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


Author: studentnovasbe

Master student in Nova Sbe

Comments are closed.