The challenging economics of climate change

imageedit_2_8238428477Global climate change has become one of the dominant discourses in the scientific and public policy arena. Studies from scientific research show that the global warming is now a real phenomenon, as there has been an unusually rapid increase in Earth’s average surface temperature over the past century primarily due to the unprecedented accumulation of carbon dioxide resulting from the burning of fossil fuels, together with emissions of other human-induced greenhouse gases. The effect of this temperature rise includes increased frequency of severe weather events (such as heat waves, hurricanes, and tornadoes), proliferated intensity of storms, and sea level rise. These changes, no doubt, pose serious threats to the welfare and existence of mankind and other living things on earth through impacting on the functioning of the ecosystem, biodiversity, and human health.

The economics of climate change refers to the study of the economic costs and benefits of climate change, and the analysis of the economic impact of actions targeting at limiting its effects. However, the economics of climate change is challenging due to the fact that there are huge uncertainties in the estimation of both the costs and benefits related to climate change. The precision of the time horizon, over which benefits and costs of climate change would accrue, is debatable. Also, there are uncertainties over thresholds for climate change impacts and the pace and form of technological innovation that can take shape in the future.

Furthermore, the effects of climate change are not uniform across countries. Different parts of the world are likely to be affected differently: countries closer to North and South poles will experience warmer temperatures and once inhospitable land will experience melting of ice. Small island nations are at risk of extinction due to rising sea levels. Low lying islands and countries are at a greater risk of flooding both from rising sea levels and increased precipitation. Countries near the equator are likely to experience unbearable heat. Some of the countries are already experiencing more frequent events of severe weather.

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The economics of climate change is further complicated by the fact that most of the developing countries can’t afford the costs of mitigation or adaptation of the aforementioned phenomenon of climate change. The 2018 Environmental Performance Index (EPI) of the Yale University ranks 180 countries on 24 performance indicators across ten issue categories covering environmental health and ecosystem vitality. These metrics provide a gauge at a national scale of how close countries are to establishing environmental policy goals. According to the EPI, most of the developing countries in the South dominate in the lower ranking. Among the bottom 10 countries in the ranking, three (Bangladesh, India and Nepal) are from South Asia. Bangladesh’s position is 179 out these 180 countries.

There are also considerable debates in the discourse of climate change with respect to the policies and actions needed to address the challenges. Two instruments are widely referred in the policy discussion. The first one is the carbon tax, which is the mandatory fee charged for the emission of a given quantity of carbon dioxide or some other greenhouse gas. The second one is carbon trading, which is buying and selling of carbon credits, abstract instruments (like money) that each represents the right to emit 1 ton of carbon dioxide or an equivalent amount of other greenhouse gases. The other policies include technology promoting programs. One more instrument, which is less explored but can be effective, is the liberalization of trade in environmental goods (EGs), which can play a crucial role in protecting the environment as well as promoting international trade in EGs. Trade has a positive effect on the environment only if environmental policy advances alongside trade liberalization. However, most of the developing countries are seriously lagging behind in conceptualizing as well as in building national capacities to implement these aforementioned instruments.

One important challenge in the economics of climate change is the political economy aspect of it. Both the global and national political economy factors are critical in addressing climate change issues. The USA President Donald Trump’s unfavorable attitude towards the warning of devastating effects from climate change, and eventually USA’s withdrawal from the Paris climate agreement has created huge uncertainties for a global partnership. At the national level, many developing countries, due to their national priorities of industrialization and lobbying power of different quarters, find it extremely difficult to contain the polluting industries. Therefore, the developing countries have uphill tasks in the future given the aforementioned challenging economics of climate change.

First published in the Thinking Aloud on 1 December 2018


How costly are the impacts of climate change in Bangladesh?

Bangladesh is highly vulnerable to climate change impacts because of its vast low-lying areas, large coastal population, high population density, inadequate infrastructure, and high dependence on natural resources. For Bangladesh, climate change manifests both as changes in the severity of extreme events and in greater climate variability. Climate variability is manifested by more pronounced variation of wet and drought years, whereas extreme weather events manifest through stronger tropical cyclones which also generate more powerful storm surges, and whose effects are amplified by the effects of rising sea levels. About 20% of the population lives in the low coastal zone and any increase in sea level will have enormous negative effects. Because of the flat topography, even small increments in sea level rise will affect large areas, directly through inundation and salt intrusion.

Against this backdrop, this study explores the possible impacts of climate change on the economy of Bangladesh, during 2015 and 2100, using a dynamic CGE model through projected changes in different parameters as provided in the ADB (2014) study. Our study considers a combined effect of six climate change scenarios: (i) the impact of climate change on paddy yield in Bangladesh in 2030, 2050 and 2080; (ii) permanent inundation of 0.90% of Bangladesh’s dry land as a result of sea level rise; (iii) annual reduction in labor supply due to mortality and morbidity until 2100; (iv) depletion of capital stock in the construction sector by 0.05% annually until 2100; (v) annual reduction in the surplus of water until 2050 and beyond that; and (vi) annual rise in the excess demand for electricity during 1930s and 1950s and beyond that.


The impacts on real GDP, exports and consumer price index (CPI) show some large effects of climate change on these indicators. Compared to the business as usual (bau) scenario, set in the dynamic CGE model, real GDP would fall by 4.31% by 2030, around 6% by 2050, 7.3% by 2080, and close to 8% by 2100. There would be negative impact on exports, as exports, compared to the bau scenario, would fall by 3.7% by 2030, 5.4% by 2050, 6.7% by 2080, and more than 7% by 2100. There would also be inflationary pressure on the economy, as CPI, compared to the bau scenario, would rise by 2.5% by 2030, 3.7% by 2050, 4.9% by 2080, and 5.6% by 2100. All these figures show very large costs to the economy of Bangladesh.

What should be the adaptation strategies? The ADB (2014) study suggested a number of adaptation strategies. In the case of drought, the adaptation strategies include introducing drought tolerant crops, efficient use of water, use of surface water for irrigation and more plantation. In the case of flooding, the suggestions include introducing short duration and flood tolerant crop varieties, promoting community based seed preservation, introducing raised seed bed in highlands and floating seedbeds in low-lying areas, and constructing flood friendly infrastructure. To adapt to the changes in weather, suggestions include emphasis on heat and cold tolerant crop varieties, practicing Integrated Crop Management, and creating options for reserving surface water for irrigation. To protect river bank erosion, suggestions include constructing and maintaining relevant infrastructure and plantation. In the case of sea level rise, the suggestions include promoting community based open water fisheries, and alternative options of aquaculture (e.g. cage aquaculture, pen culture, crab fattening, etc.). In the case of salinity intrusion, the adaptation strategies include domestication of saline and brackish water fish species, constructing and rehabilitating climate resilient water infrastructure, introducing saline tolerant crops and vegetables variety.

The adaptation strategies in the case of health should include water treatment facilities, surveillance and monitoring of conditions favorable for disease outbreak, improve public education especially in reproductive health and technological/engineering controls for pests. In the case of water, broad adaptation measures include strengthening field bunds to conserve more rain water, re-excavation of traditional ponds, re-excavation of small canals and other water conveyance structures, building of water control structures, check dams across the water ways, construction of mini-ponds, shallow and deep tube wells. The major adaptation strategies for infrastructure include repair and maintenance of existing flood embankments, repair and maintenance of existing cyclone shelter, planning, design, and implementation of resuscitation of networks of rivers and canals through dredging and de-siltation work, repair and maintenance of existing coastal polders, improvement of urban drainage adaptation against floods, and adaptation against future cyclones and storm-surges and planning, design, and construction of river training works.


ADB (2014), “Assessing the Costs of Climate Change and Adaptation in South Asia”, Mandaluyong City, Philippines: Asian Development Bank

Published at the Thinking Aloud on 1 February 2015