Climate change policy must be radical and globally coordinated
COP27 is being held this month in Sharm El Sheik. These annual United Nations conferences are the primary opportunity for world leaders to collaborate on political commitments in the collective push towards global climate goals. There is usually a big gap between the objectives adopted by the participants and their eventual commitments. Politics, bargaining, and rampant short-termism impede all truly radical progress.
The emission of greenhouse gases is the prime example of a “negative externality on a public good”. In plain language, they are individuals who act in their own interest and do not consider the detriment of these actions on a shared resource, the environment.
Although we all collectively depend on a stable climate, people choose to “freeride” rather than adapt their behavior. We (individuals and companies) consider the costs and benefits to ourselves of reducing our carbon footprint and recognize that the benefit of any small contribution we can make is minimal and far outweighs the additional cost and inconvenience. This happens every year, globally, at COP conferences. Modi, Biden, Sunak (if he runs) and every other world leader would benefit from coordinated climate policy, but they fear the political consequences of imposing additional costs on the populations they represent. Instead, they do the bare minimum and “free-ride” on other nations’ policies.
When everyone takes this individualistic approach, we emit excessively and cause incalculable damage to the climate and therefore to humanity. Individual decisions lead to bad outcomes for today’s and tomorrow’s society. This presents a pessimistic, but sadly realistic, view of human nature.
Hoping for individual altruism and behavioral changes is naive, but we have alternatives. The first solution is scientific. Innovation in new technologies and systems that are both cheaper and cleaner than existing dirty solutions is the ideal long-term solution. However, there are substantial switching costs and significant lead times for this to happen. Our current energy, transport and industrial systems rely on fossil fuels.
The second solution is economical. By changing the incentives for individuals, we can reduce emissions and catalyze scientific innovation. We can either set a maximum level of emissions and require emission permits, or tax emissions. By imposing a private cost on individuals for emitting greenhouse gases, policy makers can create conditions such that it is in their own interest to act in ways that limit climate damage.
There are many carbon tax and trading systems, but there are problems. The first is that the price they impose on carbon is much too low, either because the tax is not high enough or because there are too many permits to pollute. Below, we can see how the price applied to shows has changed over time across various programs. They have increased but remain well below the roughly $135 that would be needed to encourage sufficient emission reductions. Although some jurisdictions have sufficient carbon prices, such as Sweden at the top of the graph, prices outside Western countries tend to be much lower or even non-existent. Higher prices on emissions are needed to reduce emissions today and incentivize innovation in alternative green technologies.
There is also a problem of embedded emissions, the price of carbon in Sweden is high but the price charged on the carbon of the goods consumed in Sweden is not. The manufacturing heart of the global economy is in South and East Asia, where carbon is undervalued. When a Swede in Stockholm buys a table called Vittsjö from IKEA, nothing is more Swedish, right? But the table is probably made in China or Malaysia. IKEA and Swede actually pay a much lower price on production emissions. Embedded emissions mask the full environmental impact of Western consumption and limit the potential for disjointed climate policy/
The coverage of these schemes is also insufficient. Prior to 2000, almost no shows were associated with a license fee. Today, we are about 22% of global greenhouse gas emissions covered. An improvement, but we are far from the 100% which should be our objective.
In order to achieve real progress, everyone must be sufficiently incentivized to protect the climate. The ultimate goal of a climate conference such as COP27 should be the coordination of governments to implement a common global tax or “cap and trade” system on all emissions that is strict enough to incentivize and catalyze the transition to the green economy that is in our collective interest and that of our descendants.