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Climate Policies: A Burden, or a Gain?

Abstract:
That climate policies are costly is evident and therefore often create major fears. But the alternative (no action) also has a cost. Therefore, mitigation costs netted of the damage costs avoided are the only figure that can seriously be considered as the "genuine cost" of a policy. We elaborate on this view of a policy's cost by distinguishing between its "direct" cost component and its avoided damage cost component; we then confront the two so as to evaluate its genuine cost. As damages avoided are equivalent to the benefits generated, this brings climate policies naturally in the realm of benefit-cost analysis. However, the sheer benefit-cost criterion may not be a sufficient incentive for a country to be induced to cooperate internationally, a necessary condition for an effective global climate policy. We therefore also explore how to make use of this criterion in the context of international climate cooperation.

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JEL Codes: Q54: Climate; Natural Disasters and Their Management; Global Warming, Q58: Environmental Economics: Government Policy, G38: Corporate Finance and Governance: Government Policy and Regulation

Keywords: Climate policy, Integrated assessment models, Benefit-cost analysis, International cooperation

DOI: 10.5547/01956574.36.3.tbre

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Published in Volume 36, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.