I have been asking anyone to participate in my survey on global climate policy for my dissertation. (See here
My dissertation will tackle the core argument on that “how seriously developed countries like Japan and EU should deal with climate change issue” from the view point of economic efficiency.
To be more concrete, this research will look into the following sub-questions by highlighting the likelihood of emerging international carbon tax, its tax rate and revenue use:
- To what extent are people over the world willing to accept the compensation for harming “far-distanced” victims by their pollutions as a form of “polluter pays responsibility”?
-How can climate economics contribute to this global consensus making?
Here comes the idea on the introductory part of my dissertation.
The first is my awareness of the issues.
Looking at Japan, the momentum for the current domestic climate policy has been derived from the ratification of Kyoto Protocol which requires industrialised nations to take a responsibility against climate change and Japan to reduce Green House Gasses (GHG) by 6% below the 1990 level by 2012. It is said that This national target is likely to be achieved thanks to the economic recession and the recent mega earthquake and tsunami in Japan.
On the other hand, climate change is regarded as a long-term issue (over 50 years). Thus, in order to keep climate policy ahead, global agreement on climate policy after 2012 (that is “Post-Kyoto protocol”). However, we have yet to reach a consensus on how strongly to take mitigation actions, as well as who to take a responsibility for accelerating climate change and how much to “support” the victims of climate change.
In this context, by focusing on social cost of carbon - internationally identical barometer, I would like to highlight to what extent people from different sectors such as academia, governments, NGOs, and the public over the world understand and approve international carbon tax as a global policy, comparing different opinions and suggesting policy implications in global climate policy arena.
The next is background.
Climate change is typical externality problem (Stern 2007). If so, the measure internalising the externalities of carbon emissions, comparing that internalised cost with abatement cost (i.e. CO2 reduction cost) and, choosing the cheaper one can achieve the most economic-efficient state. To be more precise, by comparing “marginal abatement cost of CO2 reduction by 1t” with “marginal damage cost by 1t CO2 emission”, we can decide which is more economically preferable. The equilibrium in both curves should optimise the social welfare and find the value (per 1t CO2) called social cost of carbon
The externalities in this context are the damages derived from climate change. Those are caused by flood, drought, tsunami, tidal wave, typhoon, sea level rise causing loss of land, change in temperature and precipitation leading to negative effect on agriculture and ecosystems, the spread of infections, and increase in refugees and conflict so on. Also, it is said that developing countries, those more dependant on the nature, especially Sub-Sahara and small islands nations are more likely to suffer the severe damages by climate change (IPCC 2007).
If these “economic” damages are clarified, we can weigh the marginal damages against marginal abatement costs for the optimisation. But it may be difficult in reality due to the characteristics of climate change – globally scaled and long-lasting.
First of all, the source of greenhouse gases and the damages of climate change are likely to be segregated each other both geographically and temporarily. Second, the damages of climate change appear wide-ranging from within the current market values to the values of ecosystem services, the price of heath and life, and the damages of social disorders by conflict, refugees and wars etc. Thus, capturing all the market and non-market values associated with the climate damages should be challenging especially in developing nations where the capacity building for research is relatively required.
Furthermore, the economic damages of climate change depends on the degrees of occurrence of climate change such as rise in temperature. Actually we have various estimate of occurrence of climate change (e.g. rise in temperature from less than 1°C to up to 10°C) even under the current emission level. But it is uncertain how much GHG are emitted into the air in the future as being affected by economic development and climate mitigation efforts which are not for sure. In other words, there is a small possibility that catastrophic destruction is raised in the future by climate change. So the problem is to what extent we should take into account of such risk (potential gigantic economic damages) for our decision-making.
From the temporal perspective, the long period of climate change may call for discount rate in economic analysis on the damages of climate change, which is really controversial. There are different concepts different economists primarily focus on – one guy likes actual market interest rate the most, another social discount rate, declining discount rate, and social equity between the current and future generations.
On the other hand, there is a limitation of estimating the marginal abatement cost. Firstly, it is needed to cover all the abatement measures with certain technology. Secondly, to calculate the cost of those measures in the long run, we need to project the degree of technological development and the expansion of such markets which strongly affect the cost.
Under those constraints, several research projects have estimate the damage costs and marginal abatement costs associated with GHG emissions. In addition, the current research has revealed that the damage costs will be diminished if adaptation measures are applied. Based on those figures, scientists such as IPCC and Stern review have estimated the carbon price (social cost of carbon) at the global scale.
If the carbon price imposes on carbon consumptions through namely carbon tax or emission trading systems, GHG emissions can be more or less reduced. However, it is needed to bear in mind that even after carbon pricing, the damage of climate change should emerge. Because CO2 emissions should not be stopped by internalising the externalities, resulting in deteriorating climate change.
Therefore, it may be required to redistribute the revenues raised by carbon pricing to the victims of climate change: this is the idea that, even though the damages occur, they are compensated for by cash. Based on this idea, United Nations (2010) has proposed that the world government especially an industrialised nation should introduce a carbon tax globally, financing for adaptation and mitigation actions in developing countries that are likely to incur the climate damages by its tax revenue.
By the way, there is no domestic and international scheme to rule the compensation for climate damages. So, one may claim that people who cause climate change do not necessarily compensate victims of climate change. In this context, there are several legal actions launched in the US, demanding large emitting industries to stop GHG emissions and indemnify damages in accordance with their responsibilities. Soon or later the judicial decisions will be made but the fact that carbon dioxide has been identified as pollutant by the Federal Court would be enormous push for the win. On the other hand, the backlash against the lawsuits should be the fact that the momentum of tackling climate change has decreased as the Democratic party lost the last election – such legal judgement is highly political.
At the international level, it may be needed to look into the precedent of a legal scheme that coordinates a request for indemnity from a nation which suffers pollutions caused by the other nation. If not, it also may be necessary to consider the possibility to establish such scheme from a legal perspective. If so, we may need to look at what kind of complaint-resolution entity should adjust a case for the indemnity.
Also, the world politics should be changed drastically – e.g. the expansion of the summit from G8 to G20, the downhill of US and dollars as key currency, emerging BRICS, the projection that Indonesia will pass Japanese economy soon or later. Africa should become more affluent. Under the current UN’s consensus rule, how is international adjustment made regarding climate change where developing countries have relatively “disadvantages”? What is the likelihood of obliging emitting countries to make a monetary payment to suffering countries in accordance with their GHG emissions? How about the surge of environmental NGOs supporting this idea under the name of “ climate debt
” in international political arena?
If there is a high risk of the occurrence, we may want to consider how and when to raise finance for such payment. For instance, if it is quite likely that such payment is obliged 20 years later, one idea would be to collect required amount of resources 20 years later by taxation or levy. However, this idea may be criticised as unfair between generations because such payment results from 20-year emissions from now on. On the other hand, the potential problem in raising compensation fund now for the future payment should be efficiency and opportunity cost – i.e. how to manage those financial resources for the next 20 years: how to get enough return by its investment, how to minimise the opportunity cost etc.
It seems that those factors are what we have to take into account when making a decision on climate policy from the view point of economic efficiency. From this perspective, climate policy should be stuck if…
1)Climate damage costs are tiny while abatement costs are huge,
2)The damage costs are huge in the future but those present values are small as a result of a discount rate, or
3)The present values of the damage costs are huge but it is not always necessary to care about those costs when emitting CO2, because there is (will be) no legal obligation to compensate to the victims.
These may be the main reasons why climate policy has not shown significant progress for a while.
Let me think of Japan’s case. The damage costs in Japan are relatively small. On the contrary, the abatement costs are regarded as the most expensive in the world. Thus, from the economic perspective, it may be better to take “moderate” climate actions domestically or contribute to cheaper climate actions abroad. The pledge to reduce GHG emissions by 25% by 2020 might be a “political suicide”.
This means that if one would like to take climate actions against regardless of economic efficiency, such momentum should be derived from the other sounds. One possibility is moral – some cannot stand with the fact that they pollute and harm poverty and ecosystems. Another is diplomatic strategy to show one’s presence – some nation’s contribution to the international community in climate change agenda can be achieved by its own pledge: that is to set up high domestic national target, and promise financial supports and technology transfer to poorer nations.
It can be thought that the other motivation is to create investment opportunities so as to stimulate the economic development. Especially for developed nations, there are already plentiful goods and services so development projects are relatively scarce compared to emerging countries namely China. Thus, it may be effective to transit to low carbon economy / green economy in order to create new demands . It is said that a large amount of money has been seeking for safe and highly profitable investment projects around the world.
The point here is whether climate investment is attractive rather than the other investment opportunities in this regard. That is, to stimulate the economy, high value-added monetary circulation is required but if there exist more profitable investment projects, investment on climate projects may yield the loss of opportunity. This matter is comparative so we need to look into the profitability of both climate investment and the any other investment around the world both at the present and in the future.
In addition, the matter of international competitiveness may come arise. Many claim that restricting CO2 emissions on industry, especially heave industry like utility, iron and cement which cannot help but consume CO2, should undermine the nation’s industrial competitiveness against the other countries’.
The matter of international carbon tax may be related to all the those issues thus should be really controversial. But understanding the perception of the people around the world on this should provide an important suggestion for how to tackle climate change globally. Now is the time when we need to argue above board and decide climate policy, based on such findings. Because climate change is buth only the international issue but also the domestic issue where we deal with.