An economic policy response to curb climate change: the road ahead
Authors: Shamak Tiwatane (Initiatives Project Leader) & Ben Griffiths (Vice President of Operations)
We all know climate change is a serious problem and that something needs to be done about it, but it’s often unclear what specific roles governments can play from a policy perspective.
This lack of a coherent and comprehensible policy option makes it exceedingly difficult for citizens to know what their governments could be doing, let alone make concrete demands to hold them accountable to.
Climate change isn’t just a “serious problem” though, it is the most monumental challenge humanity has ever faced and it will require a global policy response if we’re going to meaningfully tackle it.
Individual nation-states acting in isolation, while significant and worthwhile, would nonetheless be insufficient in preserving wellbeing, thus necessitating close collaboration and comradery.
Make sure to read our previous piece “The importance of internationalism” if you’d like to learn more about the need for global cooperation, and the types of issues we can resolve together as a unified planet.
So what can a climate change mitigation policy look like?
Let’s imagine an emissions reduction policy created under the assumption it will be adopted by a unified world. It would be naïve to think that such a policy would need only to focus on immediate emissions reduction.
To guarantee its effectiveness in both the short and long-term, it needs to ensure emissions reduction at least cost. This entails accounting for any regressive effects (i.e. putting a higher financial burden on poor than on rich households), alongside being palatable for business and industry. These considerations are particularly important as buy-in from regular households alongside key industries and sectors is vital to ensure successful policy implementation.
Emissions Trading Scheme
An Emissions Trading Scheme (ETS) is a simple yet effective concept. The scheme relies upon the distribution of Greenhouse Gas (GHG) emissions credits. One credit permits the emission of a mass equal to one ton of carbon dioxide. The government begins by setting a GHG emissions cap (i.e. a limit on the mega or giga-tonnes of GHG emissions permissible). This cap is then divided into emissions credits to be sold to companies. If the government decides to price these credits, it receives a one-off payment. The government cannot raise more capital as these credits now belong to companies who are free to trade them as they wish.
An issue of a traditional ETS is that it allows a company to continue emitting more than its fair share of the emissions cap yet remain compliant. They can do so by simply purchasing emissions credits from other companies who may have surplus credits.
Another issue is that the government only receives a singular inflow of money thus, limiting its capability of utilising that money to address any regressive effects.
However, a silver-lining on this dark cloud is that companies are doubly incentivised to reduce greenhouse emissions. Firstly, they will be fined if they exceed the emissions cap. Secondly, they can generate income by saving and reselling some of their emissions allowances (e.g. Tesla supplementing its income by selling emissions credits).
The proposed policy aims to further build on the above benefits. In such a policy, the emissions credits issued by the government would expire after a certain period and new credits would have to be issued. Subsequent emissions credits offerings would offer a reduced number of credits thus, reflecting an increasingly stringent emissions reduction target. The resultant effect is that credits would become more valuable if companies didn't reduce emissions and meet their targets. This creates further incentive to reduce emissions to profit from the sale of unneeded credits. Thus, establishing a positive feedback cycle.
From a government’s perspective, it would also ensure a periodic inflow of money that can be invested in further supplementary policies to address the regressive aspects of the policy or further bolster the positive impacts of the policy.
How can we ensure international collaboration?
Coordination problems can emerge very easily when some countries or regions decide to adopt policies like an ETS while others do not. The reason this occurs is because of a free-rider problem whereby the benefits of climate action are accrued regardless of whether you decide to participate.
This means that supplemental policies and approaches need to be considered in order to encourage global adoption of an ETS and climate action more broadly.
In a broad, global sense, there are a number of approaches that can be taken.One option involves creating and improving international treaties such as the 2016 Paris Accords, and therein creating enforceability or accountability mechanisms. Additional pathways could include coming together to create and strengthen international institutions, knowledge sharing, support structures, and creating climate mitigation best practice for governments, industry, and consumers.
However, there are also tangible steps that individual nations like Australia can take to encourage global adoption even without the presence of broad-scale internationalism.
A great example of this is border tax adjustments. We don’t live in a world of fully integrated markets, and national measures can still be taken within a globalised context. There are a variety of restrictions on trade between nations such as tariffs, quotas, licensing, and other requirements in order for goods, services, and financial transactions to flow between countries.
Border tax adjustments essentially involve adjusting all of these requirements and restrictions by either increasing or decreasing them for particular countries or sectors. For example, Australia could increase tariffs for countries that aren’t meeting their obligations under the Paris Accords or don’t have an ETS in order to internalise the social costs of their GHG emissions and encourage them to change their course of action. Conversely, Australia could lower trade barriers with countries that do adopt a GHG pricing system in order to incentivise other countries to take action.
Adopting measures like these would ensure that the actions of individual nation-states aren’t wasted and that through global policy integration and collaboration, GHG emissions can be successfully mitigated.
How can we avoid making an ETS regressive?
While the goal of emissions reductions is straightforward, the consequences of new policies can have a disproportionate effect on vulnerable people. It is often the case that market-based approaches to GHG emissions mitigation can have regressive effects when they aren’t carefully considered. A regressive policy is one that disproportionately affects low-income people negatively relative to high-income people, relative to a progressive policy which does the opposite.
The reason regressive policies are undesirable is because low-income people are less capable of dealing with an additional financial burden than high-income people, even if the policy goal (in this case, climate change mitigation) will ultimately be of benefit to everyone.
Market based mitigation policies can often be regressive because lower-income people are often reliant on GHG intensive goods and services (eg. cars or energy from the grid) and have difficulty substituting them for environmentally sustainable alternatives (eg. electric vehicles or solar panels). In the context of an ETS, additional costs may be an unsustainable burden for certain individuals or families. These higher costs would be the result of companies passing on the cost of emissions credits to consumers by increasing the price of consumer goods.
This means that policy makers need to be careful that they don’t hurt already vulnerable people in their efforts to combat climate change.
This potential regressivity could be controlled for by the government issuing a rebate to low-income earners to ensure that they are capable of substituting their current consumption for more sustainable options and so they aren’t otherwise adversely affected. This could be financed by using the government revenue from the GHG credits directly to make it revenue-neutral. The rebate would also be ongoing due to the expiry and reissuing of credits to ensure continued relief.
Complementary policies
It’s also critical that policy makers provide viable alternatives for people and industries to adapt instead of merely creating requirements without a meaningful path forward.
This path forward could be achieved with supplemental policies that enhance the effectiveness of an ETS.
Here are a handful of examples of potential policies:
Reallocating fossil fuel subsidies towards renewable subsidies
This would simultaneously make fossil fuels more expensive while making renewable energy a more viable path forward. It would also increase the effectiveness of an ETS by placing that additional pressure to move away from fossil fuels while providing a viable alternative.
Furthermore, it provides a prospective job market for people adversely affected by the switch to renewable energy. In doing so, it also provides a solid foundation to lobby for industry or union support. The state of California in the US has shown the capability of renewable energy in creating growing employment opportunities (Heavner, Del Chiaro, 2003). So much so that there are five times more jobs related to clean energy than fossil fuels.
Research and development into battery technology, renewable energy sources, and potential novel technologies such as carbon capture.
This could be financed with a proportion of the government revenue from the ETS and would actively seek out tangible new visions and improvements for a sustainable society.
Creating standards and information instrument
This would provide guidance and rules that would allow individuals and industry to transition more smoothly to sustainable lifestyles and operations.
Examples of this can include:
Building codes, appliance standards etc
“Eco-labelling” of the environmental impact of certain products
Creating and diffusing a new best practice for industry
Subsidising the installation of solar panels in homes and businesses
The Victorian government already has a similar program to this, which eases the burden of the transition, particularly for small businesses and low-income households.
Final remarks
What we’ve aimed to discuss in this article has been a practical and actionable economic response to the current climate crisis. We say “current” because it isn’t a distant worry, it’s an issue firmly rooted in the present. We’d like to leave you with an excerpt from renowned astronomer Carl Sagan as a reminder of the importance of preserving our home.
“Look again at that dot. That's here. That's home. That's us… Our posturing, our imagined self-importance, the delusion that we have some privileged position in the Universe, are challenged by this point of pale light. Our planet is a lonely speck in the great enveloping cosmic dark. In our obscurity, in all this vastness, there is no hint that help will come from elsewhere to save us from ourselves.
There is perhaps no better demonstration of the folly of human conceits than this distant image of our tiny world. To me, it underscores our responsibility to deal more kindly with one another, and to preserve and cherish the pale blue dot, the only home we've ever known.”
- Carl Sagan