Economics in Depth

What are the potential costs of cutting greenhouse gas emissions? Can these emissions be reduced without sacrificing economic growth or our standard of living? These questions are frequently raised as the United States and other nations respond to the challenge of climate change.

Any effort to significantly limit greenhouse gas emissions will require changes in behavior and investments in technology – in short, changes in economic activity that could impose costs on society. The costs of climate change mitigation reflect the magnitude of the emissions reduction, the timing of these reductions, and the means of implementation. Of course, left unaddressed, climate change will impose costs on society as well – and so, the benefits of undertaking climate change mitigation must also be considered.

The Pew Center’s economics program has analyzed several commonly used models to determine how they work, what inputs and assumptions influence their results, and what important elements are missing. Differences among economic modeling results can often be explained by the way the following factors are represented in each model:

1. the economy’s and environment’s assumed baselines (i.e., how the economy will perform in the absence of climate policies);
   
   
2. the precise climate policies employed (e.g., emissions trading, inclusion of non-CO₂ gases, etc.);
   
   
3. whether estimates of damage resulting from climate change are included;
   
   
4. the economy’s flexibility when subject to sudden price shocks or government regulation; and
   
   
5. how technological change is characterized.

If models adequately address all five of these “drivers” – and few currently do – the projected costs of climate policies would likely be lower than they are now.

Effectively understanding the potential costs and benefits of mitigating climate change allows policy-makers to develop policies that achieve the greatest emissions abatement for the resources expended, secure greater participation and compliance, and maximize the environmental effectiveness of the mitigation effort.

The objective of the Pew Center’s Economics Program is to advance public and private policy-makers’ understanding of the complex interactions between the climate change problem and the economy. We work to inform this understanding by bringing sound, credible analysis to the discussion of potential costs and benefits of climate change policy.

The Pew Center is undertaking a multi-year modeling effort to improve the economic modeling of climate policies and to generate robust and insightful analyses of various proposals as they are debated.