Economic impacts of climate change and mitigation

For decades, economists have been studying the implications of climate change, in broad interdisciplinary cooperation with natural scientists. Despite significant advances, economic research continues to face formidable challenges. This section reviews what we know and examines the numerous and large uncertainties surrounding the economic impact of greenhouse gas emissions. Point estimates of GDP losses arising from limited climate change, as they are used in standard integrated assessment models, are typically not too large. However, they are based on partial representations of the impact channels. Moreover, the damage differs considerably across regions and income groups. Uncertainty and elements that are not covered, or only incompletely, in analyses of the cost of climate change suggest that the economic consequences of unabated greenhouse gas emissions could be dramatically worse than those point estimates. The section then goes on to provide an example of evidence-based design of climate mitigation policy. For this, it uses E-QUEST, a new version of the Commission’s DSGE model QUEST, which has been developed to assess climate mitigation policies. The simulations show that pricing carbon might allow decarbonisation at little aggregate economic cost, depending on how the carbon tax revenues are used. These findings justify high ambition at all levels in operationalising climate mitigation targets such as the Paris Agreement’s temperature goals and Europe’s ambition to become climate-neutral by 2050. Climate change is a global challenge. Nonetheless, its impacts have specific euro-area dimensions, as they might e.g. affect economic convergence, prices or financial stability.