Tag: game theory

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Climate tipping points


Politicians, business leaders, climate scientists, interest groups and journalists from across the world have been meeting in Dubai at the COP28 climate summit (the 28th annual meeting of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC)). The meeting comes at a time when various climate tipping points are being reached or approached – some bad, but some good. Understanding these tipping points and their implications for society and policy requires understanding not only the science, but also the various economic incentives affecting individuals, businesses, politicians and societies.

Tipping points

A recent report (see first reference in articles section below) identified various climate tipping points. These are when global temperatures rise to a point where various domino effects occur. These are adverse changes to the environment that gather pace and have major effects on ecosystems and the ability to grow food and support populations. These, in turn, will have large effects on economies, migration and political stability.

According to the report, five tipping points are imminent with the current degree of global warming (1.2oC). These are:

  • Melting of the Greenland ice sheet;
  • Melting of the West Antarctic ice sheet;
  • Death of warm-water coral reefs;
  • Collapse of the North Atlantic Subpolar Gyre circulation, which helps to drive the warm current that benefits Western Europe;
  • Widespread rapid thawing of permafrost, where tundra without snow cover rapidly absorbs heat and releases methane (a much more powerful source of global warming than CO2).

With global warming of 1.5oC, three more tipping points are likely: the destruction of seagrass meadows, mangrove swamps and the southern part of the boreal forests that cover much of northern Eurasia. As the temperature warms further, other tipping points can interact in ways that drive one another, resulting in tipping ‘cascades’.

But the report also strikes an optimistic note, arguing that positive tipping points are also possible, which will help to slow global warming in the near future and possibly reverse it further in the future.


The most obvious one is in renewable energy. Renewable power generation in many countries is now cheaper than generation from fossil fuels. Indeed, in 2022, over 80% of new electricity generation was from solar and wind. And as it becomes cheaper, so this will drive investment in new renewable plants, including in small-scale production suitable for use in developing countries in parts not connected to a grid. In the vehicle sector, improved battery technology, the growth in charging infrastructure and cheaper renewable sources of electricity are creating a tipping point in EV take-up.

Positive tipping points can take place as a result of changing attitudes, such as moving away from a meat-intensive diet, avoiding food waste, greater use of recycling and a growth in second-hand markets.

But these positive tipping points are so far not strong enough or quick enough. Part of the problem is with economic incentives in market systems and part is with political systems.

Market failures

Economic decisions around the world of both individuals and firms are made largely within a market environment. But the market fails to take into account the full climate costs and benefits of such decisions. There are various reasons why.

Externalities. Both the production and consumption of many goods, especially energy and transport, but also much of agriculture and manufacturing, involve the production of CO2. But the costs of the resulting global warming are not born directly by the producer or consumer. Instead they are external costs born by society worldwide – with some countries and individuals bearing a higher cost than others. The result is an overproduction or consumption of such goods from the point of view of the world.

The environment as a common resource. The air, the seas and many other parts of the environment are not privately owned. They are a global ‘commons’. As such, it is extremely difficult to exclude non-payers from consuming the benefits they provide. Because of this property of ‘non-excludability’, it is often possible to consume the benefits of the environment at a zero price. If the price of any good or service to the user is zero, there is no incentive to economise on its use. In the case of the atmosphere as a ‘dump’ for greenhouse gases, this results in its overuse. Many parts of the environment, however, including the atmosphere, are scarce: there is rivalry in their use. As people increase their use of the atmosphere as a dump for carbon, so the resulting global warming adversely affects the lives of others. This is an example of the tragedy of the commons – where a free resource (such as common land) is overused.

Inter-generational problems. The effect of the growth in carbon emissions is long term, whereas the benefits are immediate. Thus consumers and firms are frequently prepared to continue with various practices, such as driving, flying and using fossil fuels for production, and leave future generations to worry about their environmental consequences. The problem, then, is a reflection of the importance that people attach to the present relative to the future.

Ignorance. People may be contributing to global warming without realising it. They may be unaware of which of the goods they buy involve the release of carbon in their production or how much carbon they release when consumed.

Political failures

Governments, whether democratic or dictatorships, face incentives not to reduce carbon emissions – or to minimise their reduction, especially if they are oil producing countries. Reducing carbon involves short-term costs to consumers and this can make them unpopular. It could cost them the next election or, in the case of dictatorships, make them vulnerable to overthrow. What is more, the oil, coal and gas industries have a vested interest in continuing the use of fossil fuels. Such industries wield considerable political power.

Even if governments want the world to reduce carbon emissions, they would rather that the cost of doing so is born less by their own country and more by other countries. This creates a prisoner’s dilemma, where the optimum may be for a large global reduction in carbon emissions, but the optimum is not achieved because countries individually are only prepared to reduce a little, expecting other countries to reduce more. Getting a deal that is deemed ‘fair’ by all countries is very difficult. An example is where developing countries, may feel that it is fair that the bulk of any cuts, if not all of them, should be made by developed countries, while developed countries feel that fixed percentage cuts should be made by all countries.

Policy options

If the goal is to tackle climate change, then the means is to reduce the amount of carbon in the atmosphere (or at the least to stop its increase – the net zero target). There are two possibilities here. The first is to reduce the amount of carbon emissions. The second is to use carbon capture and storage or carbon sequestration (e.g. through increased forestation).

In terms of reducing carbon emissions, the key is reducing the consumption of carbon-producing activities and products that involve emissions in their production. This can be achieved through taxes on such products and/or subsidies on green alternatives (see the blog ‘Are carbon taxes a solution to the climate emergency?‘). Alternatively carbon-intensive consumption can be banned or phased out by law. For example, the purchase of new petrol or diesel cars cold be banned beyond a certain date. Or some combination of taxation and regulation can be used, such as in a cap-and-trade system – for example, the EU Emissions Trading System (EU ETS) (see the blog ‘Carbon pricing in the UK‘). Then there is government investment in zero carbon technologies and infrastructure (e.g. electrifying railways). In practice, a range of policy instruments are needed (see the blog ‘Tackling climate change: “Everything, everywhere, all at once”‘).

With carbon capture, again, solutions can involve a mixture of market mechanisms and regulation. Market mechanisms include subsidies for using carbon capture systems or for afforestation. Regulation includes policies such as requiring filters to be installed on chimneys or banning the felling of forests for grazing land.

The main issue with such policies is persuading governments to adopt them. As we saw above, governments may be unwilling to bear the short-term costs to consumers and the resulting loss in popularity. Winning the next election or simple political survival may be their number-one priority.

COP28

The COP28 summit concluded with a draft agreement which called for the:

transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science.

This was the first COP summit that called on all nations to transition away from fossil fuels for energy generation. It was thus hailed as the biggest step forward on tackling climate change since the 2015 Paris agreement. However, there was no explicit commitment to phase out or even ‘phase down’ fossil fuels. Many scientists, climate interest groups and even governments had called for such a commitment. What is more, there was no agreement to transition away from fossil fuels for transport, agriculture or the production of plastics.

If the agreement is to be anything more than words, the commitment must now be translated into specific policy actions by governments. This is where the real test will come. It’s easy to make commitments; it’s much harder to put them into practice with policy measures that are bound to impose costs on various groups of people. What is more, there are powerful lobbies, such as the oil, coal and steel industries, which want to slow any transition away from fossil fuels – and many governments of oil producing countries which gain substantial revenues from oil production.

One test will come in two years’ time at the COP30 summit in the Amazonian city of Belém, Brazil. At that summit, countries must present new nationally determined commitments that are economy-wide, cover all greenhouse gases and are fully aligned with the 1.5°C temperature limit. This will require specific targets to be announced and the measures required to achieve them. Also, it is hoped that by then there will be an agreement to phase out fossil fuels and not just to ‘transition away’ from them.

Reasons for hope

Despite the unwillingness of many countries, especially the oil and coal producing countries, to phase out fossil fuels, there are reasons for hope that global warming may be halted and eventually even reversed. Damage will have been done and some tipping points may have been reached, but further tipping points may be averted.

The first reason is technological advance. Research, development and investment in zero carbon technologies is advancing rapidly. As we have seen, power generation from wind and solar is now cheaper than from fossil fuels. And this cost difference is likely to grow as technology advances further. This positive tipping point is becoming more rapid. Other technological advances in transport and industry will further the shift towards renewables and other advances will economise on the use of power.

The second is changing attitudes. With the environment being increasingly included in educational syllabuses around the world and with greater stress on the problems of climate change in the media, with frequent items in the news and with programmes such as the three series of Planet Earth, people are becoming more aware of the implications of climate change and how their actions contribute towards the problem. People are likely to put increasing pressure on businesses and governments to take action. Growing awareness of the environmental impact of their actions is also affecting people’s choices. The negative externalities are thus being reduced and may even become positive ones.

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Questions

  1. Use a diagram to demonstrate the effects of negative externalities in production on the level of output and how this differs from the optimum level.
  2. Use another diagram to demonstrate the effects of negative externalities in consumption on the level of consumption and how this differs from the optimum level.
  3. What was agreed at COP28?
  4. What incentives were included in the agreement to ensure countries stick to the agreement? Were they likely to be sufficient?
  5. What can governments do to encourage positive environmental tipping points?
  6. How may carbon taxes be used to tackle global warming? Are they an efficient policy instrument?
  7. What can be done to change people’s attitudes towards their own carbon emissions?
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Tackling climate change: ‘Everything, everywhere, all at once’

The United Nations International Panel on Climate Change (IPCC) has just published its most comprehensive report so far. It finds that ‘human activities, principally through emissions of greenhouse gases, have unequivocally caused global warming’. This has led to widespread and rapid changes in climate and biodiversity and to more extreme weather patterns, such as droughts, floods and hurricanes. What is more, the distribution of these effects is uneven, with communities who have contributed the least to current climate change being disproportionately affected.

At the 2015 COP21 climate change conference in Paris (see also), it was agreed to adopt policies to limit the increase in global temperatures to ‘well below’ 2°C above pre-industrial levels and to make an effort to limit it to 1.5°C. Global temperatures have already risen 1.1°C above 1850–1900 levels and are set to reach 1.5°C in the early 2030s. Every increment of global warming will intensify ‘multiple and concurrent hazards’.

Deep, rapid and sustained reductions in emissions would slow down the rise in global temperatures, but even with such reductions, temperatures will still exceed 1.5°C in the next few years and, even under the best-case scenario, would not fall below 1.5°C again until the end of the 21st century. Under more pessimistic scenarios, global temperatures could rise to 2.7°C above pre-industrial levels by the end of the century under an intermediate greenhouse gas emissions scenario and to 4.4°C under a very high emissions scenario. Anything above 2°C would be likely to have catastrophic effects. The longer countries wait to take action, the greater the rise in global temperatures and hence the greater the damage and the more costly it will be to rectify it.

‘For any given future warming level… projected long-term impacts are up to multiple times higher than currently observed (high confidence). Risks and projected adverse impacts and related losses and damages from climate change escalate with every increment of global warming (very high confidence). Climatic and non-climatic risks will increasingly interact, creating compound and cascading risks that are more complex and difficult to manage (high confidence).’ (Paragraph B2)

But the report is not all ‘doom and gloom’. It is possible to limit global warming to 1.5°C or only a little over by making rapid, deep and, in most cases, immediate greenhouse gas emissions reductions in all sectors and reaching net zero emissions in the early 2050s. Science and technology have the answers – answers that are now much cheaper and more available than back in 2015 when the 1.5°C target was agreed. But what it does require is doing ‘everything, everywhere, all at once’. And that requires political will and the right economic incentives.

The politics and economics of achieving net zero

In terms of the politics, there is general global agreement by governments about the likely effects of climate change. And most governments agree that action needs to be taken. However, there are three key political problems.

The first is that the costs of action will be borne now, while the benefits of action will accrue over a much longer period of time. This links to the second problem – the mismatch between the lives of governments and the long-term effects of climate change. If governments put off doing anything now and merely promise that something will be done in the future, they will not have to take unpopular actions, such as raising taxes on energy, private transport and certain goods or banning various activities. Future governments will have to sort things out, by when, although the problems will be greater, the existing politicians will no longer be in power.

The third problem concerns the distribution of the costs and benefits of action. The major emitters of carbon are the rich countries, while the major sufferers are poor people in countries subject to drought, flooding and rising sea levels. Not surprisingly, who should cut down on emissions and pay for the mitigation necessary in many of the poorer countries is a difficult political issue, which is why it’s much easier to say what needs to be achieved overall than precisely what measures should be taken by which countries.

These problems reflect the fact that many, if not most, of the environmental costs of production and consumption are external costs – costs borne, not by the direct producer or consumer, but by other people at other places and/or in the future.

Nevertheless, the relative costs of moving to greener production and consumption are falling. The costs of renewable energy, including solar power, onshore and offshore wind and hydroelectric power are falling relative to that generated from fossil fuels. At the same time, the take up of electric cars is likely to continue rising as battery technology improves. This does, of course, require an increase in charging infrastructure. Domestic heat pump technology is improving and home insulation methods are becoming more efficient.

Persuading consumers and firms to take account of environmental externalities could in part be achieved by education. It makes it much easier for politicians to take appropriate action now if their populations are on board. There has been increasing awareness over the years of the environmental impact of people’s actions. People have become more willing to take responsibility for the world that future generations will inherit. This is helped both by education in schools and colleges and by frequent items in the media.

But incentives also have a major part to play. To internalise environmental externalities, external costs could be taxed and external benefits subsidised.

The effect of a carbon tax on production

The use of taxes to reduce activities with negative environmental externalities is illustrated in the diagram (click here for a PowerPoint). It takes the case of carbon emissions from coal-fired electricity generation in a large country. To keep the analysis simple, it is assumed that all electricity in the country is generated from coal-fired power stations and that there are many such power stations, making the market perfectly competitive.

It is assumed that all the benefits from electricity production accrue solely to the consumers of electricity (i.e. there are no external benefits from consumption). Marginal private and marginal social benefits of the production of electricity are thus the same (MPB = MSB). The curve slopes downwards because, with a downward-sloping demand for electricity, higher output results in a lower marginal benefit (diminishing marginal utility).

Competitive market forces, with producers and consumers responding only to private costs and benefits, will result in a market equilibrium at point a in the diagram: i.e. where demand equals supply. The market equilibrium price is P0 while the market equilibrium quantity is Q0. However the presence of external costs in production means that MSC > MPC. In other words, MEC = b – a.

The socially optimal output would be Q* where P = MSB = MSC, achieved at the socially optimal price of P*. This is illustrated at point d and clearly shows how external costs of production in a perfectly competitive market result in overproduction: i.e. Q0 > Q*. From society’s point of view, too much electricity is being produced and consumed.

If a carbon tax of d – c is imposed on the electricity producers, it will now be in producers’ interests to produce at Q*, where their new private marginal costs (including tax) equals their marginal private benefit.

But this brings us back to the politics of measures to reduce emissions. People do not like paying higher taxes. In his latest Budget, the UK Chancellor, Jeremy Hunt, decided not to raise fuel duties by the 12p that had been previously planned, despite fuel prices having recently fallen. Meanwhile, charging prices for electric cars have risen.

Other economic measures

A simpler method for dealing with environmental externalities is ban certain activities that omit CO2. For example, in the UK there will be a ban on the sale of new petrol and diesel cars and vans from 2030 (with the exception of some low-emission hybrids until 2035). In the EU there will be a similar ban from 2035. Clearly, such measures are only suitable when there are non-emitting alternatives.

Another alternative is a cap-and-trade system, such as the European Emissions Trading Scheme. It involves setting quotas for emissions and allowing firms which manage to cut emissions to sell their surplus permits to less efficient firms. This puts a price pressure on firms to be more efficient. But the quotas (the ‘cap’) must be sufficiently tight if emissions are going to be cut to desired levels. Nevertheless, it is an efficient way of cutting emissions as it gives a competitive advantage to low-emission producers.

Conclusion

If the problem of global warming is to be limited to 1.5°C, or only very little above, multiple solutions will need to be found and there must be a combination of political will, economic incentives and the mobilisation of scientific and technical know-how. As the Secretary-General of the United Nations, António Guterres, stated in launching the new report:

This report is a clarion call to massively fast-track climate efforts by every country and every sector and on every timeframe. In short, our world needs climate action on all fronts – everything, everywhere, all at once.

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Questions

  1. Why might countries not do ‘everything, everywhere, all at once’ to avert climate change?
  2. What might an optimist conclude from the ICC report?
  3. To what extent is climate change an economic problem?
  4. On a diagram similar to the one above, show how a subsidy could be used to internalise positive externalities.
  5. How might countries reduce the consumption of fossil fuels in the most efficient way? Are they likely to want to do this? Explain.
  6. Is a ‘cap-and-trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
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Good COP and bad COP: reflections on the Glasgow climate change conference


The Climate Change Pact agreed by leaders at the end of COP26 in Glasgow went further than many pessimists had forecast, but not far enough to meet the goal of keeping global warming to 1.5°C above pre-industrial levels. The Pact states that:

limiting global warming to 1.5°C requires rapid, deep and sustained reductions in global greenhouse gas emissions, including reducing global carbon dioxide emissions by 45 per cent by 2030 relative to the 2010 level and to net zero around mid-century, as well as deep reductions in other greenhouse gases.

So how far would the commitments made in Glasgow restrict global warming and what actions need to be put in place to meet these commitments?

Short-term commitments and long-term goals

According to Climate Action Tracker, the short-term commitments to action that countries set out would cause global warming of 2.4°C by the end of the century, the effects of which would be calamitous in terms of rising sea levels and extreme weather.

However, long-term commitments to goals, as opposed to specific actions, if turned into specific actions to meet the goals would restrict warming to around 1.8°C by the end of the century. These long-term goals include reaching net zero emissions by certain dates. For the majority of the 136 countries agreeing to reach net zero, the date they set was 2050, but for some developing countries, it was later. China, Brazil, Indonesia, Russia, Nigeria, Sri Lanka and Saudi Arabia, for example, set a date of 2060 and India of 2070. Some countries set an earlier target and others, such as Benin, Bhutan, Cambodia, Guyana, Liberia and Madagascar, claimed they had already reached zero net emissions.

Despite these target dates, Climate Action Tracker argues that only 6 per cent of countries pledging net zero have robust policies in place to meet the targets. The problem is that actions are required by firms and individuals. They must cut their direct emissions and reduce the consumption of products whose production involved emissions.

Governments can incentivise individuals and firms through emissions and product taxes, through carbon pricing, through cap-and-trade schemes, through subsidies on green investment, production and consumption, through legal limits on emissions, through trying to change behaviour by education campaigns, and so on. In each case, the extent to which individuals and firms will respond is hard to predict. People may want to reduce global warming and yet be reluctant to change their own behaviour, seeing themselves as too insignificant to make any difference and blaming big business, governments or rich individuals. It is important, therefore, for governments to get incentive mechanisms right to achieve the stated targets.

Let us turn to some specific targets specified in the Climate Change Pact.

Phasing out fossil fuel subsidies

Paragraph 20 of the Climate Change Pact

Calls upon Parties to accelerate … efforts towards the … phase-out of inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable in line with national circumstances and recognizing the need for support towards a just transition.

Production subsidies include tax breaks or direct payments that reduce the cost of producing coal, oil or gas. Consumption subsidies cut fuel prices for the end user, such as by fixing the price at the petrol pump below the market rate. They are often justified as a way of making energy cheaper for poorer people. In fact, they provide a bigger benefit to wealthier people, who are larger users of energy. A more efficient way of helping the poor would be through benefits or general tax relief. Removing consumption subsidies in 32 countries alone would, according to International Institute for Sustainable Development, cut greenhouse gas emission by an average of 6 per cent by 2025.

The chart shows the 15 countries providing the largest amount of support to fossil fuel industries in 2020 (in 2021 prices). The bars are in billions of dollars and the percentage of GDP is also given for each country. Subsidies include both production and consumption subsidies. (Click here for a PowerPoint of the chart.) In addition to the direct subsidies shown in the chart, there are the indirect costs of subsidies, including pollution, environmental destruction and the impact on the climate. According to the IMF, these amounted to $5.4 trillion in 2020.

But getting countries to agree on a path to cutting subsidies, when conditions vary enormously from one country to another, proved very difficult.

The first draft of the conference agreement called for countries to ‘to accelerate the phasing-out of coal and subsidies for fossil fuels’. But, after objections from major coal producing countries, such as China, India and Australia, this was weakened to calling on countries to accelerate the shift to clean energy systems ‘by scaling up the deployment of clean power generation and energy efficiency measures, including accelerating efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies’. (‘Unabated’ coal power refers to power generation with no carbon capture.) Changing ‘phasing-out’ to ‘the phasedown’ caused consternation among many delegates who saw this as a substantial weakening of the drive to end the use of coal.

Another problem is in defining ‘inefficient’ subsidies. Countries are likely to define them in a way that suits them.

The key question was the extent to which countries would actually adopt such measures and what the details would be. Would they be strong enough? This remained to be seen.

As an article in the journal, Nature, points out:

There are three main barriers to removing production subsidies … First, fossil-fuel companies are powerful political groups. Second, there are legitimate concerns about job losses in communities that have few alternative employment options. And third, people often worry that rising energy prices might depress economic growth or trigger inflation.

The other question with the phasing out of subsidies is how and how much would there be ‘targeted support to the poorest and most vulnerable in line with national circumstances’.

Financial support for developing countries

Transitioning to a low-carbon economy and investing in measures to protect people from rising sea levels, floods, droughts, fires, etc. costs money. With many developing countries facing serious financial problems, especially in the light of measures to support their economies and healthcare systems to mitigate the effects of COVID-19, support is needed from the developed world.

In the COP21 Paris Agreement in 2015, developed countries pledged $100 billion by 2020 to support mitigation of and adaptation to the effects of climate change by developing countries. But the target was not reached. The COP26 Pact urged ‘developed country Parties to fully deliver on the $100 billion goal urgently and through to 2025’. It also emphasised the importance of transparency in the implementation of their pledges. The proposal was also discussed to set up a trillion dollar per year fund from 2025, but no agreement was reached.

It remains to be seen just how much support will be given.

Then there was the question of compensating developing countries for the loss and damage which has already resulted from climate change. Large historical polluters, such as the USA, the UK and various EU countries, were unwilling to agree to a compensation mechanism, fearing that any recognition of culpability could make them open to lawsuits and demands for financial compensation.

Other decisions

  • More than 100 countries at the meeting agreed to cut global methane emissions by at least 30 per cent from 2020 levels by 2030. Methane is a more powerful but shorter-living greenhouse gas than carbon. It is responsible for about a third of all human-generated global warming. China, India and Russia, however, did not sign up.
  • Again, more than 100 countries agreed to stop deforestation by 2030. These countries include Indonesia and Brazil, which has been heavily criticised for allowing large parts of the Amazon rainforest to be cleared for farming, such that the Amazon region in recent years has been a net emitter of carbon from the felling and burning of trees. The pledge has been met with considerable cynicism, however, as it unclear how it will be policed. Much of the deforestation around the world is already illegal but goes ahead anyway.
  • A mechanism for trading carbon credits was agreed. This allows countries which plant forests or build wind farms to earn credits. However, it may simply provide a mechanism for rich countries and businesses to keep emitting as usual by buying credits.
  • Forty-five countries pledged to invest in green agricultural practices to make farming more sustainable.
  • Twenty-two countries signed a declaration to create zero-emission maritime shipping routes.
  • The USA and China signed a joint declaration promising to boost co-operation over the next decade on various climate actions, including reducing methane emissions, tackling deforestation and regulating decarbonisation.

Blah, blah, blah or real action?

Many of the decisions merely represent targets. What is essential is for countries clearly to spell out the mechanisms they will use for achieving them. So far there is too little detail. It was agreed, therefore, to reconvene in a year’s time at COP27 in Egypt. Countries will be expected to spell out in detail what actions they are taking to meet their emissions targets and other targets such as ending deforestation and reducing coal-fired generation.

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Questions

  1. What were the main achievements of COP26?
  2. What were the main failings of COP26?
  3. How can people be incentivised to reduce their direct and indirect greenhouse gas emissions?
  4. How is game theory relevant to understanding the difficulties in achieving global net zero emissions?
  5. Should developing countries be required to give up coal power?
  6. If the world is to achieve net zero greenhouse gas emissions, should all countries achieve net zero or should some countries achieve net negative emissions to allow others to continue with net positive emissions (albeit at a lower level)?
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Code Red for humanity

The UN’s Intergovernmental Panel on Climate Change (IPCC) has just published the first part of its latest seven-yearly Assessment Report (AR6) on global warming and its consequences (see video summary). The report was prepared by 234 scientists from 66 countries and endorsed by 195 governments. Its forecasts are stark. World temperatures, already 1.1C above pre-industrial levels, will continue to rise. This will bring further rises in sea levels and more extreme weather conditions with more droughts, floods, wildfires, hurricanes and glacial melting.

The IPCC looked at a number of scenarios with different levels of greenhouse gas emissions. Even in the most optimistic scenarios, where significant steps are taken to cut emissions, global warming is set to reach 1.5C by 2040. If few or no cuts are made, global warming is predicted to reach 4.4C by 2080, the effects of which would be catastrophic.

The articles below go into considerable detail on the different scenarios and their consequences. Here we focus on the economic causes of the crisis and the policies that need to be pursued.

Global success in reducing emissions, although partly dependent on technological developments and their impact on costs, will depend largely on the will of individuals, firms and governments to take action. These actions will be influenced by incentives, economic, social and political.

Economic causes of the climate emergency

The allocation of resources across the world is through a mixture of the market and government intervention, with the mix varying from country to country. But both market and government allocation suffer from a failure to meet social and environmental objectives – and such objectives change over time with the preferences of citizens and with the development of scientific knowledge.

The market fails to achieve a socially efficient use of the environment because large parts of the environment are a common resource (such as the air and the oceans), because production or consumption often generates environmental externalities, because of ignorance of the environmental effects of our actions, and because of a lack of concern for future generations.

Governments fail because of the dominance of short-term objectives, such as winning the next election or appeasing a population which itself has short-term objectives related to the volume of current consumption. Governments are often reluctant to ask people to make sacrifices today for the future – a future when there will be a different government. What is more, government action on the environment which involves sacrifices from their own population, often primarily benefit people in other countries and/or future generations. This makes it harder for governments to get popular backing for such policies.

Economic systems are sub-optimal when there are perverse incentives, such as advertising persuading people to consume more despite its effects on the environment, or subsidies for industries producing negative environmental externalities. But if people can see the effects of global warming affecting their lives today, though fires, floods, droughts, hurricanes, rising sea levels, etc., they are more likely to be willing to take action today or for their governments to do so, even if it involves various sacrifices. Scientists, teachers, journalists and politicians can help to drive changes in public opinion through education and appealing to people’s concern for others and for future generations, including their own descendants.

Policy implications of the IPCC report

At the COP26 meeting in Glasgow in November, countries will gather to make commitments to tackle climate change. The IPCC report is clear: although we are on course for a 1.5C rise in global temperatures by 2040, it is not too late to take action to prevent rises going much higher: to avoid the attendant damage to the planet and changes to weather systems, and the accompanying costs to lives and livelihoods. Carbon neutrality must be reached as soon as possible and this requires strong action now. It is not enough for government to set dates for achieving carbon neutrality, they must adopt policies that immediately begin reducing emissions.

The articles look at various policies that governments can adopt. They also look at actions that can be taken by people and businesses, actions that can be stimulated by government incentives and by social pressures. Examples include:

  • A rapid phasing out of fossil fuel power stations. This may require legislation and/or the use of taxes on fossil fuel generation and subsidies for green energy.
  • A rapid move to green transport, with investment in charging infrastructure for electric cars, subsidies for electric cars, a ban on new petrol and diesel vehicles in the near future, investment in hydrogen fuel cell technology for lorries and hydrogen production and infrastructure, cycle lanes and various incentives to cycle.
  • A rapid shift away from gas for cooking and heating homes and workplaces and a move to ground source heating, solar panels and efficient electric heating combined with battery storage using electricity during the night. These again may require a mix of investment, legislation, taxes and subsidies.
  • Improvements in energy efficiency, with better insulation of homes and workplaces.
  • Education, public information and discussion in the media and with friends on ways in which people can reduce their carbon emissions. Things we can do include walking and cycling more, getting an electric car and reducing flying, eating less meat and dairy, reducing food waste, stopping using peat as compost, reducing heating in the home and putting on more clothes, installing better insulation and draught proofing, buying more second-hand products, repairing products where possible rather than replacing them, and so on.
  • Governments requiring businesses to conduct and publish green audits and providing a range of incentives and regulations for businesses to reduce carbon emissions.

It is easy for governments to produce plans and to make long-term commitments that will fall on future governments to deliver. What is important is that radical measures are taken now. The problem is that governments are likely to face resistance from their supporters and from members of the public and various business who resist facing higher costs now. It is thus important that the pressures on governments to make radical and speedy reductions in emissions are greater than the pressures to do little or nothing and that governments are held to account for their actions and that their actions match their rhetoric.

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Questions

  1. Summarise the effects of different levels of global warming as predicted by the IPCC report.
  2. To what extent is global warming an example of the ‘tragedy of the commons’?
  3. How could prices be affected by government policy so as to provide an incentive to reduce carbon emissions?
  4. What incentives could be put in place to encourage people to cut their own individual carbon footprint?
  5. To what extent is game theory relevant to understanding the difficulties of achieving international action on reducing carbon emissions?
  6. Identify four different measures that a government could adopt to reduce carbon emissions and assess the likely effectiveness of these measures.
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Time to address global warming

In December 2015, countries from around the world met in Paris at the United Nations Intergovernmental Panel on Climate Change (IPCC). The key element of the resulting Paris Agreement was to keep ‘global temperature rise this century well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.’ At the same time it was agreed that the IPCC would conduct an analysis of what would need to be done to limit global warming to 1.5°C. The IPPC has just published its report.

The report, based on more than 6000 scientific studies, has been compiled by more than 80 of the world’s top climate scientists. It states that, with no additional action to mitigate climate change beyond that committed in the Paris Agreement, global temperatures are likely to rise to the 1.5°C point somewhere between 2030 and 2040 and then continue rising above that, reaching 3°C by the end of the century.

According to the report, the effects we are already seeing will accelerate. Sea levels will rise as land ice caps and glaciers melt, threatening low lying coastal areas; droughts and floods will become more severe; hurricanes and cyclones will become stronger; the habits of many animals will become degraded and species will become extinct; more coral reefs will die and fish species disappear; more land will become uninhabitable; more displacement and migration will take place, leading to political tensions and worse.

Two tragedies



 
The problem of greenhouse gas emissions and global warming is a classic case of the tragedy of the commons. This is where people overuse common resources, such as open grazing land, fishing grounds, or, in this case, the atmosphere as a dump for emissions. They do so because there is little, if any, direct short-term cost to themselves. Instead, the bulk of the cost is borne by others – especially in the future.

There is another related tragedy, which has been dubbed the ‘tragedy of incumbents’. This is a political problem where people in power want to retain that power and do so by appealing to short-term selfish interests. The Trump administration lauds the use of energy as helping to drive the US economy and make people better off. To paraphrase Donald Trump ‘Climate change may be happening, but, hey, let’s not beat ourselves up about it and wear hair shirts. What we do will have little or no effect compared with what’s happening in China and India. The USA is much better off with a strong automobile, oil and power sector.’

What’s to be done?

According to the IPCC report, if warming is not to exceed 1.5℃, greenhouse gas emissions must be reduced by 45% by 2030 and by 100% by around 2050. But is this achievable?

The commitments made in the Paris Agreement will not be nearly enough to achieve these reductions. There needs to be a massive movement away from fossil fuels, with between 70% and 85% of global electricity production being from renewables by 2050. There needs to be huge investment in green technology for power generation, transport and industrial production.

In addition, the report recommends investing in atmospheric carbon extraction technologies. Other policies to reduce carbon include massive reforestation.

Both these types of policies involve governments taking action, whether through increased carbon taxes on either producers or consumer or both, or through increased subsidies for renewables and other alternatives, or through the use of cap and trade with emissions allocations (either given by government or sold at auction) and carbon trading, or through the use of regulation to prohibit or limit behaviour that leads to emissions. The issue, of course, is whether governments have the will to do anything. Some governments do, but with the election of populist leaders, such as President Trump in the USA, and probably Jair Bolsonaro in Brazil, and with sceptical governments in other countries, such as Australia, this puts even more onus on other governments.

Another avenue is a change in people’s attitudes, which may be influenced by education, governments, pressure groups, news media, etc. For example, if people could be persuaded to eat less meat, drive less (for example, by taking public transport, walking, cycling, car sharing or living nearer to their work), go on fewer holidays, heat their houses less, move to smaller homes, install better insulation, etc., these would all reduce greenhouse gas emissions.

Finally, there is the hope that the market may provide part of the solution. The cost of generating electricity from renewables is coming down and is becoming increasingly competitive with electricity generated from fossil fuels. Electric cars are coming down in price as battery technology develops; also, battery capacity is increasing and recharging is becoming quicker, helping encourage the switch from petrol and diesel cars to electric and hybrid cars. At the same time, various industrial processes are becoming more fuel efficient. But these developments, although helpful, will not be enough to achieve the 1.5°C target on their own.

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Questions

  1. Explain the extent to which the problem of global warming is an example of the tragedy of the commons. What other examples are there of the tragedy?
  2. Explain the meaning of the tragedy of the incumbents and its impact on climate change? Does the length of the electoral cycle exacerbate the problem?
  3. With the costs of low or zero carbon technology for energy and transport coming down, is there as case for doing nothing in response to the problem of global warming?
  4. Examine the case for and against using taxes and subsidies to tackle global warming.
  5. Examine the case for and against using regulation to tackle global warming.
  6. Examine the case for and against using cap-and-trade systems to tackle global warming.
  7. Is there a prisoners’ dilemma problem in getting governments to adopt policies to tackle climate change?
  8. What would be the motivation for individuals to ‘do their bit’ to tackle climate change? Other than altering prices or using regulation, how might the government or other agencies set about persuading people to ‘be more green’?
  9. If you were doing a cost–benefit analysis of some project that will have beneficial environmental impacts in the future, how would you set about adjusting the values of these benefits for the fact that they occur in the future and not now?