By Richard S.J. Tol

The European Union aims to limit its 2020 greenhouse gas emissions to 80% of its 1990 emissions. The European Commission has published an impact assessment, but not a cost-benefit analysis – an earlier cost-benefit analysis covered the eventual target but not the intermediate ones, let alone the details of policy implementation. This paper fills the gap, estimating the costs and the benefits of reducing greenhouse gas emissions by 20% in a decade. 

The results of cost-benefit analyses should always be interpreted with care, because estimates of the costs and the benefits of an intervention are never complete and rarely do justice to the complexity of the situation. These problems are particularly pronounced for evaluations of such problems as climate change, which is global, diffuse, unequal, long-lived, and uncertain. Nevertheless, cost-benefit is far superior as a guide to good policy than the hand-waving practised by some politicians. The results of this paper should therefore be treated with caution but not dismissed out of hand. 

In Section 2, Tol surveys the economic impacts of climate change. In Section 3, he studies the impacts of greenhouse gas emission reduction. In Section 4, the two are combined in a cost-benefit analysis of the EU 20/20/2020 package, and Section 5 concludes.