Planetary boundaries to help policy assessment in climate crisis

Starting point of the new study, published in the Journal of Economics and Statistics, is the cost-benefit analysis used in welfare economics, extended to include the concept of planetary boundaries. While it seeks the welfare-maximising option, it does so only within the operating space allowed by the boundaries. Until now, such boundaries were either ignored or regarded as rigid targets to be achieved as cheaply as possible, with economic benefits from avoided environmental damage ignored in the model. The strength of the new method can be seen in the example of fossil fuels: the implementation of the temperature target is still a precondition, but the model also provides that climate damages which can be well documented empirically are directly priced in by the policy.

“With regard to policy advice and social debate in the climate crisis, our new approach offers three advantages,” says MCC Director Edenhofer. “Firstly, the scope for action is obviously better illuminated. Secondly, climate policy does not appear to be a requirement of natural science, but rather an economic trade-off. And thirdly, it becomes clear that climate damages are an economic factor, and that avoiding climate damages serves welfare just as much as producing goods. All this is necessary to ensure acceptance of the transition to a climate-neutral future."

How the boundaries can be justified, and how they can be integrated into the cost-benefit analysis, is outlined in the study in different variants. They can be an expression of a concrete tipping point in the respective natural system, or they can indicate the lower edge of a “danger zone” according to a general precautionary principle. And where the state of a natural system cannot be measured exactly, such as the integrity of the biosphere, “proxy variables” serve a useful purpose, such as tree cover, habitat size, or species diversity.

“Human-caused perturbations in natural systems carry the risk of catastrophic welfare damages”, warns PIK Director Rockström. “Including boundaries in the cost-benefit analysis of policy pathways tends to lead to the recommendation of earlier and stronger countermeasures. The model framework presented in our study could lay the groundwork for economic research to better focus on planetary boundaries, helping ensure that environmental resources are finally governed sustainably as global commons."