Climate change is essentially a permanent adverse supply shock.

Production
costs will rise, potential output will fall. If the private sector fails to adjust,
then either monetary or fiscal policy will have to reduce aggregate demand to
the required lower level. Discuss.
14 This is a complex question which would require a book rather than an essay to
answer it comprehensively. The following pointers should give you some
ideas:

Climate change, or rather the evidence to support it, is regarded as

controversial by many of those who deny the significance of its impact.
However, many economists accept that more volatile weather conditions
throughout the world in the recent past are indicative of some fundamental
change.

Arguments centre on the impact of greenhouse gases such as carbon dioxide

and methane. It is the excessive emissions of these gases that are said to be
responsible for global warming. In recent years, global temperatures appear
to have dramatically changed. Global warming causes ice to melt and water to
expand, causing sea levels to rise. Excessive carbon emissions are seen as
the major cause of global warming. The reduction of carbon emissions (our
carbon footprint) has therefore become a focal point of climate change
discussions.

Certainly, climate change represents an adverse supply shock which may

become permanent. Not only fish stocks and rain forests are at risk, whole
swathes of primary production and crop yields are threatened in many areas
of the planet. More infertile soil may have to be brought under cultivation,
raising costs of agricultural production.

Manufacturing depends on raw materials from the primary sector and

decreases in the supply of these therefore threaten output in all sectors of the
economy. If the culture of production for private profit irrespective of the
environmental consequences continues to dominate without self-discipline
with regards to carbon emissions, governments may have to use corrective
action, not only on the supply side through fiscal policy (higher taxation the
so called green taxes and the subsidization of green technology) but also
on the demand side to encourage moves towards self-sustained economies.

An international dimension to the problem was recognized in 1997 with the

signing of the Kyoto Agreement. 169 countries had signed by 2006. The
European Union has set up an Emissions Trading Scheme.

In 2006, the UK government published the Stern Report on the economics of

climate change. It recommended that from now on, 1% of GNP must be
invested in measures to avoid the effects of climate change. Failure to act
risks a future cost of up to 20% of global GDP.

Debate among economists centres on how much sacrifice should be made

today to protect the welfare of future generations. This involves the
consideration of which discount rate, the rate at which society discounts
future costs and benefits, to use when making policy decisions. The lower the
discount rate, the less we care about protecting future generations.