In order for humans to continue to develop and thrive in an changing climate, humans will need to mitigate and adapt to those changes. Human induced damage to the environment is an example of an 'externality', it is a cost that is not correctly considered in economic decision making, leading to decisions that do not correctly recognise the environmental costs of that decision. This is a classic example of the tragedy of the commons. Implicitly, development that does include this cost is a more costly development pathway than the status quo. For example, the construction of renewable electricity generation leads to a more costly supply of electricity compared with more traditional gas or coal, due in most part to increased upfront capital costs.
In addition to mitigating changes through alternative, sustainable, development pathways, societies will also be required to adapt to change that have already or are likely to occur. This may involve costs of, for example, reinforcing sea walls or levees; or in a more extreme example the costs associated with moving societies to locations less exposed to the environmental impacts of climate change such as flooding or drought.
At the same time, correctly internalising the cost of the environment into economic decision making is likely to have longer term cost benefits; such as a reduced reliance on finite fossil fuels for energy generation (which will, in any case, end one day), society occupying more favourable locations or the reduced cost of healthcare associated with air pollution.
A consideration of the economic effects of climate change must therefore consider both the potential costs and any benefits of those mitigation and adaptation actions that a changing environment will lead society to take.
