Climate Economics: The State of the Art

This report by the Stockholm Environment Institute evaluates the current state of climate economics, arguing that economic modeling has lagged behind climate science. The authors advocate for a precautionary, standards-based approach to policy—such as maintaining a 2°C warming limit—rather than relying on traditional cost-benefit frameworks that often underestimate catastrophic risks and the importance of future generations.

• Climate economics frequently fails to keep pace with climate science, often utilizing outdated scientific data and simplified representations that are years or decades old. The authors argue that economic models should instead approximate the range of potential outcomes found in the latest scientific results, including non-declining temperatures over several centuries.
• The report highlights a critical disconnect between physical damage estimates and monetary cost assessments. Many economic models use generalized damage functions that assume damages grow with the square of temperature, a practice the authors describe as unsubstantiated. They recommend that models incorporate sector-specific damages and regional vulnerability.
• The authors advocate for a 'standards-based' or precautionary approach to decision-making. This method replaces welfare maximization with cost minimization to achieve a specific climate outcome, such as keeping temperature increases below 2°C, based on the scientific assumption that exceeding certain thresholds leads to unacceptably large damages.
• The report discusses the 'Dismal Theorem' by Martin Weitzman, which mathematically suggests that the marginal benefit of emission reduction is infinite if climate uncertainty is high (fat-tailed distribution) and potential welfare losses are limitless (endangering human survival).
• To limit global warming to 2°C, the report states that global emissions must be reduced to less than 20 percent of 2005 levels by 2050. Analysis of twenty scenarios achieving this goal indicates that emissions must peak by 2020 at the latest and then decline rapidly.
• The report identifies several mitigation and adaptation economic factors: 'negative-cost abatement' (saving money and energy simultaneously) is considered a real possibility; 'rebound effects' (where efficiency gains are partially offset by increased spending) typically range from 10 to 30 percent; and 'backfire' (where efficiency gains are entirely erased) is dismissed as an 'urban legend'.
• Adaptation costs are difficult to quantify due to their localized nature and interaction with mitigation. Estimates for near-term global adaptation costs vary widely from $4 billion to $166 billion annually, while some estimates for developing countries range from $80 billion to $230 billion per year by 2030.

APA

Ackerman, F., & Stanton, E. A. (2011). Climate Economics: The State of the Art. Stockholm Environment Institute. https://www.sei.org/mediamanager/documents/Publications/Climate-mitigation-adaptation/Economics_of_climate_policy/sei-climateeconomics-state-of-art-2011-es.pdf

Chicago

Ackerman, Frank, and Elizabeth A. Stanton. Climate Economics: The State of the Art. Stockholm Environment Institute, 2011. https://www.sei.org/mediamanager/documents/Publications/Climate-mitigation-adaptation/Economics_of_climate_policy/sei-climateeconomics-state-of-art-2011-es.pdf.

Wikipedia

{{cite report |last1=Ackerman |first1=Frank |last2=Stanton |first2=Elizabeth A. |title=Climate Economics: The State of the Art |publisher=Stockholm Environment Institute |date=November 2011 |url=https://www.sei.org/mediamanager/documents/Publications/Climate-mitigation-adaptation/Economics_of_climate_policy/sei-climateeconomics-state-of-art-2011-es.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{ackerman2011climate, author = {Ackerman, Frank and Stanton, Elizabeth A.}, title = {{Climate Economics: The State of the Art}}, institution = {Stockholm Environment Institute}, year = {2011}, month = nov, url = {https://www.sei.org/mediamanager/documents/Publications/Climate-mitigation-adaptation/Economics_of_climate_policy/sei-climateeconomics-state-of-art-2011-es.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }