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Economics of CC

This paper is an introduction to the economics of climate change policy. The goal is to help the reader understand how analysts use computer models to make projections of mitigation costs and climate change impacts, and why projections made by diff e rent groups diff e r. In order to accomplish this goal, the paper will describe five key determinants of greenhouse gas (GHG) mitigation cost estimates. The paper starts with a discussion of how the economy would adjust to restrictions on GHG emissions, especially carbon dioxide, the dominant, and easiest to measure GHG produced in the United States. Combustion of fossil fuels — oil, gas, and coal — produces large amounts of carbon dioxide. Central to this discussion is the role of energy price increases in providing the incentives for corporations and individuals to reduce their consumption of these fuels. Energy price increases cause producers to substitute among the inputs they use to make goods and services, and consumers to substitute among the products they buy. Simultaneously, these price increases provide incentives for the development of new technologies that consume less energy in pro viding the goods and services that people desire. How a model re p resents these substitution and innovation responses of the economy are important determinants of the economic impacts of restrictions on GHGs.

 

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