climate change and the economy

Addressing climate change and the economic damage it will likely bring presents policymakers with a dilemma. The benefits of policy action are uncertain and would accrue largely to future generations, whereas the costs of policies run the risk of being more immediate and extensive. At the same time, the costs of inaction are irreversible, potentially catastrophic, and likely to hit poorer countries harder than developed ones. Moreover, even if the greenhouse gas (GHG) emissions that accumulate in the atmosphere and warm the climate stopped immediately, temperatures would rise for some decades because of the emissions already accumulated. For these reasons, economic policymakers increasingly recognize that policies will have to be adopted both to mitigate global warming, by slowing and ultimately reversing the growth of GHG emissions, and to adapt to the effects of the emissions that have already occurred and will occur in the coming decades. And they agree that mitigation policies in particular can have rapid and wide-ranging consequences. To shed light on how mitigation policies would affect countries ’ economies, the IMF recently undertook a study comparing alternative policy designs—taxes on GHG emissions, emissions permit trading, and hybrid schemes combining elements of both policies. The encouraging news is that the analysis shows that climate change can be addressed without either hurting macroeconomic stability and growth or putting an undue burden on the countries least able to bear the costs of policies. In other words, if policies are well designed, their economic costs should be manageable. Policies to reduce the emission of greenhouse gases need not hobble the economy