(a) Sunspot Theory:

This early theory was advanced by the neo-classical economist W.S. Jevons. It is a trade

cycle theory stating that trade cycle is related to the appearances of sunspots-trade is

linked to the regular occurrence of solar flares, which affects the earth’s climate and

agricultural output.

(b) Black Swan Theorem:

This theory was put forward by Nassim Taleb originally applied to financial risks-it

deals with the highly improbable and unpredictable events that have massive impact. The

Black Swan Theory refers to unexpected events of large magnitude like the Asian

Tsunami and their dominant role in history.

(c) The Dismal Theorem:

This theorem developed by Prof. Marty Weitzman is a critique of the cost-benefit

analysis of climate change as developed by economists like Prof.William Nordhaus . He

says that the kind of uncertainty we face on the climate issue invalidates cost-benefit

analysis and makes discussions of appropriate discount rates of little interest. Extreme

climatic outcomes, for eg, very high CO2 levels and catastrophies like a 7 metre rise in

sea level have low probability but high damage and will have “fat-tailed”distributions.

According to Ackerman (2008), there are four points that can be developed for a better

climate economics

Over 50 years ago, Kenneth Boulding’s landmark essay, “The

Economics of the Coming Spaceship Earth,” was published in a
volume of works prepared for an RFF forum on environmental quality
in a growing economy. Since its publication, this essay has had a
profound influence on much of our thinking about the global economy
and sustainability. Its vision of the “spaceship earth” was essential to
shaping the sustainability concept of the 1960s and 1970s in seminal
classics of that time.

In perhaps the most famous passage of the essay, Boulding

describes the open economy of the past—with its seemingly unlimited
resources—and contrasts it with the closed economy of the future. He
wrote, "I am tempted to call the open economy the 'cowboy economy,'
the cowboy being symbolic of the illimitable plains and also
associated with reckless, exploitative, romantic, and violent behavior,
which is characteristic of open societies. The closed economy of the
future might similarly be called the 'spaceman' economy, in which the
earth has become a single spaceship, without unlimited reservoirs of
anything, either for extraction or for pollution, and in which, therefore,
man must find his place in a cyclical ecological system which is
capable of continuous reproduction of material form even though it
cannot escape having inputs of energy."

Boulding’s essay was influential for two reasons. First, as he

emphasized in his opening sentence, transitioning to a more
sustainable economy requires humankind to rethink its relationship
with nature: “We are now in the middle of a long process of transition
in the nature of the image which man has of himself and his
environment.” Second, as an economist, Boulding recognized that the
main impetus for change must occur in the basic production and
consumption relationships of modern economies: “The closed earth of
the future requires economic principles which are somewhat different
from those of the open earth of the past.”

But developing new technology was not the heart of Boulding's prescription. He
argued that a sustainable future would require countless “social inventions”, from
new aesthetics to better methods of resolving disputes. “The unfinished tasks of the
great transition are so enormous,” he concluded, “that there is hardly anyone who
cannot find a role to play in the process.” That is still ever true now: dealing with
climate change requires a host of skills.

The authors of the 1972 The Limits to Growth — Donella Meadows, Dennis
Meadows, Jørgen Randers and William Behrens — meshed environmental science
with systems analysis. Barbara Ward was a journalist, economist and adviser to world
leaders who collaborated with Pulitzer-prizewinning microbiologist René Dubos
on Only One Earth (1972).

Commoner's The Closing Circle laid the foundation for industrial ecology.
Particularly in the postwar decades, Commoner argued, the industrialized world had
come to rely on a host of “ecologically faulty” technologies, from nuclear power to
chemical pesticides. The technologies of the future needed instead to accord with four
basic principles, which he defined as laws of ecology: “Everything is connected to
everything else”, “Everything must go somewhere”, “Nature knows best” and “There
is no such thing as a free lunch”.

For Commoner, however, the ultimate problem was economic and political, not
technological. Discussing the economic meaning of ecology, he argued that the
private-enterprise system had serious flaws. Businesses had powerful incentives to
produce new products that did more environmental harm than the products they
replaced. They did not need to account for “biological capital”, and they did not pay
the full costs of production, which included pollution. In the decades since The
Closing Circle appeared, making capitalism greener has become a major concern of
economists, business-school professors, entrepreneurs, corporate executives and
activists, yet much of Commoner's critique still holds.

What would be required for humanity to continue to thrive? To tackle so huge a

question required intellectual audacity, and the authors of the pioneering books on
sustainability were all big-picture, interdisciplinary thinkers par excellence.
Economist Kenneth Boulding — author of The Meaning of the Twentieth
Century (1964) — thought historically and philosophically. Biologist Barry Commoner
felt compelled to study political economy, as his 1971 The Closing Circle shows. Fuller
considered himself a futurist. The authors of the 1972 The Limits to Growth —
Donella Meadows, Dennis Meadows, Jørgen Randers and William Behrens —
meshed environmental science with systems analysis. Barbara Ward was a journalist,
economist and adviser to world leaders who collaborated with Pulitzer-prizewinning
microbiologist René Dubos on Only One Earth (1972).

Commoner's The Closing Circle laid the foundation for industrial ecology. Particularly
in the postwar decades, Commoner argued, the industrialized world had come to
rely on a host of “ecologically faulty” technologies, from nuclear power to chemical
pesticides. The technologies of the future needed instead to accord with four basic
principles, which he defined as laws of ecology: “Everything is connected to
everything else”, “Everything must go somewhere”, “Nature knows best” and “There
is no such thing as a free lunch”.
The Limits to Growth asked — heretically — whether humans could continue
indefinitely to make ever greater demands on Earth. The authors used computer
modelling to explore the interactions between population growth, resource demand,
industrialization, food production and pollution. They did not forecast the future,
although commentators ever since have debated whether their 'predictions' were
right; instead, they extrapolated. If present trends continued, the authors wrote,
humanity would hit the wall “sometime within the next hundred years”. They hoped
that people would avert a breakdown, but stated repeatedly that they could not
model the social, political and cultural factors that might alter trends. They did
consider whether technology could be a magic bullet, and the results were shocking.
Even when they allowed for the technological progress that greatly increased the
availability of resources and reduced the amount of pollution, the result was still
collapse — just farther down the road. Innovation alone could not lead to a
sustainable economy. We needed a fundamental shift in values.

Ward and Dubos's Only One Earth, written to accompany the 1972 United Nations
Conference on the Human Environment, added an international perspective to the
sustainability discussion. Ward had travelled the globe as an expert on economic
development. For Ward and Dubos, any effort to ensure the survival of humanity had
to bridge the tremendous gap between developed and developing nations. Although
they didn't use the phrase 'sustainable development', they offered a path-breaking
analysis of the challenge of raising living standards for the poor without degrading
the environment. At the same time, they called for the affluent to take off their
blinkers. Well-to-do nations needed to acknowledge the damage that they were
doing to the biosphere — and to accept that their fate was inseparable from the
prospects of the rest of the world. Because many environmental threats were global,
Ward and Dubos concluded, “planetary interdependence” had to become a moral
and political reality, not just “a hard and inescapable scientific fact”.

Environmental economics
Environmental economics developed in its present form in the 1960s as a result of the intensification
of pollution and the heightened awareness among the general public in Western countries about the
environment and its importance to our existence. Economists became aware that, for economic
growth to be indefinitely sustainable, the economic system needs to take into account the uses of the
environment that we have already mentioned, so that natural resources are not depleted and so that
the environment is not overused as a waste sink. Environmental economists view the environment as
a form of natural capital which performs life support, amenity, and other functions that cannot be
supplied by man-made capital. This stock of natural capital includes natural resources plus ecological
systems, land, biodiversity, and other attributes.

Ecological economics

The growth of environmental economics in the 1970s was initially within the neo-classical paradigm.

In general, this approach to the environment is concerned with issues of market failure, inappropriate

resource allocation, and how to manage public goods. There was little concern for the underlying

relationships between the economy and the environment. Concerns about the limits of this approach

to environmental economics led some environmental economists to develop what is now referred to

as ecological economics.

Ecological economics views the relationship of the economy and the environment as central. Thus,

any analysis places economic activity within the environment. This distinction is best illustrated with

reference to debates concerning sustainable development and the difference between weak and

strong sustainability. Ecological economics supports the notion of strong sustainability. This view of

sustainability assumes that not all forms of capital (ie human and natural) are perfectly substitutable.

Ecological economics (also called eco-

economics, ecolonomy or bioeconomics of Georgescu-Roegen) is both
a transdisciplinary and an interdisciplinary field of academic research addressing the
interdependence and coevolution of human economies and natural ecosystems, both
intertemporally and spatially.[1] By treating the economy as a subsystem of Earth's larger
ecosystem, and by emphasizing the preservation of natural capital, the field of ecological
economics is differentiated from environmental economics, which is the mainstream
economic analysis of the environment.[2] One survey of German economists found that ecological
and environmental economics are different schools of economic thought, with ecological
economists emphasizing strong sustainability and rejecting the proposition that natural capital
can be substituted by human-made capital (see the section on Weak versus strong
sustainability below)

Green economics

The green economy is defined as economy that aims at reducing environmental risks and
ecological scarcities, and that aims for sustainable development without degrading the
environment. It is closely related with ecological economics, but has a more politically applied
focus.[1][2] The 2011 UNEP Green Economy Report argues "that to be green, an economy must
not only be efficient, but also fair. Fairness implies recognizing global and country level equity
dimensions, particularly in assuring a just transition to an economy that is low-carbon, resource
efficient, and socially inclusive."[3]
Nicholas Georgescu-Roegen (born Nicolae Georgescu,

4 February 1906 – 30 October 1994) was a Romanian

American mathematician, statistician and economist. He is best known today for his
1971 magnum opus The Entropy Law and the Economic Process, in which he argued that
all natural resources are irreversibly degraded when put to use in economic activity.
A progenitor and a paradigm founder in economics, Georgescu-Roegen's work was seminal in
establishing ecological economics as an independent academic sub-discipline in economic

Herman Edward Daly

(born July 21, 1938) is an American ecological and Georgist economist[1] "defining a path
of ecological economics that integrates the key elements of ethics, quality of life,
environment and community." Toward a Steady-State Economy[edit]
Daly was the editor of a long-lived and influential anthology, originally published in 1973
as Toward a Steady-State Economy

The tragedy of the commons is a situation in a shared-resource system where individual users,
acting independently according to their own self-interest, behave contrary to the common good of
all users, by depleting or spoiling that resource through their collective action. The tragedy of
the commons is a situation in a shared-resource system where individual users, acting
independently according to their own self-interest, behave contrary to the common good of all
users, by depleting or spoiling that resource through their collective action. The theory originated
in an essay written in 1833 by the British economist William Forster Lloyd, who used a
hypothetical example of the effects of unregulated grazing on common land (also known as a
"common") in Great Britain and Ireland.[1] The concept became widely known as the "tragedy of
the commons" over a century later due to an article written by the American biologist and
philosopher, Garrett Hardin in 1968.[2][3] In this modern economic context, "commons" is taken to
mean any shared and unregulated resource such as atmosphere, oceans, rivers, fish
stocks, roads and highways, or even an office refrigerator.

Economics of natural disasters

What is a disaster? What is an indirect cost?

There is no single definition of a disaster. From an economic perspective, however, a natural disaster can
be defined as a natural event that causes a perturbation to the functioning of the economic system, with
a significant negative impact on assets, production factors, output, employment, or consumption.
Examples
of such natural event are earthquakes, storms, hurricanes, intense precipitations, droughts, heat
waves, cold spells, and thunderstorms and lightning.
Disasters affect the economic system in multiple ways, and defining the “cost” of a disaster is tricky.

1. Introduction
Large‐scale disasters regularly affect societies over the globe, causing huge destruction and damage. The
2010 earthquake in Port‐au‐Prince and hurricane Katrina in 2005 have shown that poor as well as rich
countries are vulnerable to these events, which have long‐lasting consequences on welfare, and on
human
and economic development.
After each of these events, media, insurance companies and international institutions publish numerous
assessments of the “cost of the disaster.” However these various assessments are based on different
methodologies
and approaches, and they often reach quite different results. Beside technical problems,
these discrepancies are due to the multi‐dimensionality in disaster impacts and their large redistributive
effects, which make it unclear what is included or not in disaster cost assessments. But most importantly,
the purpose of these assessments is rarely specified, even though different purposes correspond to
different
perimeters of analysis and different definitions of what a cost is.
This confusion translates into the multiplicity of words to characterize the cost of a disaster in published
assessments: direct losses, asset losses, indirect losses, output losses, intangible losses, market and
nonmarket
losses, welfare losses, or any combination of those. It also makes it almost impossible to compare
or aggregate published estimates that are based on so many different assumptions and methods.
To clarify the situation, this paper proposes a definition of the cost of a disaster, and emphasizes the
most
important mechanisms that explain this cost. It does so by first explaining why the direct economic cost,
i.e. the value of what has been damaged or destroyed by the disaster, is not a sufficient indicator of
disaster
seriousness and why estimating indirect losses is crucial. Then, it describes the main indirect
consequences
of a disaster and of the following reconstruction phase, and discusses the methodologies to
measure them. Finally, it proposes a review of a few published assessments of indirect economic
consequences,
which confirm their importance and the need to take them into account.
2. The indirect cost of natural hazards
2.1 What is a disaster? What is an indirect cost?
There is no single definition of a disaster. From an economic perspective, however, a natural disaster can
be defined as a natural event that causes a perturbation to the functioning of the economic system, with
a significant negative impact on assets, production factors, output, employment, or consumption.
Examples
of such natural event are earthquakes, storms, hurricanes, intense precipitations, droughts, heat
waves, cold spells, and thunderstorms and lightning.
Disasters affect the economic system in multiple ways, and defining the “cost” of a disaster is tricky.
Pelling
et al. (2002), Lindell and Prater (2003), Cochrane (2004), Rose (2004), among others, discuss typologies
of disaster impacts. These typologies usually distinguish between direct and indirect losses.
Direct losses

Typologies usually distinguish between direct and indirect losses.

Direct losses are the immediate consequences of the disaster physical phenomenon: the consequence of
high winds, of water inundation, or of ground shaking. Direct losses are often classified into direct market
losses and direct non‐market losses (also sometimes referred to as intangible losses, even though
nonmarket losses are not necessarily intangible). Market losses are losses to goods and services that are
traded on markets, and for which a price can easily be observed. Even though droughts or heat waves
affect directly the economic output (especially in the agriculture sector), direct market losses from most
disasters (earthquakes, floods, etc.) are losses of assets, i.e. damages to the built environment and
manufactured
goods. These losses can be estimated as the repairing or replacement cost of the destroyed or
damaged assets. Since building and manufactured goods can be bought on existing markets, their price is
known. Direct market losses can thus be estimated using observed prices and inventories of physical
losses that can be observed (as recorded, e.g., in the EM‐DAT database or insurance‐industry databases)
or modeled (using, e.g., catastrophe models of the insurance industry or simplified methodologies; see
Ranger et al., 2011).
Non‐market direct losses include all damages that cannot be repaired or replaced through purchases on a
market. For them, there is no easily observed price that can be used to estimate losses. This is the case,
among others, for health impacts, loss of lives, natural asset damages and ecosystem losses, and
damages
to historical and cultural assets. Sometimes, a price for non‐market impacts can be built using indirect
methods, but these estimates are rarely consensual (e.g., the statistical value of human life).
Indirect losses (also labeled “higher‐order losses” in Rose, 2004) include all losses that are not provoked
by the disaster itself, but by its consequences. Different hazards communities have different approaches
for defining indirect costs (e.g. Meyer and Messner (2005) and FLOODSite (2009) for floods; Wilhite
(2000) and Wilhite et al. (2007) for droughts). Contentious issues may emerge around the edge of these
definitions across hazard communities: what are the limits between direct and indirect costs categories?
In particular discussions often occur around the notion of business interruption, which can be included in
direct losses or in indirect losses, or as a stand‐alone category. For capital‐destroying hazards (flood,
earthquakes, storms), the term “indirect losses” is often used as a proxy for “output losses,” i.e. the
reduction
in economic production provoked by the disaster. Output losses include the cost of business interruption
caused by disruptions of water or electricity supplies, and longer term consequences of infrastructure
and capital damages.
An obvious illustration of why indirect losses are important is the difference between disaster scenarios
with various reconstruction paces. In terms of welfare, there is a large difference between, on the one
hand, a scenario in which all direct losses can be repaired in a few months thanks to an efficient
reconstruction
process and, on the other hand, a scenario in which reconstruction is inefficient and takes
years. For the same amount of direct losses, welfare impacts are much larger in the latter case, and this
should be taken into account.
To help identify indirect losses, we propose the following criteria. First, indirect losses are caused by
secondary
effects, not by the hazard itself. Indirect costs can be caused by hazard destructions or by business
interruptions. In addition to this obvious criterion, costs are indirect if they are spanning on a longer
period
of time, a larger spatial scale or in a different economic sector than the disaster itself. Classification
of hazards by scale and time effect is done by, e.g., Brown Gaddis et al. (2006), and Jonkman et al. (2008).
This definition is consistent with definitions from different hazard communities. It includes business
interruption
in direct losses (since their most classical definition makes them mainly short‐term, during the
hazard duration). Also, this definition avoids consistency problems for slow‐onset hazards such as
4
drought. With this definition, the reduction in agriculture yield, and in farmer income, are considered as
direct costs, consistent with intuition, while the impacts on other economic sector trading with the
agricultural
sector are indirect costs.
Indirect losses can be market or non‐market losses (see f.i., Government of Queensland, 2002).
Sometimes,
non‐monetary indirect consequences of disasters are also included, like the impact on poverty or
inequalities, the reduction in collected taxes, or the increase in national debt. In more general terms,
several issues are raised by the use of GDP change as an indicator to assess indirect
losses. These issues are, among others, (i) the question of appropriate scale between the scale of the
event and the scale of GDP measurement, (ii) the capacity of GDP to be a good proxy for welfare (see,
e.g., CMEPSP, 2009; Council and European Parliament, 2009).

2.3 Consumption losses and output losses

This section explains how to assess consumption losses from asset and output losses. More precisely, it
explains why the sum of asset losses and output losses is a good proxy for the loss of consumption. To do
so, Fig. 1, (a), (b) and (c) show simplified representations of a post‐disaster situation. Figure 1(a) depicts
the situation in which only output losses are estimated. In this scenario, the disaster leads to a temporary
reduction in output during the reconstruction phase. We assume here that reconstruction is a return to
the baseline scenario (i.e. a no‐disaster counterfactual scenario). As already stated, this is not always the
case, but making an assumption on the final state is necessary to define the “cost” of the disaster, and
the assumption of a return to the non‐disaster baseline scenario is likely to be the most neutral one for
this type of assessment.
2 In an utilitarist framework, what matters is not output and production, but consumption
The sum of instantaneous output loss is what is often referred to as the indirect loss. But reconstruction
needs in the disaster aftermath mean that a significant share of the remaining production will have to be
devoted to reconstruction, as shown in Fig. 1(b). In other terms, the resources used to rebuild damaged
houses cannot be used to build new houses, or to maintain existing ones. This reconstruction output is
included in total output, and is not a loss of output. But it is a “forced” investment, in addition to the
normal‐time “investment—consumption” trade‐off. It causes, therefore, a loss of welfare. The value of
this forced investment is the replacement value of damaged asset, i.e. what is referred to as the direct
losses. This is what is represented in Fig. 1(c): the sum of the output loss and of the reconstruction output
is what cannot be used for consumption and non‐reconstruction investment, and what is here referred
to as “total losses.”
In this framework, the total cost is the sum of the indirect cost (i.e., the reduction of the total value
added
by the economy due to the disaster), and the direct cost (i.e., the portion of the remaining valueadded
that has to be dedicated to reconstruction instead of normal consumption). Capital and output
losses can therefore be simply added to estimate consumption losses.
Of course, Fig. 1 shows a simplified situation in which production has no flexibility. In this case,
reconstruction
needs cannot be satisfied through increased production and it has to crowd out other consumptions
and investments. Figure 2 depicts a different case, in which there is a limited flexibility in the production
process: capital destruction leads to a reduction in output; but unaffected capital can increase its
own production to compensate this reduction, for instance through an increase in work hours by workers
at unaffected factories and businesses. In practice, there are gross indirect losses, and gross indirect gains
(due to the stimulus effect of the reconstruction). But there is still a fraction of the remaining production
that is used for reconstruction instead of normal consumption, even though this share is smaller than in
absence of production flexibility.