Transcript The Economics of Sustainability

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