© Speaker Pelosi

Still remember the United Nation Climate Change Conference 2009 in Copenhagen, unfortunately the cop 15 failed to deliver a satisfactory deal to cut greenhouse effect. However, several reasons have been mentioned. As stated in the post “Five Reasons the Copenhagen Climate Conference Failed” by George Dvorsky, five reasons which have certainly blocked an appearance of an effective consensus.

Though the conference cop 15 is regarded as a failure, from point of view of the economist, let’s try to figure out what economic politics can do to limit the emission of the greenhouse gas, carbon dioxide mostly. Three approaches have been listed by the economist.

First of all, we can adopt a traditional way which is regulatory approach. This approach is to set a maximum point of tons of carbon dioxide which the companies have the right to emit each year. As well, the maximum tons of carbon dioxide emitted can be calculated per unit of production.
But if this approach works, it requires 2 conditions:

  • We should be able to measure emissions of pollutant
  • An effective sanction should be executed in case of overpass the maximum

Advantage of this approach:
If we are able to measure CO2 and do well in the regulation, we can be sure that the rate of emission doesn’t overpass certain limit. This is efficient.
However, there are inconvenient posed by economists:
Problem: how to choose who will have the right to emit 1000 tons and 10,000 tons?
In general, we analyze historical emissions to set the limit: we take an average of emissions from past 5 years – 10% and gives the maximum emission of CO2.
But if we impose the limit and we will oblige companies to which it is easy to clean to be a constraint easier to meet. So these companies will be an advantage for low cost pollution control. In contrast, in the expanding sectors, this poses a strong constraint and disadvantage those companies. The misallocation of reduction efforts deteriorating competitiveness.

The second approach is Taxation. The taxation solves the problem of distortion. We can impose a tax of the rate which is 15 dollars/tonne of carbon dioxide emitted into the atmosphere. Companies are expected to reduce their pollution until the marginal cost of reduction of the pollution is equal to the tax, because if the marginal cost of reduction is greater than the tax, then firms prefer to pay the tax. So we expect the equalization of all marginal reduction costs at 15 dollars. (This is the same microeconomic theory in term of maximization of profit for a company.)
This allows optimal allocation of reduction efforts.
Moreover, how to set the tax rate?
In theory, this rate is fixed so as to maximize the collective surplus: it sets the rate of tax at the marginal social cost of pollution. It is the cost for the entire planet over several generations.
But we still get some problems: we are unable to calculate the marginal social cost. Even we can then calculate the tax rate that achieves this goal, but we are not sure to reach a Pareto optimum.
Double-dividend can be obtained:

  • First dividend if we tax on CO2 emissions, then we will have a positive environmental effect.
  • Second dividend: if we tax the state receives revenue. It can reduce other taxes which can lead to negative employment and production. So we can gain on activity and employment.

2nd dividend problem: when we introduce carbon tax, we reduce carbon emissions. But the tax increases the cost of production for companies and thus reflected on the price which reduces competitiveness and hence export and loss of employment and activity. Double dividend is difficult to achieve (bubble spirit), and it exists only under very restrictive as in removing highly distorting taxes.

Thirdly we can set up the quota and introduce the economy of market. It begins with a regulatory approach – setting an emission ceiling – a tradeable quota. It is expected that a single price for CO2 to form an optimal allocation because the companies try to reduce the pollution until the marginal reduction of pollution cost equals to the market price.
Problem: How to fix the amount of allowances?
The problem is the initial allocation of quotas. There is possibility of setting a limit which is too high or too low. This can make the companies sale the quota in the market with a high price and earn a lot as in the stock market.
Somehow, the solution can be the Auction:
- Equitable distribution, production efficiency, efficient allocation.
- But it seems to be the same as the tax that poses the problem in terms of activity and employment.
- Problem exists also for new entrants: a barrier to enter the market (lower efficiency of the concurrent market).

If you want to know more about the climate change, I suggest you to read the followings:

  1. http://news.bbc.co.uk/2/hi/science/nature/portal/climate_change/default.stm
  2. http://en.wikipedia.org/wiki/Climate_change
  3. http://topics.edition.cnn.com/topics/global_climate_change
  4. http://en.wikipedia.org/wiki/Stern_Review – important review on the topic of climate change and effect over economy
  5. http://www.copenhagenclimatecouncil.com/
  6. http://en.wikipedia.org/wiki/2009_United_Nations_Climate_Change_Conference
  7. https://www.actu.asn.au/Media/Mediareleases/Copenhagenclimateconferencefailstodeliverasatisfactorydealtocutgreenhousegases.aspx
  8. Kyoto Protocol.  (2009). Encyclopædia Britannica.  Chicago: Encyclopædia Britannica.
  9. “Climate Change—The Global Effects.” Encyclopædia Britannica. Chicago: Encyclopædia Britannica, 2009.
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