1. The Economics of Sustainability
Climate Change

2. 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

3. Three questions What is the problem? What will happen if I do nothing?
What should I do about it?

4. 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

5. 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!!!

6. 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

7. 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

8. 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?

9. 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

10. 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

11. 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

12. 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

13. Further complications
International aspect
Have we ever solved an international issue?
Free rider problem
The Australian ETS is not an environmental policy
Intergenerational equity

14. 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