Theoretical Insights into the Economics of Climate Change and Environmental Policy

Tesfay Gebrehiwet Abrha

doi:doi:10.11648/j.ijeee.20251002.14

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Theoretical Insights into the Economics of Climate Change and Environmental Policy

Tesfay Gebrehiwet Abrha^*

Published in International Journal of Economy, Energy and Environment (Volume 10, Issue 2)

Received: 6 March 2025 Accepted: 14 April 2025 Published: 29 April 2025

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Abstract

Climate change represents one of the most pressing challenges of the 21st century, with far-reaching consequences for global economic stability, ecological systems, and social equity. This review article conducts a rigorous theoretical exploration of the economics of climate change, analyzing the interplay between market failures, environmental externalities, and policy interventions designed to mitigate greenhouse gas (GHG) emissions. By synthesizing insights from environmental economics, game theory, and public policy, the study evaluates the efficacy of carbon pricing mechanisms (such as carbon taxes and cap-and-trade systems), regulatory instruments, and innovation-driven strategies in fostering a sustainable transition. A central focus of this research is the translation of economic theory into actionable policy solutions, addressing the global and intergenerational nature of climate change. The study critically examines how carbon pricing can internalize the social cost of emissions while balancing efficiency and equity concerns. Additionally, it highlights the pivotal role of technological innovation—supported by subsidies, R&D investments, and directed technical change—in decoupling economic growth from carbon dependency. Empirical evidence from case studies, such as the EU Emissions Trading System (EU ETS) and British Columbia’s carbon tax, underscores both the successes and limitations of existing policies. The analysis also emphasizes the need for equitable climate action, given the disproportionate burden faced by developing nations and vulnerable populations. Financial and technological transfers are identified as essential components of a just transition. Furthermore, the study explores the challenges of international cooperation through game-theoretic models, revealing the collective action dilemmas inherent in climate agreements like the Paris Accord. Strengthened enforcement mechanisms and adaptive governance frameworks are proposed to enhance compliance and ambition. Ultimately, this review advocates for hybrid policy approaches that integrate carbon pricing, innovation incentives, and equity considerations. By bridging economic theory with real-world policy design, the study contributes to the development of resilient, low-carbon strategies that align environmental sustainability with inclusive economic growth.

Published in	International Journal of Economy, Energy and Environment (Volume 10, Issue 2)
DOI	10.11648/j.ijeee.20251002.14
Page(s)	52-56
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2025. Published by Science Publishing Group

Keywords

Climate Change, Carbon Pricing, Environmental Policy, Market Failures, International Cooperation

References

[1]	IPCC. (2023). Climate Change 2023: Synthesis Report. Intergovernmental Panel on Climate Change. https://www.ipcc.ch/report/ar6/syr/
[2]	World Bank. (2023). The Economic Impacts of Climate Change: A Global Perspective. World Bank Group. https://www.worldbank.org/en/topic/climatechange/publication/the-economic-impacts-of-climate-change-a-global-perspective
[3]	OECD. (2023). Effective Carbon Rates 2023: Pricing Carbon Emissions Through Taxes and Emissions Trading. Organisation for Economic Co-operation and Development. https://www.oecd-ilibrary.org/environment/effective-carbon-rates-2023_0e848418-en
[4]	IRENA. (2023). Renewable Energy and Climate Action: Accelerating the Transition. International Renewable Energy Agency. https://www.irena.org/publications/2023/Sep/Renewable-Energy-and-Climate-Action-2023
[5]	Nordhaus, W. D. (2019). The climate casino: Risk, uncertainty, and economics for a warming world. Yale University Press.
[6]	Acemoglu, D., Aghion, P., Bursztyn, L., & Hemous, D. (2016). The environment and directed technical change. American Economic Review, 102(1), 131-166. https://doi.org/10.1257/aer.102.1.131
[7]	Carattini, S., Carvalho, M., & Fankhauser, S. (2023). Overcoming public resistance to carbon taxes. Nature Climate Change, 13(5), 412-418. https://doi.org/10.1038/s41558-023-01655-0
[8]	Barrett, S. (2020). Environment and statecraft: The strategy of environmental treaty-making. Oxford University Press. (No DOI available for the book, ISBN-13: 978-0198858971)
[9]	Martin, R., et al. (2023). The effectiveness of the EU Emissions Trading System. Energy Economics, 115, 105-120. https://doi.org/10.1016/j.eneco.2022.106362
[10]	Green, J. (2023). Carbon pricing in practice: Lessons from British Columbia. Environmental Economics and Policy Studies, 25(3), 301-320. https://doi.org/10.1007/s10018-023-00366-4
[11]	Drupp, M., Freeman, M., & Nesje, F. (2023). Discounting and the social cost of carbon. Review of Environmental Economics and Policy, 17(1), 1-25. https://doi.org/10.1093/reep/reac016
[12]	Falkner, R. (2023). Climate governance after Paris. Global Environmental Politics, 23(1), 1-20. https://doi.org/10.1162/glep_a_00689
[13]	Dechezleprêtre, A., Martin, R., & Bassi, S. (2023). The impact of climate policy on innovation. Journal of Economic Literature, 61(2), 1-45.
[14]	Buchner, B., et al. (2023). Global climate finance flows. Climate Policy Initiative. https://www.climatepolicyinitiative.org/publication/global-climate-finance-flows-2023/
[15]	European Commission. (2021). The EU Emissions Trading System (EU ETS). Retrieved from https://ec.europa.eu/clima/policies/ets_en
[16]	Acemoglu, D., Akcigit, U. and Kerr, W., 2016. Networks and the macroeconomy: An empirical exploration. Nber macroeconomics annual, 30(1), pp. 273-335. https://doi.org/10.1086/687796
[17]	UNFCCC. (2015). Paris Agreement. United Nations Framework Convention on Climate Change. https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement
[18]	Hallegatte, S., Bangalore, M., Bonzanigo, L., Fay, M., Kane, T., & Narloch, U. (2016). Shock waves: Managing the impacts of climate change on poverty. World Bank Publications.

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APA Style

Abrha, T. G. (2025). Theoretical Insights into the Economics of Climate Change and Environmental Policy. International Journal of Economy, Energy and Environment, 10(2), 52-56. https://doi.org/10.11648/j.ijeee.20251002.14

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ACS Style

Abrha, T. G. Theoretical Insights into the Economics of Climate Change and Environmental Policy. Int. J. Econ. Energy Environ. 2025, 10(2), 52-56. doi: 10.11648/j.ijeee.20251002.14

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AMA Style

Abrha TG. Theoretical Insights into the Economics of Climate Change and Environmental Policy. Int J Econ Energy Environ. 2025;10(2):52-56. doi: 10.11648/j.ijeee.20251002.14

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@article{10.11648/j.ijeee.20251002.14,
  author = {Tesfay Gebrehiwet Abrha},
  title = {Theoretical Insights into the Economics of Climate Change and Environmental Policy
},
  journal = {International Journal of Economy, Energy and Environment},
  volume = {10},
  number = {2},
  pages = {52-56},
  doi = {10.11648/j.ijeee.20251002.14},
  url = {https://doi.org/10.11648/j.ijeee.20251002.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijeee.20251002.14},
  abstract = {Climate change represents one of the most pressing challenges of the 21st century, with far-reaching consequences for global economic stability, ecological systems, and social equity. This review article conducts a rigorous theoretical exploration of the economics of climate change, analyzing the interplay between market failures, environmental externalities, and policy interventions designed to mitigate greenhouse gas (GHG) emissions. By synthesizing insights from environmental economics, game theory, and public policy, the study evaluates the efficacy of carbon pricing mechanisms (such as carbon taxes and cap-and-trade systems), regulatory instruments, and innovation-driven strategies in fostering a sustainable transition. A central focus of this research is the translation of economic theory into actionable policy solutions, addressing the global and intergenerational nature of climate change. The study critically examines how carbon pricing can internalize the social cost of emissions while balancing efficiency and equity concerns. Additionally, it highlights the pivotal role of technological innovation—supported by subsidies, R&D investments, and directed technical change—in decoupling economic growth from carbon dependency. Empirical evidence from case studies, such as the EU Emissions Trading System (EU ETS) and British Columbia’s carbon tax, underscores both the successes and limitations of existing policies. The analysis also emphasizes the need for equitable climate action, given the disproportionate burden faced by developing nations and vulnerable populations. Financial and technological transfers are identified as essential components of a just transition. Furthermore, the study explores the challenges of international cooperation through game-theoretic models, revealing the collective action dilemmas inherent in climate agreements like the Paris Accord. Strengthened enforcement mechanisms and adaptive governance frameworks are proposed to enhance compliance and ambition. Ultimately, this review advocates for hybrid policy approaches that integrate carbon pricing, innovation incentives, and equity considerations. By bridging economic theory with real-world policy design, the study contributes to the development of resilient, low-carbon strategies that align environmental sustainability with inclusive economic growth.
},
 year = {2025}
}

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TY  - JOUR
T1  - Theoretical Insights into the Economics of Climate Change and Environmental Policy

AU  - Tesfay Gebrehiwet Abrha
Y1  - 2025/04/29
PY  - 2025
N1  - https://doi.org/10.11648/j.ijeee.20251002.14
DO  - 10.11648/j.ijeee.20251002.14
T2  - International Journal of Economy, Energy and Environment
JF  - International Journal of Economy, Energy and Environment
JO  - International Journal of Economy, Energy and Environment
SP  - 52
EP  - 56
PB  - Science Publishing Group
SN  - 2575-5021
UR  - https://doi.org/10.11648/j.ijeee.20251002.14
AB  - Climate change represents one of the most pressing challenges of the 21st century, with far-reaching consequences for global economic stability, ecological systems, and social equity. This review article conducts a rigorous theoretical exploration of the economics of climate change, analyzing the interplay between market failures, environmental externalities, and policy interventions designed to mitigate greenhouse gas (GHG) emissions. By synthesizing insights from environmental economics, game theory, and public policy, the study evaluates the efficacy of carbon pricing mechanisms (such as carbon taxes and cap-and-trade systems), regulatory instruments, and innovation-driven strategies in fostering a sustainable transition. A central focus of this research is the translation of economic theory into actionable policy solutions, addressing the global and intergenerational nature of climate change. The study critically examines how carbon pricing can internalize the social cost of emissions while balancing efficiency and equity concerns. Additionally, it highlights the pivotal role of technological innovation—supported by subsidies, R&D investments, and directed technical change—in decoupling economic growth from carbon dependency. Empirical evidence from case studies, such as the EU Emissions Trading System (EU ETS) and British Columbia’s carbon tax, underscores both the successes and limitations of existing policies. The analysis also emphasizes the need for equitable climate action, given the disproportionate burden faced by developing nations and vulnerable populations. Financial and technological transfers are identified as essential components of a just transition. Furthermore, the study explores the challenges of international cooperation through game-theoretic models, revealing the collective action dilemmas inherent in climate agreements like the Paris Accord. Strengthened enforcement mechanisms and adaptive governance frameworks are proposed to enhance compliance and ambition. Ultimately, this review advocates for hybrid policy approaches that integrate carbon pricing, innovation incentives, and equity considerations. By bridging economic theory with real-world policy design, the study contributes to the development of resilient, low-carbon strategies that align environmental sustainability with inclusive economic growth.

VL  - 10
IS  - 2
ER  -

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Author Information

Tesfay Gebrehiwet Abrha

Department of Economics, College of Business and Economics, Adigrat University, Adigrat, Ethiopia

Contact Email

http://orcid.org/0000-0001-6520-0263

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APA Style

Abrha, T. G. (2025). Theoretical Insights into the Economics of Climate Change and Environmental Policy. International Journal of Economy, Energy and Environment, 10(2), 52-56. https://doi.org/10.11648/j.ijeee.20251002.14

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ACS Style

Abrha, T. G. Theoretical Insights into the Economics of Climate Change and Environmental Policy. Int. J. Econ. Energy Environ. 2025, 10(2), 52-56. doi: 10.11648/j.ijeee.20251002.14

Copy | Download

AMA Style

Abrha TG. Theoretical Insights into the Economics of Climate Change and Environmental Policy. Int J Econ Energy Environ. 2025;10(2):52-56. doi: 10.11648/j.ijeee.20251002.14

Copy | Download

@article{10.11648/j.ijeee.20251002.14,
  author = {Tesfay Gebrehiwet Abrha},
  title = {Theoretical Insights into the Economics of Climate Change and Environmental Policy
},
  journal = {International Journal of Economy, Energy and Environment},
  volume = {10},
  number = {2},
  pages = {52-56},
  doi = {10.11648/j.ijeee.20251002.14},
  url = {https://doi.org/10.11648/j.ijeee.20251002.14},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijeee.20251002.14},
  abstract = {Climate change represents one of the most pressing challenges of the 21st century, with far-reaching consequences for global economic stability, ecological systems, and social equity. This review article conducts a rigorous theoretical exploration of the economics of climate change, analyzing the interplay between market failures, environmental externalities, and policy interventions designed to mitigate greenhouse gas (GHG) emissions. By synthesizing insights from environmental economics, game theory, and public policy, the study evaluates the efficacy of carbon pricing mechanisms (such as carbon taxes and cap-and-trade systems), regulatory instruments, and innovation-driven strategies in fostering a sustainable transition. A central focus of this research is the translation of economic theory into actionable policy solutions, addressing the global and intergenerational nature of climate change. The study critically examines how carbon pricing can internalize the social cost of emissions while balancing efficiency and equity concerns. Additionally, it highlights the pivotal role of technological innovation—supported by subsidies, R&D investments, and directed technical change—in decoupling economic growth from carbon dependency. Empirical evidence from case studies, such as the EU Emissions Trading System (EU ETS) and British Columbia’s carbon tax, underscores both the successes and limitations of existing policies. The analysis also emphasizes the need for equitable climate action, given the disproportionate burden faced by developing nations and vulnerable populations. Financial and technological transfers are identified as essential components of a just transition. Furthermore, the study explores the challenges of international cooperation through game-theoretic models, revealing the collective action dilemmas inherent in climate agreements like the Paris Accord. Strengthened enforcement mechanisms and adaptive governance frameworks are proposed to enhance compliance and ambition. Ultimately, this review advocates for hybrid policy approaches that integrate carbon pricing, innovation incentives, and equity considerations. By bridging economic theory with real-world policy design, the study contributes to the development of resilient, low-carbon strategies that align environmental sustainability with inclusive economic growth.
},
 year = {2025}
}

Copy | Download

TY  - JOUR
T1  - Theoretical Insights into the Economics of Climate Change and Environmental Policy

AU  - Tesfay Gebrehiwet Abrha
Y1  - 2025/04/29
PY  - 2025
N1  - https://doi.org/10.11648/j.ijeee.20251002.14
DO  - 10.11648/j.ijeee.20251002.14
T2  - International Journal of Economy, Energy and Environment
JF  - International Journal of Economy, Energy and Environment
JO  - International Journal of Economy, Energy and Environment
SP  - 52
EP  - 56
PB  - Science Publishing Group
SN  - 2575-5021
UR  - https://doi.org/10.11648/j.ijeee.20251002.14
AB  - Climate change represents one of the most pressing challenges of the 21st century, with far-reaching consequences for global economic stability, ecological systems, and social equity. This review article conducts a rigorous theoretical exploration of the economics of climate change, analyzing the interplay between market failures, environmental externalities, and policy interventions designed to mitigate greenhouse gas (GHG) emissions. By synthesizing insights from environmental economics, game theory, and public policy, the study evaluates the efficacy of carbon pricing mechanisms (such as carbon taxes and cap-and-trade systems), regulatory instruments, and innovation-driven strategies in fostering a sustainable transition. A central focus of this research is the translation of economic theory into actionable policy solutions, addressing the global and intergenerational nature of climate change. The study critically examines how carbon pricing can internalize the social cost of emissions while balancing efficiency and equity concerns. Additionally, it highlights the pivotal role of technological innovation—supported by subsidies, R&D investments, and directed technical change—in decoupling economic growth from carbon dependency. Empirical evidence from case studies, such as the EU Emissions Trading System (EU ETS) and British Columbia’s carbon tax, underscores both the successes and limitations of existing policies. The analysis also emphasizes the need for equitable climate action, given the disproportionate burden faced by developing nations and vulnerable populations. Financial and technological transfers are identified as essential components of a just transition. Furthermore, the study explores the challenges of international cooperation through game-theoretic models, revealing the collective action dilemmas inherent in climate agreements like the Paris Accord. Strengthened enforcement mechanisms and adaptive governance frameworks are proposed to enhance compliance and ambition. Ultimately, this review advocates for hybrid policy approaches that integrate carbon pricing, innovation incentives, and equity considerations. By bridging economic theory with real-world policy design, the study contributes to the development of resilient, low-carbon strategies that align environmental sustainability with inclusive economic growth.

VL  - 10
IS  - 2
ER  -

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