Download Climate Change Policies

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
0°C
Food
Water
Global temperature change (relative to pre-industrial)
1°C
2°C
3°C
4°C
5°C
Falling crop yields in many areas, particularly
developing regions
Falling yields in many
Possible rising yields in
developed regions
some high latitude regions
Small mountain glaciers
disappear – water
supplies threatened in
several areas
Significant decreases in water
availability in many areas, including
Mediterranean and Southern Africa
Sea level rise
threatens major cities
Ecosystems
Extensive Damage
to Coral Reefs
Rising number of species face extinction
Extreme
Rising intensity of storms, forest fires, droughts, flooding and heat waves
Weather
Events
Risk of Abrupt and
Increasing risk of dangerous feedbacks and
Major Irreversible
abrupt, large-scale shifts in the climate system
Changes
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.
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Consider combinations of policies
Recognise the different stakeholders
There are costs of action and costs of inaction
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
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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
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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