Environmental Economics: Externalities, Carbon Pricing, and the Economics of Climate Change

Abstract

This article examines the core concepts and policy instruments of environmental economics, focusing on externalities, carbon pricing, and the economic challenges of climate change. It explains how Pigouvian taxes, particularly carbon taxes, can align private incentives with social costs, while the Coase Theorem highlights the roles of property rights and transaction costs in addressing environmental harm. The article compares major policy approaches, including carbon taxation, cap-and-trade systems, command-and-control regulation, clean-energy subsidies, and carbon border adjustments, and evaluates their respective advantages and limitations. It also discusses the debate between the Stern Review and Nordhaus’s DICE model, emphasizing how discount-rate assumptions shape estimates of climate damages and mitigation costs. In addition, the article considers ecosystem-services valuation and environmental-economic accounting as tools for incorporating natural capital into economic decision-making. Overall, it argues that effective climate policy requires a combination of market-based mechanisms, regulation, and improved valuation of environmental assets, while declining renewable-energy and storage costs may make rapid, low-cost decarbonization increasingly feasible.