Approach based on economics and the social welfare function

 

A second approach has been suggested based on economics and the social welfare function. To calculate the social welfare function requires an aggregation of the impacts of climate change policies and climate change itself across all affected individuals. This calculation involves a number of complexities and controversial equity issues (Markandya et al. 2001). For example, the monetization of certain impacts on human health. There is also controversy over the issue of benefits affecting one individual offsetting negative impacts on another (Smith et al. 2001). These issues to do with equity and aggregation cannot be fully resolved by economics (Banuri et al. 1996).
On a utilitarian basis, which has traditionally been used in welfare economics, an argument can be made for richer countries taking on most of the burdens of mitigation (Halsnæs et al. 2007). However, another result is possible with a different modeling of impacts. If an approach is taken where the interests of poorer people have lower weighting, the result is that there is a much weaker argument in favour of mitigation action in rich countries. Valuing climate change impacts in poorer countries less than domestic climate change impacts (both in terms of policy and the impacts of climate change) would be consistent with observed spending in rich countries on foreign aid (Hepburn 2005, Helm 2008).
In terms of the social welfare function, the different results depend on the elasticity of marginal utility. A declining marginal utility of consumption means that a poor person is judged to benefit more from increases in consumption relative to a richer person. A constant marginal utility of consumption does not make this distinction, and leads to the result that richer countries should mitigate less.
 
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Smith, J. B. et al. 2001. "Vulnerability to Climate Change and Reasons for Concern: A Synthesis. In: Climate Change 2001: Impacts, Adaptation and Vulnerability. Contribution of Working Group II to the Third Assessment Report of the Intergovernmental Panel on Climate Change (J.J. McCarthy et al. Eds.)". Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. Retrieved 2010-01-10.
Banuri, T. et al. 1996. "Equity and Social Considerations.". In J.P. Bruce et al. (PDF). Climate Change 1995: Economic and Social Dimensions of Climate Change. Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change. This version: Printed by Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. Web version: IPCC website. doi:10.2277/0521568544. ISBN 978-0-521-56854-8.
Halsnæs, K. et al. 2007. "2.6.4 Equity consequences of different policy instruments, Chapter 2 Framing issues". In B. Metz et al.. Climate Change 2007: Mitigation. Contribution of Working Group III to the Fourth Assessment Report of the Intergovernmental Panel on Climate Change. Print version: Cambridge University Press, Cambridge, U.K., and New York, N.Y., U.S.A.. This version: IPCC website. Retrieved 2010-04-06.
Hepburn, C. 2005. "Memorandum by Dr Cameron Hepburn, St Hugh's College, University of Oxford.". The Economics of Climate Change. Second Report of 2005-2006 Volume II, HL Paper No. 12-II. House of Lords Economic Affairs Select Committee. ISBN 0-19-957328-X. Retrieved 2010-04-06.
Helm, D. 2008. "Climate-change policy: why has so little been achieved?". Oxford Review of Economic Policy 24 (2): 211–238. doi:10.1093/oxrep/grn014. Retrieved 2010-04-06.