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Debate Can Climate Change be Reversed under Capitalism? Anil Markandya ABSTRACT This contribution seeks to examine the prospects for tackling climate change in a world dominated by capitalist economies. Since climate change is a relatively new phenomenon, we have to review the successes and failures of such economies in addressing other environmental issues. This review reveals a mixed picture, but the evidence suggests that once an issue is raised in the public consciousness the prospects for effective action are quite good as long as there is openness and transparency. Experience certainly indicates that the prospects are better in capitalist than in centrally planned economies. In the case of climate change the magnitude of the changes needed is immense and time is now running out. Studies indicate that convergence in living standards between the North and the South through development is possible with strict carbon targets, but it will need agreement on the allocation of rights and, furthermore, a system in which either such rights are traded or a common carbon tax is imposed. Such a system must be seen as fair by all parties and these parties must trust each other and the institutions they set up. That is where the biggest problems still lie. INTRODUCTION This contribution seeks to answer the question, how effectively can marketbased capitalist economies respond to the climate change challenge? A good point of departure is usually to look to the past, to see how such economies have addressed previous major environmental problems. This will be illuminating, but not revealing enough, because climate change is arguably a much greater crisis than any we have faced so far. In the language of economics, Lord Stern has described it as the biggest externality that has ever existed (Stern, 2006). This means that some of what follows has to be based on speculation on the nature of the challenges, and on how capitalist institutions are responding to them and how they will respond in the future. I begin with a brief review of why unregulated markets fail to address environmental problems and how they have been modified to correct that I wish to thank Servaas Storm and the editors of the journal for useful comments that have improved the final version. I also thank Tim Taylor and Alistair Hunt for reading and making suggestions on an earlier draft. All shortcomings are of course my own. C Institute of Social Studies 2009. Published Development and Change 40(6): 1139–1152 (2009). by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main St., Malden, MA 02148, USA 1140 Anil Markandya failure. There have been successes, and these are noted and analysed. There have also been failures, which teach us some important lessons. I then turn to climate change and look at its major dimensions: the long-term nature of the impacts, the high levels of uncertainty, the need for major technological advances to solve the problem, and the fact that it is a global issue: all countries have to contribute to solving it. Each of these raises institutional questions. The focus here is on how ‘capitalist’ societies are able to address these. At the start I would make the point that it serves little purpose to set up ‘straw men’ and then proceed to destroy them. In this context it is easy to caricature a capitalist society as unregulated, uncaring and unable to resolve the conflicts between the private and public provision of goods and services. It goes without saying that such a society would never be able to resolve the climate challenge. But no such society exists. All market-based economies have major public sectors and regulate the environmental substantially. They may differ in the extent to which they use one method or another but as a broad generalization all combine direct controls with some fiscal incentives. So what we really want to evaluate is how such ‘real’ economies are facing up to the climate challenge and what measures they will have to take to meet that challenge. CAPITALISM AND THE ENVIRONMENT Capitalist societies are generally characterized by two features: the private ownership of wealth and the pursuit of profit in production. In terms of ownership of wealth, one normally thinks of physical and knowledge capital, but not of human capital (at least not since the abolition of slavery), nor so much of natural capital. Of course some forms of natural capital are privately owned (e.g. agricultural land or forests) but no one considers air sheds, oceans, species and many ecosystems as private property. In terms of the pursuit of profit, this remains a strong driving force for such societies, but it is tempered and controlled by regulation. In the light of recent events, many would argue that regulation has been insufficient in the financial sector, and most would agree that regulation is needed to address major environmental problems. An important argument in the opposite direction was made by Coase (1960) to the effect that if property rights are well defined, we do not need environmental regulations because the affected parties will negotiate privately to determine an outcome that is optimal for them. There is some validity to this position in certain cases, and a number of studies have demonstrated that such negotiation does take place (see, for example, Hoffman and Spitzer, 1982), but no one seriously suggests that the Coase thesis is the basis for leaving major environmental problems such as climate change or air quality control to the private sector. If we accept that the environment needs regulation, how do we modify the institutions of a capitalist economy to achieve that goal? Traditionally the Can Climate Change be Reversed under Capitalism? 1141 focus has been on direct regulation: industries were simply told they could not pursue some methods of production that were harmful to the environment, and households were required to refrain from certain practices such as dumping waste and burning fuels in areas where air quality was a matter of concern. To a considerable extent, such measures have worked. Perhaps the best example is the control of emissions from the burning of coal in Europe. Legislation on the control of emissions from coal in the UK were introduced as long ago as 1821 and since then there have been more than thirty-five laws passed on this topic, almost all of which constituted ‘command and control’ regulation of the kind I have just described (Markandya et al., 2006). The result has been a steep decline in the levels of SO 2 since 1956 (when a major air inversion killed many people in London), without any serious impact on GDP per capita (see Figure 1). In this case, then, capitalist institutions certainly did respond and did so without apparently affecting the economic performance of the country. Other examples of major improvements in the ambient environment during the post World War II period include water quality and reforest cover in Europe. Figure 1. United Kingdom: Sulphur Emissions (1850–1999), Real GDP per capita (1870–2001) and some Air Regulations 1956 Clean Air Act 90 80 25000 1968 Clean Air Act 1874 Alkali 20000 70 15000 1972 Envl Action Prog 50 40 1974 Control of Pollution Act 1926 Smoke Abatement Act 10000 30 1994 Oslo 1995 Envt Act 20 5000 1997 National Air Qlty Strategy 10 1999 Gothenburg Protocol 0 1850 5 0 1875 1900 1925 Sulphur per capita 1950 1975 GDP per capita Note: Sulphur is measured in thousands of tons. GDP is measured in 1990 US$. Source: Markandya et al. (2006). 2000 Per capita 1990 PPP$ kilograms per capita 60 1142 Anil Markandya The link between economic progress and environmental progress has now been studied extensively under the general rubric of the Environmental Kuznets Curve (EKC), which states that as societies get richer, they initially cause a deterioration in the environment, but that after a certain point, they start to devote resources to its improvement, resulting in a reversal of the trend towards deterioration (Arrow et al., 1995; Stern and Common, 2001). The empirical evidence supports an EKC for a number of environmental indicators, but not for all. In particular, most studies do not indicate a decline in greenhouse gas (GHG) emissions with economic development. Furthermore, the point at which the reversal occurs and the rate of fall are affected by policies: the more proactive a country is in this regard the quicker and faster is the improvement in the environment. A sceptic might accuse me of having chosen an ‘easy target’ to make this point. She might say that there are more difficult environmental issues involving transboundary pollution, where regulations have not been so successful. In fact that is not true either. To continue with the example of sulphur, there is a transboundary dimension which has been addressed through agreements, such as the 1999 Gothenberg Protocol that defines national emissions of sulphur. Another example of an international environmental problem — in some respects a precursor to the climate issue — was that of Ozone Depleting Substances (ODSs). The Montreal Protocol of 1987 achieved an agreement for the phase-out of these chemicals, which were damaging the stratospheric ozone layer. The agreement involved special terms for developing countries and has achieved a substantial reduction in ODSs.1 So far, then, one would conclude that the capitalist western countries have managed to reconcile environment and growth without too much difficulty and that they have done so through the use of laws and regulations. The story, however, is more nuanced than that and there have also been areas of failure. In recent years, the rate of biodiversity loss has not been arrested, and continues at an alarming pace. Deforestation in the tropics is also continuing at a high rate. There is a serious estimate that, unchecked, a collapse of fish stocks is possible by 2048 (Siebert et al., 2006). In many developing countries problems of water and loss of soil productivity are matters of grave concern. What factors determine success in regulating the environment? It is easier to start by saying what does not ensure success. It is not a case of centrally planned versus capitalist economic structure. The countries of Eastern Europe that were centrally planned did not have a particularly good record in this sphere. The over-exploitation of the Aral Sea for irrigation of cotton is one of the worst examples (EEA, 2007), but there are also cases of 1. A similar story of at least partial success can be told for international agreements on the Trade in Endangered Species (CITES), originally signed in 1973, and the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, signed in 1992. Can Climate Change be Reversed under Capitalism? 1143 extremely serious neglect of the environmental consequences of toxic wastes including radioactivity, with ensuing harm to the population (Almaganbetov and Grigoruk, 2008). The problems were ‘solved’ in two ways: by hiding the truth from the wider public and by supporting unsustainable systems of production and resource use through transfers from richer regions. Once the Former Soviet Union collapsed, this unsustainability came to the fore and ecological-economic systems started to fall apart. Neither is success guaranteed by simply passing laws and administrative orders on what can and cannot be done. Laws have to be implemented, and we often see failures in this regard, especially — but not only — in developing countries. A major factor ensuring success in implementation of laws has been shown to be a strong civil society. Openness and transparency are key factors and access to information helps greatly; the Arhus Convention on Public Participation in Decision-making and Access to Justice in Environmental Matters, adopted in June 1998, is a cornerstone of European efforts to ensure compliance. Another factor that promotes success in regulation is the use of marketbased instruments (MBIs). The use of pollution or product charges or subsidies makes it possible for affected parties to respond more flexibly to an environmental regulation. This can result in less opposition from these parties and others on the grounds that the regulations are socially costly (e.g. in terms of employment) and can also provide stronger incentives for undertaking investment in innovation to reduce any charges or to receive a bigger subsidy (Tietenberg, 2006). The use of MBIs has been criticized as allowing polluters to ‘buy’ the rights to pollute in the case of charges or getting paid in the case of subsidies. The issue here, surely, is whether we achieve the environmental goal, and if so at what cost? MBIs have frequently been shown to achieve a goal at a lower cost than direct controls and, as the costs of regulation rise, it becomes more important to seek the lowest cost solutions possible (Markandya, 1998; Panayotou, 1998). Furthermore the use of MBIs does not imply favouring increasing inequity. Whether we use charges (under a Polluter Pays Principle), or subsidies (under a Beneficiary Pay Principle) can depend precisely on such equity considerations. In developed countries, where polluters are often large industrial enterprises, the Polluter Pays Principle makes more sense on these grounds. In poor countries, where the polluters or degraders of the environment may often be poor farmers, it may be more equitable to pay them to reduce the degradation. Indeed a big movement that seeks to develop systems for the Payment for Environmental Services is based on this principle (Pagiola et al., 2005). Overall, the move to using market-based or fiscal incentives to regulate the environment is not a particularly capitalist development. Rather, it can be seen as part of a system of incentives that can be applied to firms as well as households, government agencies and others, where the aim is practical and where the instrument is to be judged in terms of how successfully it achieves the environmental goals. Success here is measured of course first 1144 Anil Markandya and foremost in environmental terms, but it is also measured in terms of the costs imposed on society in meeting these goals.2 CAPITALISM AND CLIMATE CHANGE Climate Risks With climate change we face perhaps the most serious threat to planetary survival within the human historic timeframe. If continued unchecked, the increase in greenhouse gas (GHG) emissions could result in concentrations that would cause global mean temperature to rise by between 1.1 and 6.4◦ C by 2100 (IPCC et al., 2007). The upper end of this range would make many regions uninhabitable and cause extreme social disruption to spillover to other less affected regions. A key part of the problem is the huge uncertainty surrounding these estimates. According to the same IPCC report, there is a significant ‘tail’ in the distribution of possible temperature increases that is even more threatening. Weitzman (2009) notes that under the IPCC estimates, a doubling of GHG concentrations (a plausible outcome in the absence of action within the next century) would result in a 4.5◦ C increase, with a probability of more than 17 per cent. The probability of an increase of more than 8◦ C is around 2 per cent. Required Actions Clearly then we need to take action on precautionary grounds. Estimates of what is needed to stabilize concentrations at around 550 ppm by 2100, which would allow the increase in mean temperatures to be maintained at around 2◦ C (with a range of 1.5–4.5◦ C), indicate a peaking of global emissions in 2020 with declines of 1.0–2.5 per cent per annum thereafter (Stern, 2006). As a rule of thumb one can think of emissions declining by 50 per cent relative to 2000 levels by 2050 for the planet to be on this stabilization path. This level of stabilization has been proposed by a number of researchers (including the Stern group), but one cannot say categorically that it is an ‘optimal’ level. Estimating the costs and benefits of further reductions is extremely difficult, with such large uncertainties that some argue the exercise itself to be flawed (Weitzman, 2009). In these circumstances one can only go by judgements of what is required and what is feasible. A lower target, such as 450 ppm, 2. The use of MBIs is growing not only in Europe but across the globe. The EU website http://www2.oecd.org/ecoinst/queries/index.htm records the use of many instruments in member states and wider applications are reported in World Bank (2005). There is now a strong movement that promotes Green Fiscal Reforms, whereby public expenditures are increasingly funded by taxes on pollution, and taxes on labour and goods and services are reduced in compensation. Can Climate Change be Reversed under Capitalism? 1145 Figure 2. Stabilization Targets and Eventual Temperature Changes Stabilization and Commitment to Warming 5% 400 ppm CO2e 95% 450 ppm CO2e 550 ppm CO2e 650 ppm CO2e 750 ppm CO2e Eventual temperature change (relative to pre-industrial) 0°C 1°C 2°C 3°C 4°C 5°C Source: Stern (2006). would reduce the risks of exceeding an acceptable temperature threshold (see Figure 2), but it would require GHG emissions to peak in the next few years. Given the trends in these emissions, no one seriously believes this is possible. Hence the focus on a target of 550 ppm, which is believed to be the lowest credible target. Costs of Actions Can this be achieved with the institutions we have at present, especially the capitalist economic systems? The first thing to note is its technical feasibility: many experts are agreed that such reductions are possible without imposing too high a cost on our economies. Taking data from a large number of studies, Stern (2006) concludes that the 550 ppm stabilization target would impose a cost of between −3 per cent and +3.5 per cent of GDP per annum in 2050.3 Assuming world GDP increases by around 2.8 per cent per annum from now to 2050, that would imply an upper bound of US$ 7,800 billion, or US$ 846 per capita,4 when per capita global income is estimated at US$ 24,165. At 3. In these studies one finds that the ‘engineering’ bottom-up models result in lower costs of achieving a given target reduction rate, while macroeconomic models with less technological detail generate higher cost figures. It is likely that the correct figure is somewhere in between the two and a newer generation of hybrid models supports that. 4. Based on World Bank Data for 2006 and UN medium population projections, taking world population from 6.5 billion in 2006 to 8.9 billion in 2050. The world GDP growth rate is the long-term base case used in EC planning models such as POLES. 1146 Anil Markandya the same time new markets to the value of US$ 500 billion would be created by that year. In the shorter term, estimates of actions that would keep us on the path towards this goal are also relatively manageable. Golub et al. (2006) report the range of costs for the US, had it complied with the Kyoto Protocol Target as initially negotiated (but which it did not ratify) of 302 million tons of carbon in 2010. The pessimists claimed a cost in the range of up to 4.6 per cent of 2002 GDP, if there were no trading in emissions rights, and if reductions through ‘sinks’ were not allowed. With some trading in emissions rights and inclusion of sinks, even they concede that the costs would not exceed 2.2 per cent of GDP. Furthermore, as Golub et al. show, allowing for a number of other factors such as market reforms in the energy sector that would pay for themselves, as well as including the collateral benefits of reductions of GHGs (through reduced local pollutants), the estimated costs amount to less than 0.5 per cent of GDP and even become negative in some cases. All the above, of course, is based on models and not on actual performance in reducing emissions, evidence on which is limited but not totally absent. The UK and Germany, for example, reduced emissions over the period 1990–2000, by 11 per cent and 3 per cent respectively. At the same time, they have achieved real GDP growth over that decade of 20 and 29 per cent. To be sure, part of this reduction was due to the switch away from coal and into gas, which may not be available for all countries, and which will not offer the same potential in Germany and the UK in the future. Nevertheless, options do exist and there are some cases of them being used effectively to reduce emissions without influencing growth. Of course, the fact that the ‘carbonization’ of these economies, measured as carbon per unit of GDP, has declined while the economies have grown is not surprising. As Nakicenovic (2002) shows, the decarbonization rate for the US from 1800 to 2000 was about 1.3 per cent per annum, while the annual per capita growth was about 1.7 per cent. The 1990s saw a decline of 2.8 per cent per annum for Germany and the UK which is the kind of rate of decarbonization needed for all countries, and for a sustained period, if we are to stabilize global carbon emissions in the future. The main conclusion one can draw from the above is that the goal of climate stabilization at a level that entails a possible risk is technically and economically feasible. Given wide (though not total) consensus on this from the scientific community, why then is a global agreement to such a reduction path proving so difficult? Sharing the Costs Perhaps the most difficult question is how the costs of reduction should be shared. Even if they are estimated as being low in total, this does not mean Can Climate Change be Reversed under Capitalism? 1147 that all divisions of the costs will be low, or even if they are not very high, it does not follow that they will be acceptable to all the parties concerned. In Game Theory, experiments using ultimatum games have shown that parties prefer no deal to a deal they think is unfair, even if it leaves them better off (Oosterbeek et al., 2004). In some cases they could go for ‘strategic destruction’ when they are offered a bad deal. So the deal has to be perceived to be fair and that is proving to be a stumbling block. Developing countries see the problem as one created during the industrialization of the now developed countries and feel the latter should bear the greater burden. At the same time, developed countries (especially the USA) counter by saying that without reductions in emissions from developing countries the problem cannot be solved and anyway a fair solution requires all to share the burden. The issue comes down to the allocation of emissions rights. While it is undoubtedly true that reductions will have to be made in the developing countries if we are to achieve a halving of emissions by 2050, this is not the same as saying that emissions rights should be allocated for 2050 so that each country has half the rights it has today. In one sense (based on equality per capita), present rights are unevenly allocated with the ‘North’ having much more than the ‘South’. A capitalist system is based on well-defined property rights but as far as GHG emissions are concerned no such rights exist. In other areas where scarcity has arisen as a new phenomenon, capitalist economies have developed regulations and created implicit rights in ways that work. Where they have applied the Polluter Pays Principle, for example, they have allocated rights to the ambient environment to the pollutee, in many cases quite effectively; where they have applied the Beneficiary Pay Principle the rights are effectively allocated to the polluter. With climate change we can see the magnitude of the changes by looking at the implications of different allocation rules that would get us to a 50 per cent reduction in emissions by 2050. Table 1 is based on the POLES model, which analyses different energy and climate change scenarios with a very detailed Table 1. Projections for 2050 under Development Convergence and Climate Regulation Growth in GDP p.a. (1) GDP Per Capita in 2050 Emissions Allocated Emissions Used Net Transfer Price of CO2 (2) Units USA EU27 INDIA CHINA WORLD % US$ 95 MT CO2 MT CO2 US$ 95 Bn. US$ 2005 2 65,217 543 1,738 502 420 1 50,079 640 1,599 403 420 3 19,295 2,231 1,462 −323 420 3 45,847 1,860 3,324 615 420 2 24,166 12,156 12,156 0 420 Notes: (1) Growth rate for the last twenty years. (2) The POLES model reports the price in Euros. We have converted this into US$ using the exchange rate for 2005, when the Euro/US$ exchange rate was US$ = 0.823. Source: Author’s calculations based on the POLES Model. 1148 Anil Markandya specification of the energy sector and changes in that sector over time (Criqui et al., 2008). Essentially it estimates the energy needs for different countries under assumed growth scenarios, compares these with available supplies and then adjusts prices to match supply and demand with various constraints on local and regional energy flows. Table 1 reports the results of growth scenarios that would allow convergence between the fast growing developing countries and the developed countries by 2050. GDP is measured in PPP terms and for China the 2050 level goes up to 70 per cent of that of the US, whereas it is estimated at 24 per cent in 2010. Without going into the details, what is important is that the scenario assumes some degree of convergence between developing and developed countries. At the same time the model assumes a carbon market of the kind that would allow emissions reductions to be made where they are cheapest, thus exploiting market opportunities. Table 1 assumes that allocations are made on a pro capita basis, taking population increases into account. The results show that convergence can indeed be supported by the energy system, even under a tight carbon constraint. It requires the price of carbon to rise to around US$ 420/tCO2 (in today’s prices). While this may seem high, it is worth noting that such a price would amount to US$ 1 per litre of gasoline or US$ 3.2 per US gallon. This would amount to a doubling of the present US retail price, something that could surely be contemplated over the next forty years, given all the expected developments in efficiency, renewable sources, etc.5 Table 1 also reports the transfers different regions would need to make to purchase the required emissions rights. The USA, for example, would need to buy 1,200 Mt CO2, at a cost of US$ 500 billion (about the size of the 2009 base US defence budget). The EU27 would spend about US$ 400 billion, but more interestingly China would need to buy emission rights to the value of US$ 615 billion to support the level of development given here. Of these countries/regions only India would be a net recipient (of US$ 323 billion) but of course since net transfers are zero, other regions with lower growth and emissions needs would also benefit. Can these Changes Be Supported Institutionally? The most difficult question we face is whether institutions can be formed to support such large carbon markets and the creation of such a large number 5. It was noted by one referee that such a price increase would be significant for developing countries. I agree that if it were introduced today it would be quite unacceptable. However, we are talking about an increase in 2050. We hope two things will have happened by then: first, countries that are now poor will be much less poor; second, we will have developed alternatives to fossil fuels. Indeed if we have not, the future will be very bleak and the target reduction will not be achieved. Can Climate Change be Reversed under Capitalism? 1149 of rights that become increasingly valuable as targets are tightened, but that also lose value as alternatives to a carbon economy are developed. There is a considerable debate in the climate change literature as to whether the ‘market- based’ system for meeting the carbon targets should be a carbon tax or a permit trading scheme. Those who favour a permit scheme argue that it ensures a given environmental goal (emissions are reduced by the reduction in allowances, while with a tax the amount of reduction is uncertain) and it avoids the problems associated with increased taxation (politically difficult to agree upon even at a national level, let alone an international one). Those who favour carbon taxes employ essentially five arguments: (a) taxes will result in more predictable energy prices; (b) they can be implemented sooner and can apply more widely than cap and trade systems, which are easier to implement with large emitters; (c) they are transparent and more easily understandable to the general public; (d) they are less amenable to manipulation by special interests; and (e) taxes can be rebated to the public though dividends, while cap and trade systems are more likely to result in a flow of benefits to market participants, especially when the rights are not auctioned.6 The debate continues and shows little sign of being settled. At the end of the day, it probably matters less which of the instruments is chosen than that at least one of them is implemented. In fact it may well be possible to have both, with cap and trade applied to large emitting parties and carbon taxes applied to small emitters. Within the EU there is already a mixture of the two in some countries (the UK has both a carbon tax — a climate change levy — and is participant in the EU Emissions Trading Scheme, ETS). Ultimately, a kind of Gresham’s law is likely to prevail, with the more workable instrument dominating. It is important to have some kind of carbon market, for without it the costs of achieving the stringent reduction targets mentioned above will be much higher. All models that have been used to examine this question come up with the same conclusion: costs are likely to be halved if trading is restricted to ‘Annex I’ countries (broadly speaking, those that are developed now), and halved again if trading is opened up to all countries. Some might argue that experience to date has not shown such benefits, for example in the EU ETS. The ETS is, however, an early prototype; in the first trading period, participating enterprises were given (free) a generous allocation of rights, with little need to take measures to reduce emissions. As we enter the second trading period and as partial auctioning comes into force, the role of trading and the cost effectiveness of the scheme will become clearer. 6. A strong supporter of carbon taxes is Professor Stiglitz. His views are summarized in http://www.carbontax.org/blogarchives/2007/12/15/joseph-e-stiglitz-stands-upfor-carbon-tax/ (accessed 1 June 2009). An opposing view is expressed by other eminent economists such as Professor Sachs, Professor Stavins and others. See http://e360.yale. edu/content/feature.msp?id=2148 (accessed 1 June 2009). Views in favour of carbon taxes are also found in Nell et al. (2009). 1150 Anil Markandya There is also a concern that prices will be volatile (especially if a cap and trade scheme is adopted), resulting in disruptions and uncertainty in the economic system. However, governments can take measures to help stabilize such markets (for instance by holding a buffer stock of rights) and most large corporations are now sophisticated enough to use forward markets to hedge risks of fluctuations.7 The bigger problem in my view is agreement to a rights allocation scheme. It should be noted that such a scheme will be needed whether we go for a carbon tax or emissions trading as the instrument of choice. A one-shot move to a pro capita allocation could be too disruptive to large economies such as the US and those in the EU. Thus the shift has to take place over time (perhaps under a ‘contract and convergence’8 type programme). The issues here are trust and a sense of fairness, both of which are critical to the success of any economic system, including a capitalist one. It remains to be seen whether there are enough of these two ingredients for an accord to emerge. There are reasons for both hope and scepticism. CONCLUSIONS The theme of this debate is the prospect for stabilizing the climate in a world dominated by capitalist economies. I began by noting that ‘real’ capitalist systems do have lots of environmental regulations and large public sectors. There may be under-provisioning of some public goods, but it is not the case that such goods are ignored. If we look at environment-related goods and services, the sector has been growing and there have been important successes, achieved without compromising economic development. At the same time there are major problems that have not been tackled adequately. Often these are issues with an international dimension (pollutants that cross borders) and with a lack of immediacy, allowing policy makers to procrastinate. Once a problem has been raised in the public consciousness, however, and as long as there is openness and transparency, the prospects for effective action are quite good in capitalist economies, and certainly better than in centrally planned ones. In the case of climate stabilization, the main issues are the magnitude and the urgency of the changes required. While convergence through development between the North and the South is still possible with strict carbon targets, it does require agreement on the allocation of rights and on a system for trading such rights. To succeed, such a system and the institutions which implement it must be seen as fair by all parties: the biggest challenge will be achieving the necessary levels of trust. 7. For a detailed discussion of the role of option values and options markets as climate regulation instruments, see Golub and Markandya (2009). 8. See http://www.gci.org.uk/ (accessed 21 April 2009). Can Climate Change be Reversed under Capitalism? 1151 There are measures that can be taken to increase the chances of a fair solution being adopted. Perhaps most important among these is ensuring higher levels of development more broadly, so that the world is indeed moving toward greater convergence in living standards. In the immediate future, failure to meet the Millennium Development Goals, for example, would not send a positive message to developing countries about this longerterm objective. Second, the internalization of financial flows on the scale envisaged here, be it through taxes or permits, needs confidence building and evidence of effectiveness. These can only come gradually, and all parties have to agree that the institutions set up for the purpose can and do work. There is really no institution at present in which developed and developing countries manage large amounts of resources on an equal footing. Something along these lines will have to be created as a precursor to the kind of fair solutions envisaged in this essay. REFERENCES Almaganbetov, N. and V. Grigoruk (2008) ‘Degradation of Soil in Kazakhstan: Problems and Challenges’, in Lubomir Simeonov and Vardan Sargsyan (eds) Soil Chemical Pollution, Risk Assessment, Remediation and Security, pp. 309–20. New York and Dordrecht: Springer. Arrow, K. et al. (1995) ‘Economic Growth, Carrying Capacity, and the Environment’, Ecological Economics 15(2): 91–5. Coase, R. (1960) ‘The Problem of Social Cost’, Journal of Law and Economics 3: 1–44. Criqui, P. et al. (2008) ‘POLES 5: Prospective Outlook on Long-Term Energy Systems’. Grenoble: University of Grenoble, LEPII (mimeo). EEA (2007) Europe’s Environment: The Fourth Assessment. Copenhagen: European Environment Agency. Golub, A. and A. 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World Bank (2005) ‘Environmental Fiscal Reform: What Should be Done and How to Achieve It’. Washington, DC: The World Bank. Anil Markandya is Professor of Economics at the University of Bath and Ikerbasque Research Professor at the Basque Centre for Climate Change (BC3) in Bilbao, Spain. His mailing address is: Department of Economics and International Development, University of Bath, BA2 7AY, UK; e-mail: [email protected]. Copyright of Development & Change is the property of Blackwell Publishing Limited and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.