The Economics of Sustainability

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The Economics of Sustainability

• Climate Change

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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

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Three questions

• What is the problem?
• What will happen if I do nothing?
• What should I do about it?

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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

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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!!!

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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

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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

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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 thats considered fair?

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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

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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

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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

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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

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Further complications

• International aspect
• Have we ever solved an international issue?
• Free rider problem
• The Australian ETS is not an environmental policy
• Intergenerational equity

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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