Editing IPCC:AR6/WGIII/Chapter-17 (section)

=== 17.2.1 Economics ===

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This section concentrates on economic explanations for transitions. At the core of many of these explanations is the assumption that economic development can deliver multiple economic, social and environmental benefits. Many modern economic systems may nonetheless struggle to deliver these benefits due to major disruptions and shocks such as climate change ( [[#Heal--2020|Heal 2020]] ). One way to limit disruptions to free markets are targeted interventions in free markets such as taxes or regulation. These targeted interventions motivate firms and other entities to internalise GHGs and other pollutants, potentially paving the way for a sustainable transition ( [[#Arrow--2004|Arrow et al. 2004]] ; [[#Chichilnisky--1998|Chichilnisky and Heal 1998]] ).

A related line of thought common to economic explanations involves the principles of ‘weak sustainability’. These principles suggest that the substitution of exhaustible resources is, to some extent, feasible ( [[#Arrow--2004|Arrow et al. 2004]] ). One way to capitalise on this substitution is to target investments at technological change, green growth, and research and development. Targeted investments in the form of subsidies can encourage the substitution of exhaustible by non-exhaustible resources. To illustrate with a concrete example, investments in renewable energy can not only mitigate climate change but also offset the use of exhaustible fossil fuels and boost energy security ( [[#Heal--2020|Heal 2020]] ). It is nonetheless important to note that the principle of ‘weak sustainability’ contrasts with ‘strong sustainability’ or ‘integrated sustainability’ principles. These stronger principles suggest that constraints on resources restrict such substitutions ( [[#Rockström--2009|Rockström et al. 2009]] ). These constraints merit attention because some scarce non-substitutable forms of natural capital can be exhausted ( [[#Bateman--2020|Bateman and Mace 2020]] ). There is hence a need to capitalise on possible synergies such as those with other development priorities and trade-offs, for example, the exhaustion of non-substitutable resources. Capturing these synergies and managing these trade-offs is consistent with sustainable development, a state where the needs of the present generation do not compromise the ability of future generations to meet their own needs (Bruntland, [[#WCED--1987|WCED 1987]] ).

As suggested above, aligning climate investments with other sustainable development objectives is critical to a transition. In order to support better investments in sustainable development, financing schemes, including environmental, social and governance (ESG) disclosure schemes and the Task Force on Climate-related Financial Disclosures (TCFD), can play important roles (Executive Summary in [[IPCC:Wg3:Chapter:Chapter-15|Chapter 15]] of this report). After COVID-19, economic recovery packages have increased government-led investments ( [[IPCC:Wg3:Chapter:Chapter-1#1.3.3|Section 1.3.3]] ), which could potentially be aligned with sustainable development. Technological change and innovation are considered key drivers of economic growth and of many aspects of social progress ( [[IPCC:Wg3:Chapter:Chapter-16#16.1|Section 16.1]] ), but if technological innovation policies are coordinated with the shift to sustainable development pathways, then the economic benefits of technological change could come at the cost of increasing climate risks ( [[#Gossart--2015|Gossart 2015]] ) [[#Alarcón--2015|Alarcón and Vos 2015]] ). The environmental impacts of social and economic activities, including emissions of GHGs, are greatly influenced by the rate and direction of technological changes. Innovation and technological transformations present trade-offs that create externalities and rebound effects. This suggests that a sustainable future for people and nature requires rapid, radical and transformative societal change by integrating the technical, governance, financial and societal aspects ( [[#Pörtner--2021|Pörtner et al. 2021]] ) ( [[IPCC:Wg3:Chapter:Chapter-16#16.1|Section 16.1]] ).

One area that is pertinent to transitions and has received considerable attention in economic modelling involving climate change is innovation. In particular, some studies have shown how low-cost innovations and improvements in end-use technologies have significant potential for emissions reductions as well as sustainable development ( [[#Wilson--2019|Wilson et al. 2019]] ). Currently information technologies are improving rapidly, and the internet of things (IoT), AI and Big Data can all contribute to other development needs. This is often the case in end-use sectors, as the benefits accrue directly to the individuals who use the new innovations. The achievement and widespread deployment of fully autonomous cars, for example, will bring about broader car- and ride-sharing with negative or low additional costs compared to more conventional approaches to car ownership, with their typically very low load factors. ( [[#Grubler--2018|Grubler et al. 2018]] ) estimate that the Low Energy Demand (LED) scenario which assumes information technology innovations and induced social changes, including a sharing economy, have considerable potential for harmonising the multiple achievements of SDGs with low marginal abatement costs compared with other scenarios ( [[#IPCC--2018|IPCC 2018]] ).

It is nonetheless important to highlight a caveat to the above logic on innovation. Whether a technological innovation is wholly sustainable or not becomes less clear when considering its effects on the wider economy. To illustrate, some models predict that CO 2 marginal abatement costs in the power sector will be USD240 and USD565 tCO 2 for the 2ºC and below 2ºC goals, respectively ( [[#IEA--2017|IEA 2017]] ).

In theory, if marginal abatement costs meet marginal climate damage, mitigation measures are economically optimal in the long run. Yet marginal damage from climate change is notoriously uncertain, and economic theories do not always reflect climate-related damage. On the other hand, marginal abatement mitigation costs impose additional costs in the short term. These added costs can cause productivity in capital to decline through increases in the prices of energy and products in which the energies are embodied. These increased costs can restrict the ability to invest in and achieve the sustainable development priorities. However, precisely the opposite can occur when innovation reduces additional costs or achieves negative costs. If technological innovation leads to the accumulation of capital and productivity increases due to the substitution of energy, material and labour, these are likely to deliver sustainable development and climate mitigation benefits.

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