High costs of non-participation in economics of global warming

The focus on climate change and its impact is capturing the minds everywhere. Quite a few reports are being written with this theme. This year’s Nobel Prize predictions are heavily tilted towards Environmental Economics and non- environmental Economists  like Michael Spence are now thinking and writing about the several issues.

The topic is highly technical and most of it goes above me. All I understand is the economic perspective and am really interested in the economics of climate change. So have started reading a bit.

I was reading this Bill Nordhaus speech – Economic Issues in a Designing a Global Agreement on Global Warming. In this speech he lays out 3 economic issues with climate change:

First, raising the price of carbon is a necessary condition for implementing policies in a way that will reach the multitude of decisions and decision makers over space, time, nations, and sectors.

Second, universal participation at a harmonized level is a critical part of an efficient global-warming regime. There are extremely high costs of non-participation.

Third, the cap-and-trade approach embodied in the Kyoto model is a poor choice of mechanism. It is completely untested in the international context; it has been unable to attain anything close to universal participation; it loses precious fiscal revenues; it leads to volatile prices; and it is an invitation to rent-seeking. It is unlikely that the Kyoto model, even if strengthened, can achieve its climate objectives in an efficient and effective manner. A harmonized international carbon tax is likely to be a more effective mechanism for responding to the threat of climate change.

The first point is well-known. We need to price carbon. It is difficult to do , but unless we price carbon we cannot have people reacting to it. The consumers and producers will only react to adverse impact of carbon if there is a price attached.

The third point is Cap and Trade will not lead to desired impact.

The second point is what interested me most. The costs of non-participation are very high.

Economics leads to a second important truth about climate-change policies. The analytical basis for an efficient global-warming policy is extremely simple. Because global warming is a global public good, everyone, everywhere must face the same price.

The difficulty arises because, for global public goods like global warming, there are widely disparate incentives to participate in measures to mitigate the damages. The differences reflect different perceptions of damages, income levels, political structures, environmental attitudes, and country sizes. For example, Russia may believe that it will benefit from limited warming, while low-lying countries may believe they will be devastated. Within the United States, some regions are energy exporters and resist measures to tax carbon fuels, while others are environmentally oriented and have already enacted local legislation to limit carbon emissions.

Current international agreements differentiate among countries in their responsibilities to undertake measures to limit emissions. Under the Kyoto Protocol, Annex I countries must limit their emissions, while non-Annex I countries have a variety of non-binding commitments as well as the ability to participate in the “clean development mechanism.” Moreover, while some countries have implemented strong internal mechanisms to control emissions, these often cover only a limited part of national emissions. For example, the European Trading Scheme covers only about half of EU emissions.

A centrally important question is the extent of inefficiency inherent in the patchwork nature and incomplete participation that characterizes the current international control regime.New evidence from economic studies suggests that the costs of non-participation are much higher than was earlier thought.

He then looks at what he calls as “participatory function” and points that if US does not participate in the reduction, the costs are expected to be much higher. In the end of this points he says:

There are extremely high costs of non-participation. A rough estimate is that the penalty from exempting half the global emissions from an agreement will increase costs by around 250 percent.

Interesting stuff. Interesting dimension to the problem. I knew about the costs of non-participation but never knew it to be so high.

I was just thinking about this problem from an Indian perspective. India being a Federal country also has the same kinds of problems. If the centre agrees to certain issues but some states have objection and don’t participate, the costs are likely to be higher. Let us just take hypothetical example. Himachal Pradesh which is a high-lying state may not be as worried about flooding as much as say Uttar Pradesh, Bihar etc (just like Russia in Nordhaus example). So it may not be as interested in the discussions and instead focus on other challenges. But then this increases the cost rightaway as unless HP gets serious low lying states can do very little. And gradually the impact would be felt on HP as well as all that melting of glaciers will impact their ecosystem at some point of time.

I am sure the Indian policymakers are aware of these challenges. Am wondering how are they approaching this problem.



One Response to “High costs of non-participation in economics of global warming”

  1. High costs of non-participation in economics of global warming « acc3ss.info Says:

    […] See more here: High costs of non-participation in economics of global warming […]

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