Economics

It is human economic activity that has caused (and continues to cause) climate change, predominately through energy production, industrial activity, transport and land use. Climate change will effect all global economic activity in both a positive and negative way, but like all economics it cannot be seen in isolation. People do not want to contribute to the production of greenhouse gases but they do want to go to Barcelona for £40 return. People do not want to destroy the rainforest but they do want to feed their families. Economics tries to explain the real world but it is very complicated and difficult to interpret. The reality is that every situation requires a unique solution.

The main economic conditions of climate change are that:

• The climate is a public good in that it belongs to no individual and everyone benefits or suffers from changes in its quality, without paying.
• This makes climate change an economic externality, whereby the level of use by one consumer has a direct effect on the welfare of another. For example, living near a forest one may experience disturbance from timber lorries or the noise of harvesting without having any economic benefit from the proximity.
• The previous two conditions make climate change a classic example of market failure. Because no one pays or receives a financial benefit for the climate, there is no (monetary) incentive to do anything about it and no market.
• These three conditions underlie all the economics of climate change addressed in the recent Stern Review. It is also clear that those that suffer most from climate change will not necessarily be those that contribute most to the problem, indeed it is likely that the developing world will suffer most as a consequence of the economic activity of the industrialised nations.
• The Stern Review places great store on ensuring the economics used reflect the dynamics of the scientific evidence. It also addresses the issue of inequality using economic tools and espousing the ‘polluter pays’ principle.