The Economics of Sustainability

Climate Change

Outline

• Basic set of questions for policy development – applied to climate change

• Discussion on policies designed to address climate change

• Emphasise the ‘diabolical nature’ of the climate change problem

Three questions

• What is the problem?

• What will happen if I do nothing?

• What should I do about it?

What is the problem?

• The potential economic, social and environmental costs of global warming from elevated concentrations of greenhouse gases in the atmosphere as a result of man-made emissions

What will happen if I do nothing?

• Important, because many issues will resolve themselves and policy fixes may get in the way

• Unfortunately global warming is likely to continue without a policy response

• The reason: MARKET FAILURE!!!

Market failure

• A situation in which the market system produces an allocation of resources which is not Pareto-efficient

• Yawn and What?

• But market failures are very important and can have very real effects

• Stern: Climate change is the greatest and widest-ranging market failure ever seen

What should I do about it?

• Two main options

• Just adapt– Evidence suggests that costs outweigh the

benefits over time

• Mitigate and adapt to unavoidable climate change– Mitigation will be focus of further discussion

The three ‘Es’ of policy making

• Effectiveness: Will they achieve the required reduction in emissions?

• Efficiency: Are they the least costly way for society as a whole to reduce emissions?

• Equity: Will the suite of policies deliver reductions in a way that’s considered fair?

Mitigation options

• Command and control regulation– May be effective but can leak– Rarely efficient – information problem– Why throw baby out with bathwater?

• Market-based mechanisms– Internalise the externality

Market-based mechanisms

• Carbon-tax– Simple but may not be effective – still requires

information– Fallacy of price stability

• Emissions trading– Complex but effective if properly enforced– Efficient to a tea

Will an ETS be enough?

• Yes– Makes many current policies and many future

policies redundant– Other mitigation policies will change the mix

not the amount of reduction– Is this efficient?

• And No– Other market failures exist– Some sectors are not covered by trading

And what about equity?• Emissions trading will deliver effectiveness

and efficiency, other policies needed to ensure equity

• Households– Need to be careful not to reduce incentives –

cash not subsidies

• Businesses– Closed vs. trade exposed industries– Principles for compensating emitters– Systemic industries

Further complications

• International aspect– Have we ever solved an international issue?– Free rider problem– The Australian ETS is not an environmental

policy

• Intergenerational equity

Further complications cont.

• Uncertainty– Emission concentrations on climate– Impact of climate change policies– Costs of climate change policies– Relationship between Australian and global

response

• CC impacts could be large and irreversible