Global warming, an economic challenge5 reading minutes

Le Regard Libre N° 27 - Nicolas Jutzet

There's a consensus among specialists on the subject: if we do nothing, we'll soon be facing the serious consequences of an uncontrolled rise in average temperature. The IPCC (Intergovernmental Panel on Climate Change) predicts an average temperature rise of 2.5° to 7.8° C. by the end of the century. The scientific consensus postulates that the upper limit that would be manageable and acceptable for mankind is reduced to an increase of 1.5° to 2° C. maximum. There is also consensus on the human origins of global warming.

Achieving this goal will require considerable effort. The task promises to be arduous, as neither population growth nor the legitimate desire of emerging countries to achieve an economic level similar to that of today's developed countries will help. Quite the contrary, in fact. The problem has been recognized since the end of the twentieth century^th century, but despite the good intentions of the various parties involved, it's hard to identify any real global movement to change the situation. What are the reasons for this stagnation?

1° Selfishness towards future generations

The costs generated by any strategy aimed at mitigating climate change are perceptible in the short term, while its effects will be felt over the long term, and not necessarily at home. In fact, it asks the current generation to finance a policy that will not bring them any direct return, and which may also benefit their neighbor, who continues to lead a lifestyle that is damaging to the ecosystem.

2° The stowaway problem

For an economist, the climate can be classified as a «common good», whose criteria are: non-exclusion (no one can be excluded from its use) and non-rivalry (use by one individual does not prevent the same or a different use by another). To put it explicitly, no one can prevent another from breathing the air of a country. However, this approach does not take into account the potential scarcity of resources in the event of over-exploitation, which would result in a «tragedy of the commons» in the long term. Let's take fishing or hunting as an example of this tragedy of the commons. It's impossible to «exclude» someone from fishing. (At most, it's possible to regulate the flow slightly by making access to a hunting/fishing license extremely demanding. It should be noted, however, that this approach, which at first seems to make good sense, is a false good idea. A fisherman who loses time and money to obtain his license will then want to make the most of this investment, and therefore fish more than he would have done with easier access.) But catching one fish reduces the number of prey available to others. This damage is called an externality. To avoid a «tragedy of the commons» - in our model, this would be the extinction of a species or a reduction in the number of fish (which, incidentally, makes fishing even more attractive to a fisherman, as a rare commodity has a much higher commercial value than an abundant one... a real vicious circle) - we need to internalize this externality. In other words, making the person who creates the damage pay for it directly. To return to the issue of global warming, without a global solution that treats each player fairly and charges for CO₂ on a global scale, there is no indisputable reason for any one country to lead by example, so great are the incentives to take on the role of «free rider», i.e. to profit from the efforts of others.

3° Competition with other countries

Introducing ecological taxation on a purely national level increases the cost of labor, and places companies in country A at a competitive disadvantage. In fact, the laudable intention so often brandished of wanting to «save the planet» can paradoxically turn into a social and ecological catastrophe. We then speak of dumping ecological. This term refers to relocation to a country with lower pollution standards. A unilateral policy therefore often lacks ecological legitimacy. Unfortunately, this approach is usually only recognized by the «climate-skeptic» part of the population, and serves as an excuse to do nothing. Other, more Machiavellian factors mean that countries are constantly delaying progress towards global management of global warming. The higher a country's carbon intensity, the stronger its position (i.e., the more it can hope to receive compensation for its efforts, either in monetary form or by facilitating access to the «right to pollute»). Fortunately, there are a number of factors which, despite all the weaknesses mentioned above, make it worthwhile to pursue an ambitious climate policy at national level. Replacing a coal-fired power plant with a «greener» means of production can improve energy efficiency, thereby reducing the impact on the local population. This is why China massively supports the production of photovoltaic panels.

The solution is either global or not

As mentioned above, if we are to succeed in overcoming the problem of global warming, we need to «internalize» the damage created by the various economic players. However, the current approach, based on the idea that the solution will come through constraint and strong action by governments, is a failure. According to Jean Tirole, this approach is favored because it allows governments to appear involved in the fight against global warming. However, it has been proven that so-called «dirigiste» policies unnecessarily amplify the cost of environmental policies.

To put an end to the standstill and take real action, only one solution seems credible to date: introduce a price mechanism, either by taxing carbon or by setting up a global market in «emission rights» (better known as the right to pollute). There are many incentives to reject the introduction of this «universal tax». For a polluting country, it would mean damaging additional costs, hence the desire to play the role of stowaway. To reduce this incentive, the World Trade Organization could be empowered to consider non-compliance with a global agreement on emissions taxation as an act of «dumping".« dumping Another problem is that, for »emerging« countries, this would be a tax that would put the brakes on their growth. Another problem is that, for »emerging« countries, this would be a tax that would slow down their growth, which may seem unfair given that developed countries have built their economies »on the backs of nature«. The idea of a green fund that would enable North-South transfers or easier access to »emission permits" could remedy this without calling into question the logic of a global system.

Write to the author : nicolas.jutzet@leregardlibre.com

Photo credit: © decision-achats.fr