Why are the identities so misleading? The problem is that they ignore important causal relationships, and arbitrarily emphasise certain forces while completely ignoring others. The approach contradicts the “first principles” of economics, particularly resource economics and the contributions of Paul Romer, Michael Kremer and William Nordhaus, all of whom have received the Nobel Memorial Prize in Economics.
More realistic costs
My study shows that introducing just a single additional factor to the simple identities – referred to as “input substitution” – turns the statement completely on its head, in principle making climate policies available free of charge.
However, since this extension does not fix the problem that important economic relationships are suppressed, I have replaced the identities with a theoretically consistent approach based on basic insights from production and innovation theory, thereby introducing the missing causal relationships.
I use this to derive an alternative formula that is still simple, but theoretically and empirically sound.
Incomes continue to rise
As a result, having a strict climate policy slows down economic growth and income development only moderately, without pulling it into negative territory. Reduced income is therefore not necessary when it comes to achieving climate goals. This is good news for emerging economies and less developed countries in particular, as they are dependent on seeing living standards improve. And, as we know, richer countries are also concerned about not paying too much for climate protection.