Estimates of the economic costs of climate change rely on guesswork in the face of huge uncertainties, and arbitrary judgements about what is important. The models can produce any number their creators want them to; and typically, they trivialise the risks. Despite being described as ‘worse than useless’ by leading academics, economic analysis of this kind has been credited with a Nobel Prize, and it continues to inform government policy.

Estimates of the economic costs of climate change rely on guesswork in the face of huge uncertainties, and arbitrary judgements about what is important. The models can produce any number their creators want them to; and typically, they trivialise the risks. Despite being described as ‘worse than useless’ by leading academics, economic analysis of this kind has been credited with a Nobel Prize, and it continues to inform government policy.

Climate change presents two types of risks: those we can adapt to or try to counteract and those beyond our power to cope. The first group includes (1) sea level rise, which threatens much of our infrastructure and cultural patrimony; (2) extreme weather, particularly storm events; (3) climate alterations harmful to agriculture; (4) loss of biodiversity; (5) ocean acidification that interferes with shell production and threatens marine food chains; and (6) threats to human health from disease and especially extreme heat. The second group, which encompasses an unmanageable intensification of all of the first, is the risk of runaway climate change. This can arise if elevated atmospheric carbon concentrations trigger positive feedback mechanisms, like stored methane releases, widespread forest die-offs, reduction of the Earth’s albedo, or changes in prevalent cloud formations that amplify initial warming effects, resulting in a “hothouse Earth.” The tools of standard welfare economics, like calculation of a social cost of carbon and its use in cost–benefit analysis, are unhelpful. Their basis in marginal effects is contradicted by the scale of climate impacts, and their deference to consumer judgment tells us little about the political judgments that must guide policy trade-offs.

This chapter compares utilitarianism and prioritarianism as alternative social welfare frameworks for evaluating climate policies. We review the main debates in the climate policy literature concerning the parameters of the utilitarian social welfare function, and discuss the analytical requirements and climate policy implications of prioritarianism both in deterministic and stochastic settings. We show that, given the specific characteristics of the climate issue and the assumptions routinely made in the climate literature, prioritarianism tends to support more lenient climate policies than undiscounted utilitarianism. This is based on the assumption of economic and social progress that makes the current generation worse-off than future generations. The presence of catastrophic climate outcomes that endanger the living conditions of future generations (or of the poorest individuals living in the future) relaxes this result.

President Reagan’s 1981 executive order exalted the use of formal cost–benefit analysis in determining whether to promulgate regulations (to the extent environmental laws permit those considerations). Regulations to curb pollution from oil and gas operations and the combustion of oil and gas, as documented in various studies, yield larger benefits than costs. To tilt cost–benefit analysis to disfavor these regulations, the administration adopted methods that systematically understated the economic benefits from regulations. It ignored public health and environmental benefits from reducing emissions, despite documentation by scientific studies, and ignored benefits that are difficult to capture in monetary terms. It also adopted assumptions that gave only limited consideration to the well-being of future generations and of non-Americans, both controversial ethical choices. The administration, forced by existing court decisions to take into account climate impacts, chose an extremely paltry sum of $1 per ton of carbon dioxide (down from $51, as calculated by the Interagency Working Group during the Obama administration). Armed with skewed economic analysis, the administration weakened numerous regulations governing the operations of the oil and gas sector, including curbing emissions of methane, a potent greenhouse gas.

For the United States, which already bears costs from human-caused climate change, taking action to address the crisis is cheaper than doing nothing. Yet, the Trump administration not only pulled out of the Paris Climate Agreement but banded together with Russia and Saudi Arabia to undermine progress in international climate talks. The administration attempted to derail the prudent efforts by state governments and the nonfossil-fuel private sector to adapt to the changing economic opportunities in response to the climate crisis. It curbed states’ rights, e.g., blocking California’s efforts to tighten vehicle fuel-efficiency standards in line with global demand. It used regulatory powers to block the financial sector’s decision not to fund Arctic drilling and pension-fund managers’ growing interest in considering environmental, social and governance issues that affect their investment returns. The United States can still right its course on climate action. In December 2020, Congress enacted legislation to fund clean energy investments and to mandate cuts in hydrofluorocarbons, a potent greenhouse gas, for which US manufacturers are leaders for substitute products. While ambitious climate legislation faces tremendous hurdles in Congress, these narrower provisions, framed as strategies to support American jobs and leadership in manufacturing, were able to win bipartisan support.

To confront the climate crisis, we need to hedge our bets against the risk of climate change. We must be willing to spend some money now in order reap a larger benefit that will take many decades to deliver. This is similar to the philosophical concept of Pascal’s Wager, where one bets a finite resource for a potentially infinite reward. But estimating how much we should spend now is not easy; attempts to estimate this amount – the “social cost of carbon” – produce a wide range of numbers. We may need to accept that there is going to be radical uncertainty in any numerical estimate. Nevertheless, we can use climate models to quantify the risk of climate change as best we can, while taking into account the different types of uncertainties. Often, risk assessment requires numerical probabilities, but these are not always available for uncertainties associated with climate prediction.