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State and Local Climate and Energy Program


Economic Impacts Associated with Climate Change Adaptation

Climate change impacts will affect the economy as the nation adapts/responds to stresses on water resources in the form of droughts and floods, changes in agricultural and livestock production, sea–level rise and storm surge, wildfires, and ecosystem changes, as well as health impacts related to heat stress, diseases, extreme weather events and poor air quality. While there will be costs to the economy associated with these climate change events, there will also likely be benefits as some sectors experience economic gains. More details are available in the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) Exit EPA disclaimer.

It is very difficult to predict the full economic impact of climate change; however, studies have explored the costs of adapting to climate. According to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC), the total funding needed for adaptation by 2030 would be between $49 – 171 billion per year across the globe. For more information about potential climate change impacts globally and in the U.S., visit Impacts & Adaptation.

Economic Impacts of Climate Change Mitigation

More is understood about estimating the economic impacts of climate change mitigation measures than estimating the cost of inaction. While many studies focus primarily on evaluating the costs and cost-effectiveness of mitigation measures, states can also include in their analyses the potential energy, environmental, and human health benefits of climate change mitigation policies. These analyses can result in net benefits to key macroeconomic indicators, including:

  • Employment
  • Gross state product
  • Economic output
  • Economic growth
  • Personal income/earnings

With analyses of the economic impacts of policies, states can:

  • Demonstrate how mitigation measures can advance or impede economic development goals
  • Build support for mitigation measures among state and local decision–makers
  • Identify opportunities where meeting today's climate change challenges can also serve as an economic development strategy

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Understanding Economic Analyses and Models

Many tools and resources are available to help states assess the net effect of the potential costs and benefits of mitigation options. Economic analyses can be done using screening–level approaches or using sophisticated modeling tools depending upon the level of rigor desired or resources available.

Ultimately, modeling results are determined by the quality of the model and the assumptions used to generate the results. While models can provide useful insights into how one or more policies are likely to affect a state's economy, models can be applied very differently to analyses of the same policy and can create conflicting or confusing results at first glance. It is important for states to understand the limitations of the available tools and the assumptions used to generate each scenario, so they can objectively manage or review the analyses.

For example:

  • Models try to be representative of the real world but do not fully capture all of the details and dynamics that exist in the complex economic system.
  • Different types of economic models or approaches – each designed for different inputs and with different strengths and weaknesses – can be useful for answering different types of questions.
  • Uncertainties are inherent in model formulations, model data, and many of the assumptions and inputs made in modeling that will affect the results.

Recognizing their limitations, economic models are useful in enabling policy–makers to explore how the complex economic system is likely to respond to climate change mitigation options and to ensure that the potential impacts are consistent with the overall state goals and priorities. More details are available on assessing the economic benefits of clean energy initiatives in Chapter 5 of Assessing the Multiple Benefits of Clean Energy: A Resource for States.

Sample questions for states to consider when planning an economic analysis of mitigation options:

  • What method of analysis is appropriate? For example:
    • Is it sufficient to conduct basic screening analyses or does it require more sophisticated dynamic modeling, perhaps for regulatory purposes? Or both?
    • Within the methods, which types of models are appropriate?
  • Is the purpose of the study retrospective (an historical assessment) or prospective (forward–looking)? Is it long-term or short-term?
  • What financial and staff resources are available to conduct the model? To analyze the model results?
  • What are the specific assumptions about the baseline scenario and what data exists and/or is needed to model the scenario?
  • Who needs to contribute to and/or review the analysis and/or assumptions?

Sample questions for states to consider when reviewing an economic analysis of mitigation options:

  • Does the analysis include both the costs and benefits of taking a particular course of action?
  • What type of model or approach was used? For example:
    • Was it a rule-of-thumb estimate or a sophisticated modeling exercise?
    • Was the model dynamic or static?
    • How rich is the energy or other sector representation (i.e. how many fuel options or technologies does it include)?
    • Is the data in the model state-specific?
    • Does the model treat policies as a one-time shock to the economy or does it allows agents in the model to anticipate future policies and change behavior accordingly?
  • Were the assumptions reasonable and objective? For example:
    • How were the costs and benefits determined?
    • How or do prices change over time?
    • Does the analysis include the opportunity cost of the investment?
    • How was autonomous technological change represented in the model?

Tools and Resources

Assessing the Multiple Benefits of Clean Energy

Assessing the Multiple Benefits of Clean Energy: A Resource for States provides an overview of the multiple benefits of clean energy and their importance. It includes information on:

  • The importance of and approaches to calculating or estimating energy savings as the foundation for deriving multiple benefits
  • A range of tools and approaches to estimating energy systems, environmental, and economic benefits across varying levels of rigor
  • How states have supported the use of clean energy through the estimation of multiple benefits

EPA's Climate Economics Page

EPA's Climate Economics page provides an overview of the analyses EPA has conducted on the effect of various national policy options on the U.S. economy, as well as a summary of the modeling tools and methods used. In addition, it includes information on long term scenarios of climate related economic impacts and non-CO2 greenhouse gases.

Examples of Benefits Analyses

This table provides a summary of benefits analyses (8 pp, 108K, About PDF) and findings in 22 clean energy studies. The studies analyze benefits related to energy, emissions, air quality, health, and economics. Information on methods and links to the studies are also included.

Quantifying Economic Benefits

EPA provides information for states on Quantifying Economic Benefits. This page includes an explanation of the economic benefits of clean energy and climate change policies, as well as key steps in quantifying those benefits. The page also features examples of state analyses of economic benefits and applicable tools and resources.

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