The economic approach to analysing global warming attempts to equate the marginal damage of greenhouse gas (GG) emissions to the marginal cost of reducing them, and so preventing the damage (Nordhaus 1991a; Cline 1992). Estimates of the costs of reducing GG emissions, in so far as they rely on increasing the price of fossil energy (use of which is the greatest cause of such emissions), are influenced by implicit or explicit elasticities of demand for energy. However, the way that reductions in energy demand are shown to affect output depends on a number of assumptions of the modelling process and the nature of the model used.

Chapter 1 gives a brief review of the nature and possible impacts of global warming; this chapter describes the costs associated with it and their relation to each other. The chapter continues with a discussion of how the costs of preventing global warming have been modelled, and gives some estimates of those costs from the literature. It then identifies several factors that may have exaggerated the costs in many of the studies and presents alternative estimates, also from the literature. Finally, the chapter draws some conclusions.

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