Climate Change Policies Market failure and possible government failure

Market failure with a difference According to Stern: Climate change is an externality with a difference: –Global –Long-term –Uncertain –Potentially large and irreversible –“Climate change is the biggest market failure the world has ever seen”

Projected impacts of climate change 1°C2°C5°C4°C3°C Sea level rise threatens major cities Falling crop yields in many areas, particularly developing regions Food Water Ecosystems Risk of Abrupt and Major Irreversible Changes Global temperature change (relative to pre-industrial) 0°C Falling yields in many developed regions Rising number of species face extinction Increasing risk of dangerous feedbacks and abrupt, large-scale shifts in the climate system Significant decreases in water availability in many areas, including Mediterranean and Southern Africa Small mountain glaciers disappear – water supplies threatened in several areas Extensive Damage to Coral Reefs Extreme Weather Events Rising intensity of storms, forest fires, droughts, flooding and heat waves Possible rising yields in some high latitude regions

Sources of emissions

Climate change policies and A2 economics 1.Identify some of the policies 2.Analyse how they might work 3.Evaluate them –Effectiveness Short term (e.g. CO2 stabilisation) Medium term (shift towards low carbon economy) –Equity issues E.g. rich and poor countries Households of different income Current and future generations 4.Consider combinations of policies 5.Recognise the different stakeholders 6.There are costs of action and costs of inaction 7.Key issue is sustainability and creating the right framework

Kyoto Protocol Developed Countries Signed: –Greenhouse Gases ↓ by 5% by 2012 –Reduce or Offset –National Targets, Government’s responsible Mechanisms: –Clean Development Mechanism –Emissions Trading Runs out in 2012 – new agreement needed

Policies to mitigate impact of climate change Pricing the externality: –Carbon tax –Carbon trading –Implicit pricing through regulation / legislation Bringing forward lower carbon technology- research, development and deployment –Which policies provide the best incentive for this? Income payments for environmental husbandry e.g. to combat deforestation Overcoming information barriers Promoting a shared understanding of responsible behaviour across all societies

Deforestation

Key concepts Marginal external costs and benefits Marginal abatement costs Relative prices (e.g. of different energy sources) Incentives and substitution effects Investment and research Economies of scale Commitments Game theory and climate change negotiations

Carbon trading Market based mechanism Cap and trade –More certain about volume of carbon reduction –Those firms that are good at reducing CO2 will have permits to sell – these become an asset on the balance sheet Putting a price on carbon Importance of –Verification and commitment –Scarcity –Price expectations –Clean Development Mechanism –Rewarding efficiency and action But pitfalls of the EU ETS as it has operated so far – an example of government failure?

Carbon taxes Make the polluter pay –Internalising externalities –Who to tax? Producer and/or consumer? Can be revenue neutral –Compensation to reduce inequities Ring-fenced taxation Need for multi-lateral approach to avoid competitiveness issues Less certainty about emission reduction Worries about who will bear burden of higher energy prices Many EU countries now introducing their own green taxes

EU green taxes Taxes on batteries in Belgium, Bulgaria, Denmark, Italy, Latvia, Lithuania and Sweden Tax on plastic carrier bags in Denmark, Italy and Ireland Tax on disposable beverage containers in Belgium, Denmark, Estonia, Finland, Latvia, Lithuania, Poland and Sweden Deposit-refund schemes in Austria, Germany and the Netherlands Taxes on tyres in Bulgaria, Denmark, Finland, Latvia and Sweden Taxes on disposable cameras in Belgium Taxes on lubricant oil in Finland, Italy, Latvia, Norway, Slovenia, Spain and Sweden Landfill tax in the UK