Climate Economics: The State of the Art

The report argues that climate economics lags behind climate science, often relying on outdated damage functions and oversimplified cost-benefit frameworks. It advocates for a shift toward standards-based (precautionary) decision-making to avoid catastrophic tipping points, such as the collapse of ice sheets or the Amazon rainforest. The authors recommend that models incorporate endogenous technological change, explicit discount rate justifications, and regional equity considerations to provide policy-relevant guidance for staying below a 2°C warming threshold.

• Climate economics frequently fails to keep pace with climate science, often using simplified or outdated representations of scientific knowledge that are years or decades old.
• Recent scientific evidence suggests that 'overshooting' global average temperatures is irreversible on a timescale of centuries or millennia; temperatures will not decline even if greenhouse gas concentrations are reduced.
• To have a reasonable chance of limiting global warming to 2°C, greenhouse gas emissions must peak by 2020 at the latest and then decline rapidly.
• The 'Dismal Theorem' proposes that under plausible assumptions of fat-tailed probability distributions for climate sensitivity and unbounded disutility of extreme outcomes, the marginal benefit of emission reduction is infinite.
• Common economic practices of assuming that climate damages grow with the square of temperature are unsubstantiated and should be replaced by models that reflect sector-specific and regional vulnerabilities.
• A standards-based or precautionary approach, which focuses on cost minimization to achieve a specific outcome (e.g., staying below 2°C), is recommended as an alternative to welfare-optimization models when damages cannot be accurately represented.
• The report identifies critical tipping points that could be triggered at temperatures as low as 2°C to 4°C, including the collapse of the Amazon rainforest and major ice sheets.
• Technological progress in mitigation should be modeled endogenously to account for 'learning by doing' effects, where unit costs decline as cumulative production increases.
• Negative-cost abatement options exist and should be included in economic analyses, while the 'backfire' effect (where efficiency gains are entirely erased) is described as an 'urban legend' with no empirical evidence.
• Climate-economics models often fail to account for the significant impact of fossil fuel price assumptions, which are a primary determinant of the comparative affordability of abatement measures.
• Adaptation costs are highly uncertain and localized, with estimates for developing countries varying widely, from $80 billion to $230 billion per year by 2030.
• The report argues that the 'representative agent' model is inadequate for climate economics; models must separately consider the concerns of poor and rich countries and present results by region.

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.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.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.pdf |access-date=23 October 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.pdf}, urldate = {2026-10-23}, note = {Indexed by Climate Insights Directory} }