Economic Evaluation of Damage from the Global Climate Change

In the past two decades, global climate change has become one of the most pressing problems of the world economy and politics, and the proposed methods have not solved this problem entirely. Identification and theoretical justification of such methods are an important task of economic science. This paper describes the issues of the economic estimation of future damages and the choice of instruments of the national climate regulation. The complexity of the problem related to overcoming these issues is the inability to use the categories of economics, located outside of the object of the study. Accounting of these categories is crucial to developing efficient theoretical and practical approaches to solving the problem of climate change.

The definition of the economic evaluation of damages caused by climate change is a difficult task due to the uncertainty of loss as well as the inability to determine the exact extent of some indirect adverse impacts. The difficulty of estimating damages, as well as the difference in the forms of discounting, creates a meaningful differentiation for the analysis of future losses. The assessment of damages caused by climate change can be carried out by analyzing the vulnerability of the economy or calculating the cost of adaptation measures.

According to the first aspect, climatologists describe the predicted consequences of climate change with the help of specialized climate models. Climatologists estimate the probability of a particular type of damage using these models. On the other hand, the cost of the measures, aimed at minimizing or preventing adverse effects, is the subject of research.

One of the most efficient methods to assess the future effects of climate change are the comparison of objects with their equivalents and existing climatic conditions. In most economic and climatic models, the social norm is used to evaluate the future consequences with a particular percentage indicator. This value gives the opportunity to compare the discount rate with the market rate of profit.

Stern's Model of Global Climate Change

Stern denies the traditional approach, refusing to consider costs as a typical investment project to mitigate climate change. The scientist highlights the critical importance of the mitigation of climate change for humanity as well as its long-term character and the high level of uncertainty of the problem. According to the researcher, the government should not transfer costs to future generations. Stern rejects arguments that these costs will be less burdensome for future generations due to higher income. The scientist defined the discount rate as 1,4% (? = 0,1%, ? = 1, g = 1,3%). The choice of low discount rate has been criticized by many prominent scientists, including the authors of such traditional economic and climate models as Mendelsohn, Nordhaus, and Tol. According to other researchers, Stern chose an excessively high ratio (? = 1). It will lead to an unrealistic assessment of damages. It is unfair to the poorest representatives of the modern society.

Weizmann tried to find a compromise between the positions of Stern and of the majority of neoclassical economists in regard to the discount rate issue. According to the scientist, 1% of global GDP per year is sufficient to prevent the adverse effects of climate change. Stern`s discount rate, 1,4% (? = 0,1%, ? = 1, g = 1,3%), is approximately 100 times different as compared with the typical discount rate, 6% (? = 2%, ? = 2, g = 2%). This difference is 1% of global GDP.

It is impossible to objectively assessdamages caused by climate change and formulate specific recommendations aimed at reduction of emissions without scientific justification of choice of the discount rate. However, this choice does not have any objective basis and depends on the value orientation of the authors of models to a greater extent. The development of universal principles of the discounting on the basis of the symbiosis of economic theory and philosophy is an essential task for researchers.

Greenhouse gas emissions are the negative externalities of economic activities of economic agents at the micro level. Companies do not include such damages to their costs. The state's task is to create a system of administrative coercion and economic stimulation. A tax on greenhouse gas emissions and an emissions trading system are essential parameters in the formulation of the government climate policy. An additional factor is uncertainty of emission reduction costs for businesses. A significant decrease of the limit of emissions and the delineation of the limit of prices can be promising from a strategic point of view. This system allows to reduce the market uncertainty due to the significant reduction of price volatility. Climate change can lead to a global catastrophe in the long term. At the same time, excessive emission limit can result in inflated costs faced by enterprises and, as a result, to an economic disaster. The task of economics is to propose measures that will improve the quality of climate regulation, taking into account differences in the interests of different actors of the political process.

In conclusion, formulation of the national climate policy is a daunting task. A detailed analysis of the state of the economy and the political system, as well as the current system of economic control, are integral aspects of the solution. Introduction of quota trading is an efficient element of climate regulation. The Economic analysis of future damage, choice of instruments of national climate regulation and definition of formats for international cooperation are the primary tasks of economic systems.

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