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 And No 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