Economic Affairs and Policy

A Review of the International Economic Consensus to combat Climate Crisis

Malhar Satav

This piece examines the importance of global consensus to combat the Climate Crisis by arguing that the cost of inaction exceeds far more than the cost of immediate, intensive, and coordinated action to mitigate the climate crisis through a global economic consensus by treating the ecosystem as a ‘global commons’.

The economics of climate change is an indispensable component of the climate crisis debate since the usual justifications of inaction inordinately fall back on the imprudence in bearing costs of ‘undoing’ the fossil fuel ecosystems in favor of expensive clean fuel technologies which are less promising as an alternative from the economic point of view. The immediate impact of marginal abatement costs (the cost of reducing one extra unit of carbon in favour of renewable energy) on a nation’s GDP, deters any incumbent political dispensation to take steep strides toward cleaning the fossil fuel economy. This piece also makes normative observations about the road ahead to adopting economic policies in the interest of ecological sustainability and most importantly- climate justice.

Why is an economic Consensus necessary?

There has been much hue and cry about the climate crisis from both- the privileged industrialized West and the economically benign, developing rest. There have been several conferences, dialogues, reports, declarations, and national commitments toward combating the climate crisis- all but to little avail. Invariably, the gains of one country are offset by the laxity of another. The net impact is thus self-defeating in the quest to stabilize and then lower current CO2 emissions. The current global consensus embodied by the Paris climate accord is also inadequate which would, according to current pledges, lead to a median warming of about 3.5 degrees Celsius. This is significantly above the 2 degrees threshold mandated by the Paris agreement.

Unless and until there is an articulation of the climate crisis as a ‘public good issue’ warranting immediate and intensive containment measures, there would not ever be the ‘right time’ to employ mitigatory measures. The greater the degree of vacillation right now, the steeper would be the transition cost in the future. 

The benefit/cost ratio of 5:1 in a flagship study conducted by Harris, Roach, and Codur titled the ‘Economics of Climate Change’, is explicit about the fact that immediate policy action is warranted since the benefits are 5 times the cost of acting without delay. This is as opposed to delayed, lax action- which is estimated to cost around 5% of the global GDP with damages projected to be around 20% of the world GDP or more. The ultimate objective of a global collaboration to mitigate the climate crisis is essential to internalize the externalities caused by local and regional pollutants.  

Challenges to an economic consensus 

The first imperative that this paper identifies is the recognition that the cost-benefit analysis of immediate action justifies the promptness that is being advocated in this paper. 

The essence of this cost-benefit analysis is to weigh the consequences of the projected increase in carbon emissions against the costs of prompt policy actions to freeze and eventually reduce CO2 emissions. This logic is of ‘avoided costs’, wherein the benefits of prompt action are equal to or more than the value of damages that are being avoided. The biggest barrier in the path of expedient action is the apparently cumbersome cost of action on the current GDP. 

These potential costs on a nation’s GDP are computed by Integrated Assessment Models (IAMs) wherein costs to mitigate climate change are estimated in present-day monetary terms. There are several models employing a cost-benefit analysis today like the following;

Note: The three different models (ENVISAGE, DICE, and CRED) shown in this figure give damage estimates that are similar at low to moderate levels of temperature change, but diverge at higher levels, reflecting different assumptions used in modelling.

These models are fairly convergent in the initial stages but diverge significantly in the long run.

However, notwithstanding the individual particularities of these models, an inter-model comparison affirms the conclusion that climate-change mitigation is technically and economically feasible with mid-century costs most likely to be around 1% to +/- 3% of the Global GDP. Nicolas Stern computes (see page 248) that the estimated effect of an ambitious climate change mitigation policy upon economic output would be around 1% or less of national and world product, averaged across the next 50 to 100 years. 

Moving Toward Climate Justice and The Road Ahead

Now that we have established conceptual clarity that the cost of inaction is exponentially more than the cost of immediate and prompt action, the question of how becomes important. The challenge is to translate this conceptual consensus among researchers into tangible policy prescriptions in the interest of climate justice. The root cause of insufficient consensus is the equivocation by wealthier nations to tangibly commit and contribute money for prompt redressal of the climate crisis. Negotiations break down at the altar of the proposition which posits a pro-rata distribution of costs, on the basis of historic GHG emissions.

To illustrate, assume that Greenhouse Gas (hereinafter GHG) stabilization requires a commitment of 1% of world GDP annually. If the richest 20% of the world’s population, which produce 80% of the world’s output- agreed to pay 20% more- equivalent to 1.2% of their National GDP- this would allow the poorer 80% of world’s population to bear costs amounting to only 0.2% of their GDP (see page 259). 

This Stern model is also conducive to the economic development and growth of the nascently industrialised or developing nations. This is simply because the primary reason developing nations refuse to substantially commit to climate mitigation is that they are already resource-strapped and they would rather channelize their resources to competitive growth rather than hedging against a not so imminent climate crisis. 

Employment of this model offsets the unfair burden cast upon the newly industrialized countries for two main reasons; 

Firstly, it is unfair upon the developing counties to contribute equally to mitigation when they have not been historic polluters. This model infuses equity into the question of climate justice insofar as there is a pro-rata distribution of burdens among the developed and the developing. A contribution amounting to 0.2% of their GDP should not be excessively cumbersome when the GDP of newly developing countries grows exponentially, since it is less expensive to set aside a portion of the GDP for climate justice when there is constant economic flux and heightened activity as opposed to when there is stagnancy. This is in the long-term interest as well, given that OECD estimates suggest that developing counties could account for around 60% of the global GDP by 2030.  

Secondly, it is unreasonable to impose exorbitant transition costs on developing countries, when currently the adaptation cost to carbon alternatives is expensive. The idea is that over time, along the learning curve, there would be innovative R&D in carbon alternatives to make the transition cheaper and efficient. 

A dedicated investment in the R&D ecosystem is sine qua non to ensure smooth transition from a carbon heavy ecosystem to robust climate alternatives because since but for this investment – the apprehension of being overtaken by competitors will deter current investment into the R&D infrastructure. 

However, this apprehension of being overtaken in economic growth by committing to tackle the climate crisis is assuaged by ‘UNEP’s 6 sector solution to limit the temperature rise to 1.5 degree Celsius.’ For instance, in the energy sector, the UNEP suggests cutting down 12.5 Gigatonnes (GtGt) annually by simply shifting to renewable energy (subject to to existing transitory arrangementsbackstop arrangements) and using less energy in general. All the other 5 sectors – Industry(7.3Gt), Transport(4.7Gt), Agriculture (5.9Gt), Buildings and Cities (5.9Gt) can cumulatively deliver a reduction of 30Gt which is indispensable to reach the 1.5-degree Celsius goal. Thus, such piecemeal reductions in these sectors will not drastically impede economic growth.  In sum, one percent of the global GDP (+/-0.3%) would be the cost of action to stabilize GHG emissions at 500-550 ppm (parts per million) of CO2 emissions, which is the necessary level for global warming to stabilize at 1.5-2 degree Celsius

Flowing from this model, I have four policy prescriptions. 

Firstly, an augmentation of the Green Climate Fund can be done by mandating developed counties to substantially endow it with 1.2% of their National GDP. Currently, the Climate Fund is inadequate for want of sufficient mitigation funds and access to them by the most vulnerable countries.

Secondly, the Nationally Determined Contributions (NDCs) can mandate developing counties to invest in themselves, or in their own future, viz- Carbon alternatives. To facilitate this, an independent body comprised of UNFCCC officials can oversee the allocation of funds toward carbon alternatives. A hybrid model could be worked out, where the Green Climate Fund aids in the current mitigation of climate externalities, and the funds allocated to adaptation can be 0.2% of their GDP, as this model suggests. This model is practically workable because the current disbursal of funds through the Green Climate Fund is already skewed in favour of mitigation as opposed to adaptation.

Thirdly, an alternative approach is also to enable direct capital transfers in order to compensate countries that face disproportionally large and costly adjustments to the structure of their economies. However, this approach requires a greater degree of cooperation amongst the comity of nations, thus creating a potential impediment in its execution- as was witnessed in the unviability and opaqueness of the carbon credits scheme. 

Fourthly, pricing carbon (see page 324), either via tax or trading can ensure climate equity since it hugely disincentivizes future investment in carbon-heavy infrastructure and the extant GHG ecosystem. Moreover, the maintenance of a consistent carbon pricing policy is a sine qua non to ensure long-term public spending on research and development of clean fuel compatible technologies. This would ensure that the historical GHG emitters face the consequences of their actions and not just the human resource-rich countries and low-lying islands which are inordinately impacted due to global GHG emissions. 

An example in this regard could be modifying WTO regulations to allow for impositions of tariffs on carbon-heavy products, in consonance with the national will of the country. To illustrate, if Country A is making consistent efforts to transition to carbon alternatives, and Country B is invariably dishonoring Country A’s efforts by emitting huge volumes of carbon, then it should be justified for Country A to impose tariffs on carbon-heavy goods exported by Country B. The WTO can recognize this practice to be a valid one and accommodate it accordingly in its policy framework. This punitive strategy is likely to work out since the carbon offsetting model based on mutual understanding has not worked out in the past

Fifthly, I argue that transparency is the cornerstone of a collaborative success in mitigating the climate crisis. For this, the sharing of best practices between the private and public sectors and amongst countries is crucial. This has to transcend geo-political reservations and bloc politics. An incentive structure could be worked out for an institutionalized collaboration between the government and the private sector for adapting clean fuel technology. India is an excellent example of a collaborative adaptation of clean fuel technology through initiatives like the ISA (International Solar Alliance), and the Public-Private Partnership based ‘Panchamrit’ (India’s 5 climate commitments to the world)., This makes it the only G20 nation on track to meet her goals. Additionally, in order to incentivize transparency, the primary innovator country can be paid an annual royalty derived from the Green Climate Fund. This will further spur research and can bolster national pride alsoas well- thus solidifying the political commitment to tackle the climate crisis. 


The piece attempted to contribute to the climate change discourse in a two-fold way:

Firstly, it illustrated how the climate change discourse has shifted to a cost-benefit and a cost-effectiveness analysis from a conceptual battle debating the existence of climate change itself. This shift in the trajectory presupposes the acceptance of the urgency and intensity of remedial action. Hence, global collaborative action can focus on increasing the efficacy of globally consistent mitigation strategies.

Secondly, this piece examined politically viable and economically justified policy prescriptions to tackle the climate crisis head-on such that climate justice and equity is promoted and institutionalized in the climate change discourse. 

The author is an undergraduate student at the National Law School of India University, Bengaluru.