Economic analysis of climate change uses economic tools and models to calculate the scale and distribution of damages caused by climate change. It can also give guidance for the best policies for mitigation and adaptation to climate change from an economic perspective. There are many economic models and frameworks. For example, in a cost–benefit analysis, the trade offs between climate change impacts, adaptation, and mitigation are made explicit. For this kind of analysis, integrated assessment models (IAMs) are useful. Those models link main features of society and economy with the biosphere and atmosphere into one modelling framework.

In general, climate damages increase the more the global surface temperature increases. Many effects of climate change are linked to market transactions and therefore directly affect metrics like GDP or inflation. For instance, climate change can drive inflation in food via heat and droughts, but also drives up overall inflation. There are also non-market impacts which are harder to translate into economic costs. These include the impacts of climate change on human health, biomes and ecosystem services.

Economic analysis also looks at the economics of climate change mitigation and the cost of climate adaptation. Mitigation costs will vary according to how and when emissions are cut. Early, well-planned action will minimize the costs.Stern, N. (2006). Stern Review on the Economics of Climate Change: Part III: The Economics of Stabilisation. HM Treasury, London: http://hm-treasury.gov.uk/sternreview_index.htm Globally, the benefits and co-benefits of keeping warming under 2 °C exceed the costs. Cost estimates for mitigation for specific regions depend on the quantity of emissions allowed for that region in future, as well as the timing of policies.IPCC, 2007: Technical Summary – Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change [B. Metz, O.R. Davidson, P.R. Bosch, R. Dave, L.A. Meyer (eds)], Cambridge University Press, Cambridge, United Kingdom and New York, NY, United States., XXX pp. Economists estimate the incremental cost of climate change mitigation at less than 1% of GDP. Across all developing countries, adaptation costs have been estimated to be about US$215 billion per year up to 2030, and are expected to be higher after.United Nations Environment Programme (2023). Adaptation Gap Report 2023: Underfinanced.Underprepared. Inadequate investment and planning on climate adaptation leaves world exposed. Nairobi.

Purposes Economic analysis of climate change investigates the economic impacts of the effects of climate change, the costs and benefits of preventing climate change, and the cost of adapting to a changing climate. These analyses can focus on:O'Neill, B., M. van Aalst, Z. Zaiton Ibrahim, L. Berrang Ford, S. Bhadwal, H. Buhaug, D. Diaz, K. Frieler, M. Garschagen, A. Magnan, G. Midgley, A. Mirzabaev, A. Thomas, and R.Warren, 2022: Chapter 16: Key Risks Across Sectors and Regions. In: Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 2411–2538,

Global aggregate economic costs of climate change (i.e. global climate damages) Sectoral or regional economic costs of climate change (e.g. costs to agriculture sector or energy services) Economic costs and benefits of implementing climate change mitigation and adaptation strategies Estimating the projected impacts to society per additional metric tonne of carbon emissions (social cost of carbon) informing policy decisions, interntionally or nationally

The economic impacts of climate change also include any mitigation (for example, limiting the global average temperature below 2 °C) or adaption (for example, building flood defences) employed by nations or groups of nations, which might infer economic consequences. Some regions or sectors may benefit from low levels of warming, for example through lower energy demand or improved crop yields.IPCC, 2022: Summary for Policymakers [H.-O. Pörtner, D.C. Roberts, E.S. Poloczanska, K. Mintenbeck, M. Tignor, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem (eds.)]. In: Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 3–33,

In some areas, policies designed to mitigate climate change may contribute towards other sustainable development objectives, such as abolishing fossil fuel subsidies which would reduce air pollution and thus save lives., in , in Direct global fossil fuel subsidies reached $319 billion in 2017, and $5.2 trillion when indirect costs such as air pollution are priced in. In other areas, the cost of climate change mitigation might divert resources away from other socially and environmentally beneficial investments (the opportunity costs of climate change policy).

Types of economic models Many economic tools are employed to understand the economic aspects around impacts of climate change, climate change mitigation and adaptation. Several approaches exist. Econometric models (statistical models) are used to estimate the impacts of weather and climate on economic variables, either globally or for a specific sector. Structural economic models look at market and non-market impacts affecting the whole economy through its inputs and outputs. Process models simulate physical, chemical and biological processes under climate change, and the economic effects.

Process-based models

Structural models

Computable general equilibrium models

Aggregate cost-benefit models

Integrated assessment models (IAMs) are also used to make aggregate estimates of the costs of climate change. These (cost-benefit) models balance the economic implications of mitigation and climate damages to identify the pathway of emissions reductions that will maximize total economic welfare.Clarke L., K. Jiang, K. Akimoto, M. Babiker, G. Blanford, K. Fisher-Vanden, J.-C. Hourcade, V. Krey, E. Kriegler, A. Löschel, D. McCollum, S. Paltsev, S. Rose, P.R. Shukla, M. Tavoni, B.C.C. van der Zwaan, and D.P. van Vuuren, 2014: Assessing Transformation Pathways. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA. In other words, the trade-offs between climate change impacts, adaptation, and mitigation are made explicit. The costs of each policy and the outcomes modelled are converted into monetary estimates.

The models incorporate aspects of the natural, social, and economic sciences in a highly aggregated way. Compared to other climate-economy models (including process-based IAMs), they do not have the structural detail necessary to model interactions with energy systems, land-use etc. and their economic implications.

Statistical (econometric) methods

A third modelling approach uses empirical, statistical methods to investigate how the economy is affected by weather variation.Dell, M., Jones, B. F., & Olken, B. A. (2014). What do we learn from the weather? The new climate-economy literature. Journal of Economic literature, 52(3), 740–798. This approach can identify effects of temperature, rainfall, drought and storms on agriculture, energy demand, industry and other economic activity. Panel data of weather variation over time and space, e.g. from ground station observations or (interpolated) gridded data is aggregated for economic analysis to investigate effects on national economies. These studies show that for example, hot years are linked to lower income growth in poor countries, and low rainfall is linked to reduced incomes in Africa. Other econometric studies show that there are negative impacts of hotter temperatures on agricultural output, on labour productivity and in outdoor industries such as mining and forestry. The analyses are used to estimate the costs of climate change in the future.

Analytical frameworks

Cost–benefit analysis

Standard cost–benefit analysis (CBA) has been applied to the problem of climate change. In a CBA framework, the negative and positive impacts associated with a given action are converted into monetary estimates.IPCC, 2022: Annex II: Glossary [Möller, V., R. van Diemen, J.B.R. Matthews, C. Méndez, S. Semenov, J.S. Fuglestvedt, A. Reisinger (eds.)]. In: Climate Change 2022: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Sixth Assessment Report of the Intergovernmental Panel on Climate Change [H.-O. Pörtner, D.C. Roberts, M. Tignor, E.S. Poloczanska, K. Mintenbeck, A. Alegría, M. Craig, S. Langsdorf, S. Löschke, V. Möller, A. Okem, B. Rama (eds.)]. Cambridge University Press, Cambridge, UK and New York, NY, USA, pp. 2897–2930, This is also referred to as a monetized cost–benefit framework. Various types of model can provide information for CBA, including energy-economy-environment models (process models) that study energy systems and their transitions. Some of these models may include a physical model of the climate. Computable General Equilibrium (CGE) structural models investigate effects of policies (including climate policies) on economic growth, trade, employment, and public revenues. However, most CBA analyses are produced using aggregate integrated assessment models. These aggregate-type IAMs are particularly designed for doing CBA of climate change.Kolstad C., K. Urama, J. Broome, A. Bruvoll, M. Cariño Olvera, D. Fullerton, C. Gollier, W.M. Hanemann, R. Hassan, F. Jotzo, M.R. Khan, L. Meyer, and L. Mundaca, 2014: Social, Economic and Ethical Concepts and Methods. In: Climate Change 2014: Mitigation of Climate Change. Contribution of Working Group III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Edenhofer, O., R. Pichs-Madruga, Y. Sokona, E. Farahani, S. Kadner, K. Seyboth, A. Adler, I. Baum, S. Brunner, P. Eickemeier, B. Kriemann, J. Savolainen, S. Schlömer, C. von Stechow, T. Zwickel and J.C. Minx (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA

The CBA framework requires (1) the valuation of costs and benefits using willingness to pay (WTP) or willingness to accept (WTA) compensation as a measure of value, and (2) a criterion for accepting or rejecting proposals:

For (1), in CBA where WTP/WTA is used, climate change impacts are aggregated into a monetary value, with environmental impacts converted into consumption equivalents, and risk accounted for using certainty equivalents. Values over time are then discounted to produce their equivalent present values. The valuation of costs and benefits of climate change can be controversial because some climate change impacts are difficult to assign a value to, e.g., ecosystems and human health.