Getting the Costs of Environmental Protection Right: Why Climate Policy Is Inexpensive in the End

Lucas Bretschger

Ecological Economics, 2021, vol. 188, issue C

Abstract: The belief that stringent climate policies are very costly is widespread among political decision-makers and the public. The cost argument is often used by governments as a motivation for sluggish policy making. However, such judgements ignore the economic benefits of policy changes and implicitly build on a misguided decomposition of environmental impact into separate population, income, and technology effects. The paper shows that this method predicts policy-induced income losses that are systematically and significantly biased. I extend the decomposition analysis by introducing input substitution, which drastically lowers policy costs. By additionally incorporating a production approach, causal relationships between the drivers of resource use, and a framework for endogenous technology development I develop a new structural equation to assess climate policy effects. For a given decarbonization path, I calculate the projected income development at the global and country level. The use of the structural approach instead of agnostic decomposition suggests that the costs of a stringent climate policy are much lower than normally expected, which supports deep decarbonization.

Keywords: Environmental Protection; Costs of Climate Policy; Decarbonization; IPAT Identity; IAT Formula (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolec:v:188:y:2021:i:c:s0921800921001749

DOI: 10.1016/j.ecolecon.2021.107116

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