Climate Change is one of the gravest threats to humanity this century and one that has yet to be tackled effectively. This phenomenon is largely man made. That is, rapid economic growth without due concern for its environmental impact has resulted in an increase in the average global surface temperature and with it, a long list of climate change consequences such as rising ocean levels, deteriorating animal and plant diversity, more frequent natural disasters, among other complications. If economic growth led to the predicament we find ourselves in today, how can we effectively use the economic tools at our disposal to mitigate climate change?
Recent history provides encouraging examples of multilateral regimes that achieved considerable results in counteracting environmental problems of a transnational and global nature. One particularly instructive case is that of the Montreal Protocol on Substances that Deplete the Ozone Layer (1987). Policymakers and political representatives should draw on the lessons of this regime and apply it to even more ambitious multilateral environmental initiatives, such as those being proposed to combat global climate change.
Ozone is a molecule composed of three oxygen atoms concentrated in the earth’s atmosphere that is critical to the absorption of ultraviolet radiation from the sun. This radiation is harmful to organic life on earth and is a source of skin cancer in humans. As early as 1974, two scientists from the University of California (Irvine), F. Sherwood Roland and Mario Molina, published an article suggesting that human activity could upset stratospheric concentrations of ozone. This was particularly true, they discovered, of chlorofluorocarbons (CFCs), which are used in refrigeration and aerosol products. In 1985, British scientists discovered that a hole in the earth’s ozone layer had formed over Antarctica – caused, it was hypothesized, by CFCs. This alarming discovery prompted the United Nations Environmental Program (UNEP) to work with the international community to take action to curtail the production of CFCs. The foundation of this effort was the Vienna Convention for the Protection of the Ozone Layer (1985).
The Vienna Convention paved the way for the Montreal Protocol in 1987, which set international targets for the elimination of Ozone Depleting Substances (ODS), including CFCs. The reductions the Montreal Protocol called for did not require the discontinuation of refrigeration or aerosol products, merely their substitution with similar products that performed the same function but emitted less damaging hydrochlorofluorocarbons (HCFCs) instead of the much more pernicious CFCs. According to the United Nations, as of 2014, the Montreal Protocol has successfully eliminated 98% of ODSs worldwide. Because the Montreal Protocol has been so successful, amendments to the agreement have been made that now seek to phase out HCFCs that, while less damaging to the ozone than CFCs, are still greenhouse gasses that will have to be eliminated eventually if a lower global carbon footprint is to be achieved. While the effects of ODSs on the earth’s ozone layer will be felt for years to come, progress in reversing their concentration in the atmosphere suggests that the ozone will begin to “heal” over time. This process could be complete by 2050. If this comes to pass, it will be a resounding victory for global environmental cooperation.
There are a few important lessons to take from the record of the Montreal Protocol. First, this multilateral agreement had legitimacy. It was the first United Nations agreement to achieve universal accord, eventually being ratified by all 197 members of the United Nations. For that reason, in 2005, former UN Secretary General Kofi Annan hailed the Montreal Protocol as “perhaps the single most successful international environmental agreement to date.” Second, the Montreal Protocol was phased and realistic in its goals. Developed countries committed to eliminating out their CFCs first, before expecting developing countries to do so, thereby sparing the latter any prohibitive economic damage. Furthermore, developed countries established the Multilateral Fund for the Implementation of the Montreal Protocol for the expressed purpose of helping developing countries meet their targets once they began to make efforts to reduce their ODS emissions. Finally, the invention of substitute products for those being phased out due to their emission od CFCs meant that environmental progress was made without unduly harming high standards of living.
Today, the Paris Agreement is the most prominent multilateral environmental agreement, one that sets daunting targets for states to reduce their carbon footprint in order to combat climate change. While taking mitigating steps is completely voluntary through nationally determined contributions, the Paris Agreement serves an important function; it establishes a global carbon reduction target for all countries to strive towards. Article 2(a) of the agreement thereby aims to limit the rise of average global temperatures to less than 2 degrees centigrade above pre-industrial levels, that is, to try to keep global temperatures from rising over 2 degrees centigrade from what they were prior to the Industrial Revolution two centuries ago. Economists have debated the use of different methods of emissions reduction such as the use of a carbon tax, a cap-and-trade program, and the subsidization of carbon free sources of energy such as wind and solar power. It may be worthwhile to ponder some of the market-based solutions to the calamity that is the unintended result of market productivity.
The Carbon Tax Option
Nobel laureate William Nordhaus has long been a proponent of initiating a carbon tax. Nordhaus is famous for having developed the DICE Model (Dynamic Integrated Climate-Economy Model), which integrates the impacts of emissions as well as the economic cost of policies to curb global warming into a single economic model. Nordhaus describes a carbon tax as one that would sufficiently raise the price of fossil fuels, which would induce economic agents to substitute carbon intensive goods and services for others. The idea is to add a harmonised tax to all goods and services across industries in proportion to their carbon dioxide content. As such, higher carbon intensive goods would have a higher tax placed on them effectively increasing its market price, and making it less desirable for consumers which would act as an incentive to drive companies towards choosing sustainable sources of energy.
A hike in product prices is, of course, generally undesirable, and its effects could disproportionately affect the less economically stable. The gilets jaunes of France are an example of a popular reaction to fuel taxes, especially highlighting the economic plight of low-income households. For this reason, Nordhaus proposes that the carbon tax be revenue neutral. That is, that the carbon tax be implemented in such a way that it incentivises a reduced carbon footprint but bears no major economic burden. For example, governments could implement a carbon tax but at the same time reduce other forms of taxes, such as income tax.
Cap and Trade Programs
The basic idea behind a cap and trade program is to set a limit (a cap) on the total amount of carbon emissions across an industry, with each company in that industry being issued a permit that specifies the amount of carbon it may burn. Should a company want to exceed its allotted carbon emissions, it would need to buy extra permits from other companies that have burned less. For example, Quebec and California have a linked cap and trade system which allows companies in Quebec to buy permits from those in California and vice versa. Over time the emissions ceiling (or cap) will decrease and thereby progressively reduce greenhouse gas emissions.
To date, one of the most successful cap and trade programs was the sulphur allowance program initiated in the US for controlling electric utility emissions that were contributing to acid rain, as part of the Clean Air Act Amendments. The sulphur allowance policy aimed to cap the aggregate sulphur dioxide emissions in the US by issuing individual plant allowances and by allowing firms to buy and sell allowances. Plants that polluted more than their allocated share faced a substantial penalty and had to forfeit an equivalent allowance the following year. The program was initiated in 1990 with the goal of reducing the total sulphur dioxide emissions by 10 million tons relative to 1980, and by 2007 annual emissions had declined well over the program’s nine million ton goal, with a 43% reduction from 1990 levels.
It is no surprise that action taken towards mitigating the effects of climate change is long overdue. In 2018, the UN Intergovernmental Panel on Climate Change warned that there would be roughly only 12 more years to keep global warming at a maximum of 1.5 centigrade, beyond which the world is sure to experience an increase in drought, floods, extreme heat and poverty for millions resulting from natural disasters. As such, incentivising sustainable economies must be a priority. Environmental policies have the potential to complement long run economic growth, for the economic costs of climate change are mounting while the economic potential of sustainable development is yet to be fully tapped into.
Featured image: Industry Pollution Smog by SD Pictures via Pixabay.
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