Nova workboard

a blog from young economists at Nova SBE

The Economics of Climate Change

The problem: Climate Change

Climate Change, as of today, is one of the most important challenges humans face. It is a global problem that has been getting worse due to the way the Capitalist industrialized societies are organized, and the incentives that the system itself gives to the people. From short term profit oriented decisions to planned obsolescence production, we can clearly see how economic development in this system does not equate to human development.  Not only the way Neoliberalism applied to economic decisions in a Capitalist framework is fundamentally disruptive to humans as part of societies, in the sense that it corrupts our sense of cooperation, which is especially noticeable when the times urge for collective action decisions (such as dealing with Climate Change), but also disruptive to humans as a species, in the way its individualistic point of view disconnects us from the Earth and the environment we find ourselves in. That being said, there is still plenty of regulation and policy making that can and should be done to tackle the issue.

The present mechanism in the EU: Carbon Emissions Market

Our institutions have been dealing with the problem through the European Union Emission Trading Scheme (EU-ETS), which practically translates into a carbon emissions market. The market mechanism allowing for trade of monthly discharged permits is a cost-effective policy, i.e., this policy achieves the intended target (which in this case would be the reduction of emissions to the amount of the permits) at the lowest possible cost for firms, provided that some specific conditions fit reality. However, the interests of firms, which in this setting are the ones who make the decisions, may not be aligned with the best interests of societies as a whole.

We therefore present some of the most obvious disadvantages of this mechanism. One of them is the fact that it may be complicated to decide how many permits to allow.

Or in other words, in the current economic system, and the way the power to take such decisions is balanced towards big corporations, which are represented by interest groups and lobbies close to the Governments, the decisions taken may be of the best interest to the firms, but not to societies. As a very clear example, when the EU introduced a system of carbon trading, in the initial period of 2005-07 the price of carbon permits were driven down to zero, and after 2007 90% were free. We have reached the cumulus of firms profiting from this system, while maintaining their pollution levels. As a global problem it needs a global solution, and if carbon trading is introduced in some countries but not in others, it may cause production to shift to countries that did not implement the policy. Some countries may not start carbon trading for the fear other countries will be free riding on their efforts. This means that this mechanism will have a greater impact on those with low incomes and poor areas. So it becomes also an International Relations problem, which is aligned with the “global competitiveness” and “global economic growth” paradigm our current system has to offer.

The most urgent alternative: Carbon Tax

The application of a pollution tax, having enough information about the firms’ emissions and abatement costs, and being therefore able to decide the amount of the tax, also leads us to an efficient outcome. On top of that, the incentives created by this policy are more appropriate: firms get taxed by imposing an externality on others. This can lead firms to reduce emissions so as to reduce tax costs, or to evade taxation. Hence this policy requires monitoring and the administrative costs that go with it. This policy also allows the Government to generate tax revenues, which could be used to cover the aforementioned costs, and fund research and development on fossil fuel alternatives or other methods of production, in both firms and universities. Hence, this looks like the most adequate short term policy to address the issue considering the subject’s urgency.

However, there are some problems in implementing a carbon tax. As with the emissions market, the global character of the problem emerges: with this policy, production could also shift to countries with no or lower pollution taxes. Another problem is the fact that firms translate this tax into a price increase. This is especially likely in goods with inelastic demand, such as energy for example. This has redistribution effects, as the tax burden would pass from the profit seeking firms to the consumers.

So, even if well applied this mechanism could be much more effective to address the problem than the current market for emissions, the way current Governments are so intricately connected and influenced by big profit seeking corporations, makes it difficult to believe this would be the case. This is also because this policy is addressing a consequence (pollution) instead of the cause (profit seeking industrial production). For those reasons, it would require a lot of monitoring and enforcement. However, since we urgently need a short term alternative, taxation seems to be the best to address the issue.

Reflections on the future: Structural Change

Climate Change is always portrayed as one big global problem, which desperately needs a global solution. However, it is a systemic consequence of the way we economically organize and deal with resources. As Helena Norberg-Hodge puts it “when we hear about global warming as presented by Al Gore and others, these reasons for the dramatic increase in energy consumption and CO2 emissions are largely ignored. Instead, the discussion focuses on the isolated consumer and what they can do to reduce their individual contribution to climate change. There is no mention of the need to look at our systems of production, marketing, and consumption. No mention of the trade treaties that deregulated global businesses and banks, while over-regulating local and national businesses. No mention of the way that our taxes have subsidized global trade and global infrastructures, enabling the giants to outprice smaller, local businesses.”

In order to effectively address this topic, the discussion should be centered on the system by which we live (economically speaking), trade and distribute goods, and exploit resources. The fact that production decisions lay on the hands of only a small parcel of the population implies that the collective interest may not be pursued. However, it is worth mentioning some movements that have efficiently addressed this problem, with the clear conscience that the root of the problem is systemic, and are willing to tackle the causes of pollution with that in mind. One of these movements, not only focusing on reducing emissions, but also on reconnecting people with each other and the Earth, is Localism1, which aims to shift away from the corporate-led global economy toward strong local economies that provide the basis for greater security, prosperity, a healthier environment, and a more stable climate.

  1. To know more about Localism, take a look at for example, the official website of the International Society for Ecology and Culture, and producers of the movie and book The Economics of Happiness.

José Ricardo Sequeira – 729

Ana Martins – 734

Filipe Figueiroa – 765


There is a “Hydra” in hydraulic fracking

In Greek mythology the Lernaean Hydra was reptile-like monster that possessed multiple heads and had a poisonous breath. When a single head was decapitated it grew two new ones in its place and hence became an even bigger threat. Eventually Hercules who cauterised the stumps after decapitating it to prevent regeneration defeated it. A game-theoretic approach to the problem of the Learnaean Hydra without a Hercules would yield “don’t even try to chop off one of its heads” as a dominant strategy to not further increase its power.

Hydraulic fracking is a controversial yet widely used technique designed to recover gas and oil from shale rock. The underlying processes rely on the use and injection of various chemicals into the soil and come at partly unknown costs to the environment during the regular exploitation process and accidents. Hydraulic fracking’s “poisonous breath” is constituted of air pollution, water contamination, exposure to radioactive and other carcinogenic chemicals and in rare cases even seismic activity. Albeit the mentioned possible threats the full scope of consequences is still unknown and there exist more than 2.7 million fracking sites as of 2013.

In this light the Scottish government issued a moratorium on hydraulic fracking quoting the Scottish Minister for Energy “the ban would last however long it took to carry out a full public consultation on the extraction of shale gas and research into its impact on the environment and public health”.

We support the moratorium as allowing further exploitation using hydraulic fracking draws an imperfect analogy to the ancient Hydra as the number of exploitations sites/wells will continuously grow at unknown and not quantifiable consequences. Therefore as the gametheoretic solution to the ancient Hydra, fracking should not be touched until a modern Hercules in the form of scientists and engineers arises to set bounds to it. Before possible externalities are not fully quantifiable and/or risks associated with fracking are minimized by introducing more developed processes it shall be left untouched.

The drastic measure of completely banning hydraulic fracking is supportable as both global externalities as leakage of gas and other particles to the atmosphere constitute a global environmental problem and local externalities as flaming kitchen faucets and groundwater contamination are known but costs associated with those externalities not yet fully quantifiable. As we lack information about damage and abatement costs other common tools used in environmental economics as taxes on emissions, the introduction of a cap-and-trade system or simply by enforcing the property rights of those suffering the externalities are doomed to fail. With this massive lack of information a tax-solution would most likely not be cost-efficient.

#685 and #692

Cartel in European Envelopes | Executive Summary

Executive Summary

In December 2014 the European Commission concluded that 5 companies, namely Bong (Sweden), GPV and Hamelin (France), Mayer-Kuvert (Germany) and Tompla (Spain), had infringed Article 101 of the Treaty and Article 53 of the EEA Agreement by forming a cartel. The relevant markets in question are the European markets for standard and special printed envelopes. In both markets the geographic dimension is coincident, and although evidences suggest practices of cartelization took place in six European countries (Denmark, France, Germany, Norway, Sweden and UK), however it involved also customers from other countries. As to product dimension, the catalogue envelope market comprehends standard non-personalized envelopes of all sizes and colors. The special printed envelope product market relates to special printed envelopes (specially designed to meet customer’s specifications), also for all sizes and colors available.

Within this market the behavior of the participants of the collusion was not compliant with the regulations in Article 101 of the Treaty and Article 53 of the EEA Agreement which prohibit anti-competitive behavior.

According to the report of the Commission, there has been a single and continuous infringement of the law. The members had a single goal – customer´s allocation and price coordination. The cartel started on 8 October 2003 in an official industry meeting in Athens and continued until 22 April 2008, when the members met in Hofheim (Germany), and thus covered a specific period of time without breaks. Furthermore, all the participants were aware of the geographical scope of the cartel and finally, the contact between the participants was frequent. There were both multi and bilateral contacts, consisting physical meetings between members with the purpose of agreeing on the functioning of their collusion. Regarding those events, the Commission concluded that the participants engaged in agreements and concerted practices, which are forbidden under European vertical restraints regulations. Competitors and costumers were influence by their behavior differently than under perfect competition.

The main harm caused by this infringement was hindering competition. Instead of
competing with each other, these companies agreed to artificially increase prices for
envelopes across a number of member states. (EU Competition Commissioner, 2014). Firms were using illicit anti-competitive practices – allocation of customers and sales volumes, price coordination, price fixing, exchange of information and bid-rigging of crossborder tenders – competitive distortions that have the capability of damaging both the consumers and other firms operating in the market. This market is also characterized by several large consumers sourcing their envelopes from different countries. Since this cartel operated in EU/EFTA members, it could have a serious effect in the trade flow, in both trade organizations, as it could hamper or disturb it and remove the benefits of the wellestablished freedom of trade in both organizations.

Even though the Commission ascertained the gravity of anti-competitive behavior as very high, the imposed fines have been adjusted due to the participant’s involvement, its cooperation in regard of the Leniency Notice and the participant’s ability to pay.

Competition Policy | Group 5