The economic analysis of global warming seeks to balance the costs of damage from or adaptation to it with the costs of preventing it. The costs of adaptation and damage have been estimated using techniques of environmental evaluation but are subject to a wide margin of uncertainty. The costs of prevention, principally by reducing the emissions of CO2, have been estimated using different kinds of economic models, some of the results of which have suggested that very little abatement of carbon emissions is justified before the costs of abatement exceed the benefits of it in terms of forgone damage and adaptation costs. The chapter analyses the extent to which this conclusion is a function of the modelling assumptions and techniques used, rather than a likely practical outcome, with regard to the models' treatment of unemployed resources, revenue recycling, prior distortions in the economy due to the tax system and possible dynamic effects from the introduction of a carbon energy tax. It concludes that, with different and arguably more appropriate treatment of the above issues, especially when the secondary benefits of reducing CO2 emissions are also taken into account, it is not clear that even substantial reductions in the use of fossil fuels will incur net costs if there is the prospect of even only moderate costs from global warming.
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