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82 Recent research on the impacts of global warming has revealed that the net impacts of climate change are much smaller than first thought. Near-term damage will largely be offset by near-term benefits. Damages are expected to exceed benefits only in the second half of this century and only in scenarios with rapid climate change. The research also suggests that most of the damages will be felt in low-latitude countries, whereas the benefits will occur largely in the mid- to high-latitude countries. Because most of the poorest countries in the world are located in the low latitudes, most of the damages from climate change will happen to the world’s poorest people. These impact results have important policy ramifications. First, the low net damages from current emissions imply that only limited resources should be devoted to near-term abatement. Second, mitigation is likely only to slow global warming. It is therefore important to plan an adaptation strategy to cope with global warming. Third, because the world’s poorest people are the most affected by climate change, climate policy should also include a compensation package for poor countries. The magnitude, timing, and distribution of the impacts of climate change have important ramifications for climate policies. As our understanding of these impacts progresses, it is important to update climate policies to take into account new findings. With a problem as long-standing as climate change, repeating the theme of learning and then acting should become standard policy practice. The Policy Implications of Climate Change Impacts robert mendelsohn 5 10865-06_CH05_rev.qxd 12/10/07 11:40 AM Page 82 policy implications of climate change impacts 83 This paper first reviews the history of the literature on the impact of climate change over the last twenty-five years. It concentrates on economic studies that have quantified the magnitude of impacts and highlights the major insights from this literature over time. The second section then draws the important policy implications suggested by the findings. The paper concludes with a final set of policy recommendations supported by the current literature. Review of Impact Literature The literature on the economic impacts of climate change has grown considerably over the last twenty-five years. The first comprehensive study of climate change impacts analyzed the United States.1 Although this study did not arrive at a comprehensive estimate of the net damages from climate change, it introduced a number of methodologies that could be used to quantify climate impacts in various sectors. Subsequent authors relied heavily on these studies to produce quantitative estimates of net impacts.2 The International Panel on Climate Change (IPCC) provided an authoritative review of this early literature in its Second Assessment Report.3 One significant finding in this initial literature is that most of the economy is not climate sensitive.4 The market sectors that are judged to be climate sensitive include agriculture, coastal development, energy, forestry, and water (mostly irrigation). The climate-sensitive non-market sectors include ecosystems, biodiversity , and human health. Another important result is that the impacts were judged to be less than 2 percent of GDP, even including generous estimates of non-market effects. Since this seminal work, impact research has focused on making a number of innovations. First, research has revealed that most sectors have a hill-shaped sensitivity to climate.5 For each climate-sensitive sector, there is an optimal climate that is most productive. The farms or sectors cooler than this optimum are less productive, as are the farms or sectors warmer than this optimum. This implies that warming is likely to have different effects on countries depending on their initial climate with respect to the optimum. Countries that are cooler than the optimum will see benefits from warming at first. Countries that are near the optimal climate will see little change. Countries that are hotter than the optimum will see immediate damages from warming. The impacts of climate change will not be uniform; rather, they will vary across the planet. The results imply that warming will at first lead to damages in the low latitudes and benefits in the middle to high latitudes.6 Only as warming becomes quite large will most of the planet be damaged, but even in this case, the low latitudes are expected to bear a larger share of the damages.7 Second, the impact literature has come to recognize the importance of adaptation .8 The early literature sometimes included a few adaptive responses such as 10865...

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