Economic Modeling for Climate Policy

Economic models are an important tool for evaluating the potential impact of proposed legislation on our economy. C2ES’s economics program has analyzed several commonly used models to determine how they work, what inputs and assumptions influence their results, and what important elements are missing. Differences among economic modeling results are often explained by the way the following factors are represented in each model:

  1. The economy’s and environment’s assumed baselines (i.e., how the economy will perform in the absence of climate policies);
  2. The precise climate policies employed (e.g., emissions trading, inclusion of non-CO2 gases, etc.);
  3. Whether estimates of damage resulting from climate change are included;
  4. The economy’s flexibility when subject to sudden price shocks or government regulation; and
  5. How technological change is characterized.

 

Effectively understanding the potential costs and benefits of mitigating climate change allows policymakers to develop policies that achieve the greatest emissions abatement for the resources expended, secure greater participation and compliance, and maximize the environmental effectiveness of the mitigation effort.

Because climate change is an interdisciplinary issue by its nature, much of the modeling work that is done to analyze the issue incorporates both economics and science. Integrated Assessment Models (IAMs) aim to pull these complex interactions together. An IAM incorporates a model of the global climate system, along with the response of natural systems to increases in greenhouse gas emissions, with a model of economic systems in order to assess the impact that a changing climate will have on the future economy. 

 

To read more about IAMs, click here.

For a review of modeling analyses for a piece of proposed climate legislation, click here.