The Economics of Sustainability

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 • 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