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The Economics of Sustainability

Explore the basics of climate change policy development, emphasizing its urgency and market failures. Learn about the economic, social, and environmental costs of global warming, the consequences of inaction, and mitigation options. Dive into the three key elements of policy making: effectiveness, efficiency, and equity. Delve into command and control regulations, market-based mechanisms like carbon tax and emissions trading, and the challenges of ensuring equity in emission reduction strategies. Consider the complexities of the international aspect, addressing free rider problems, intergenerational equity, uncertainties, and impacts of climate change policies on both local and global scales.

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The Economics of Sustainability

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  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

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