will choose to bear the economic brunt of being the first to reduce its emissions. In this situation, only a strong international agreement binding nations to act for the common good can prevent serious environmental consequences.

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