Economic analysis of climate change uses economic tools and models to calculate the scale and distribution of damages caused by climate change. It can also give guidance for the best policies for mitigation and adaptation to climate change from an economic perspective. There are many economic models and frameworks. For example, in a cost–benefit analysis, the trade offs between climate change impacts, adaptation, and mitigation are made explicit. For this kind of analysis, integrated assessment models (IAMs) are useful. Those models link main features of society and economy with the biosphere and atmosphere into one modelling framework.

In general, climate damages increase the more the global surface temperature increases. Many effects of climate change are linked to market transactions and therefore directly affect metrics like GDP or inflation. For instance, climate change can drive inflation in food via heat and droughts, but also drives up overall inflation. There are also non-market impacts which are harder to translate into economic costs. These include the impacts of climate change on human health, biomes and ecosystem services.

Economic analysis also looks at the economics of climate change mitigation and the cost of climate adaptation. Mitigation costs will vary according to how and when emissions are cut. Early, well-planned action will minimize the costs. Globally, the benefits and co-benefits of keeping warming under 2 °C exceed the costs. Cost estimates for mitigation for specific regions depend on the quantity of emissions allowed for that region in future, as well as the timing of policies. Economists estimate the incremental cost of climate change mitigation at less than 1% of GDP. Across all developing countries, adaptation costs have been estimated to be about USD 215 billion per year up to 2030, and are expected to be higher after.

Economic analysis of climate change investigates the economic impacts of the effects of climate change, the costs and benefits of preventing climate change, and the cost of adapting to a changing climate. These analyses can focus on:

The economic impacts of climate change also include any mitigation (for example, limiting the global average temperature below 2 °C) or adaption (for example, building flood defences) employed by nations or groups of nations, which might infer economic consequences. Some regions or sectors may benefit from low levels of warming, for example through lower energy demand or improved crop yields.

In some areas, policies designed to mitigate climate change may contribute towards other sustainable development objectives, such as abolishing fossil fuel subsidies which would reduce air pollution and thus save lives. Direct global fossil fuel subsidies reached $319 billion in 2017, and $5.2 trillion when indirect costs such as air pollution are priced in. In other areas, the cost of climate change mitigation might divert resources away from other socially and environmentally beneficial investments (the opportunity costs of climate change policy).

Many economic tools are employed to understand the economic aspects around impacts of climate change, climate change mitigation and adaptation. Several approaches exist. Econometric models (statistical models) are used to estimate the impacts of weather and climate on economic variables, either globally or for a specific sector. Structural economic models look at market and non-market impacts affecting the whole economy through its inputs and outputs. Process models simulate physical, chemical and biological processes under climate change, and the economic effects.

Intergovernmental Panel on Climate Change (IPCC) has relied on process-based integrated assessment models (PB-IAM) to quantify mitigation scenarios. They have been used to explore different pathways for staying within climate policy targets such as the 1.5 °C target agreed upon in the Paris Agreement. Moreover, these models have underpinned research including energy policy assessment and simulate the Shared socioeconomic pathways. Notable modelling frameworks include IMAGE, MESSAGEix, AIM/GCE, GCAM, REMIND-MAgPIE, and WITCH-GLOBIOM. While these scenarios are highly policy-relevant, interpretation of the scenarios should be done with care.