Climate targets and cost-effective climate stabilization pathways

Abstract

Climate economics has developed two main tools to derive an economically adequate response to the climate problem. Cost benefit analysis weighs in any available information on mitigation costs and benefits and thereby derives an “optimal” global mean temperature. Quite the contrary, cost effectiveness analysis allows deriving costs of potential policy targets and the corresponding cost- minimizing investment paths. The article highlights pros and cons of both approaches and then focusses on the implications of a policy that strives at limiting global warming to 2 °C compared to pre-industrial values. The related mitigation costs and changes in the energy sector are summarized according to the IPCC report of 2014. The article then points to conceptual difficulties when internalizing uncertainty in these types of analyses and suggests pragmatic solutions. Key statements on mitigation economics remain valid under uncertainty when being given the adequate interpretation. Furthermore, the expected economic value of perfect climate information is found to be on the order of hundreds of billions of Euro per year if a 2°-policy were requested. Finally, the prospects of climate policy are sketched.