Editing IPCC:AR6/WGIII/Chapter-3 (section)

=== 3.6.2 Benefits of Avoiding Climate Change Impacts ===

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Cost-benefit analyses (CBA) aim to balance all costs and benefits in a unified framework (Nordhaus, 2008). Estimates of economic benefits from avoided climate change impacts depend on the types of damages accounted for, the assumed exposure and vulnerability to these damages as well as the adaptation capacity, which in turn are based on the development pathway assumed (Cross-Working Group Box 1 in this chapter). CBA IAMs raised criticism, in particular for omitting elements of dynamic realism, such as inertia, induced innovation and path dependence, in their representation of mitigation ( [[#Grubb--2021|Grubb et al. 2021]] ), and for underestimating damages from climate change, missing non-monetary damages, the uncertain and heterogeneous nature of damages and the risk of catastrophic damages ( [[#Stern--2013|Stern 2013]] , 2016; [[#Diaz--2017|Diaz and Moore 2017]] ; [[#NASEM--2017|NASEM 2017]] ; [[#Pindyck--2017|Pindyck 2017]] ; [[#Stoerk--2018|Stoerk et al. 2018]] ; [[#Stern--2021|Stern and Stiglitz 2021]] ). Emerging literature has started to address those gaps, and integrated into cost-benefit frameworks the account of heterogeneity of climate damage and inequality ( [[#Dennig--2015|Dennig et al. 2015]] ; [[#Budolfson--2017|Budolfson et al. 2017]] ; [[#Fleurbaey--2019|Fleurbaey et al. 2019]] ; [[#Kornek--2021|Kornek et al. 2021]] ), damages with higher persistence, including damages on capital and growth ( [[#Moyer--2014|Moyer et al. 2014]] ; [[#Dietz--2015|Dietz and Stern 2015]] ; [[#Moore--2015|Moore and Diaz 2015]] ; [[#Guivarch--2018|Guivarch and Pottier 2018]] ; [[#Ricke--2018|Ricke et al. 2018]] ; [[#Piontek--2019|Piontek et al. 2019]] ), risks of tipping points ( [[#Cai--2015|Cai et al. 2015]] , 2016; [[#Lontzek--2015|Lontzek et al. 2015]] ; [[#Lemoine--2016|Lemoine and Traeger 2016]] ; [[#van%20der%20Ploeg--2018|van der Ploeg and de Zeeuw 2018]] ; [[#Cai--2019|Cai and Lontzek 2019]] ; [[#Nordhaus--2019|Nordhaus 2019]] ; [[#Yumashev--2019|Yumashev et al. 2019]] ; [[#Taconet--2021|Taconet et al. 2021]] ) and damages to natural capital and non-market goods ( [[#Tol--1994|Tol 1994]] ; [[#Sterner--2008|Sterner and Persson 2008]] ; [[#Bastien-Olvera--2020|Bastien-Olvera and Moore 2020]] ; [[#Drupp--2021|Drupp and Hänsel 2021]] ).

Each of these factors, when accounted for in a CBA framework, tends to increase the welfare benefit of mitigation, thus leading to stabilisation at a lower temperature in optimal mitigation pathways. The limitations in CBA modelling frameworks remain significant, their ability to represent all damages incomplete, and the uncertainty in estimates remains large. However, emerging evidence suggests that, even without accounting for co-benefits of mitigation on other sustainable development dimensions (see [[#3.6.3|Section 3.6.3]] for further details about on co-benefits), global benefits of pathways that limit warming to 2°C outweigh global mitigation costs over the 21st century: depending on the study, the reason for this result lies in assumptions of economic damages from climate change in the higher end of available estimates ( [[#Moore--2015|Moore and Diaz 2015]] ; [[#Ueckerdt--2019|Ueckerdt et al. 2019]] ; [[#Brown--2020|Brown and Saunders 2020]] ; [[#Glanemann--2020|Glanemann et al. 2020]] ), in the introduction of risks of tipping points ( [[#Cai--2019|Cai and Lontzek 2019]] ), in the consideration of damages to natural capital and non-market goods ( [[#Bastien-Olvera--2020|Bastien-Olvera and Moore 2020]] ) or in the combination of updated representations of carbon cycle and climate modules, updated damage estimates and/or updated representations of economic and mitigation dynamics ( [[#Dietz--2015|Dietz and Stern 2015]] ; [[#Hänsel--2020|Hänsel et al. 2020]] ; [[#Wei--2020|Wei et al. 2020]] ; [[#van%20der%20Wijst--2021b|van der Wijst et al. 2021b]] ). In the studies cited above that perform a sensitivity analysis, this result is found to be robust to a wide range of assumptions on social preferences (in particular, on inequality aversion and pure rate-of-time preference) and holds except if assumptions of economic damages from climate change are in the lower end of available estimates and the pure rate-of-time preference is in the higher range of values usually considered (typically above 1.5%). However, although such pathways bring net benefits over time (in terms of aggregate discounted present value), they involve distributional consequences and transition costs ( [[#Brown--2020|Brown et al. 2020]] ; [[#Brown--2020|Brown and Saunders 2020]] ) (Sections 3.6.1.2 and 3.6.4).

The standard discounted utilitarian framework dominates CBA, thus often limiting the analysis to the question of discounting. CBA can be expanded to accommodate a wider variety of ethical values to assess mitigation pathways ( [[#Fleurbaey--2019|Fleurbaey et al. 2019]] ). The role of ethical values with regard to inequality and the situation of the worse off (Adler et al. 2017), risk ( [[#van%20den%20Bergh--2014|van den Bergh and Botzen 2014]] ; [[#Drouet--2015|Drouet et al. 2015]] ), and population size ( [[#Scovronick--2017|Scovronick et al. 2017]] ; [[#Méjean--2020|Méjean et al. 2020]] ) has been explored. In most of these studies, the optimal climate policy is found to be more stringent than the one obtained using a standard discounted utilitarian criterion.

Comparing economic costs and benefits of mitigation raises a number of methodological and fundamental difficulties. Monetising the full range of climate change impacts is extremely hard, if not impossible (AR6 WGII Chapter 16), as is aggregating costs and benefits over time and across individuals when values are heterogeneous (Chapter 1; AR5 WGIII Chapter 3). Other approaches should thus be considered in supplement for decision-making ( [[IPCC:Wg3:Chapter:Chapter-1|Chapter 1]] and [[IPCC:Wg3:Chapter:Chapter-1#1.7|Section 1.7]] ), in particular cost-effectiveness approaches that analyse how to achieve a defined mitigation objective at least cost or while also reaching other societal goals ( [[#Koomey--2013|Koomey 2013]] ; [[#Kaufman--2020|Kaufman et al. 2020]] ; [[#Köberle--2021|Köberle et al. 2021]] ; [[#Stern--2021|Stern and Stiglitz 2021]] ). In cost-effectiveness studies too, incorporating benefits from avoided climate damages influences the results and leads to more stringent mitigation in the short term ( [[#Drouet--2021|Drouet et al. 2021]] ; [[#Schultes--2021|Schultes et al. 2021]] ).

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