A simple climate-Solow model for introducing the economics of climate change to undergraduate students

In this paper the simplest integrated assessment model is developed in order to illustrate to undergraduate students the economic issues associated with climate change. The growth model developed in this paper is an extension of the basic Solow model and includes a simple climate model. Even though the model is very simple it is very powerful in its predictions. Students use the model to explore various scenarios illustrating how economic activity today will inflict damages from higher temperatures on future generations. But students also observe that future generations will be richer than today's generation due to productivity growth and population stabilization. Hence, the richer future generations will not be as rich as they would be without climate change. Since the cost of action is absorbed by the current generation and the benefits of action accrue to future generations students can conduct a cost-benefit analysis and explore the importance of the discount rate. The appendix provides step-by-step instructions for students to setup the model in MS Excel and to conduct simulations.