Opinion: The future and the environment Reply

As we celebrate Youth Day, you are likely to hear someone say that the youth is South Africa’s future. There are many blog posts to write about this, for example, the importance of education or the problems of youth unemployment. I felt that we should think long-term future and the environment.

Now I realise that climate change and global warming is a vast topic and an emotive one. Not everyone believes that human (economic) activity is causing climate change and even fewer people believe that we should pay to mitigate climate change. For those who are interested I have a few links to share to recent posts:

  • In May the concentration of carbon dioxide in our atmosphere reached 400ppm. At The Ecologist Andrew Simms writes: “when a number came along that represented a genuine threat to civilisation it caused barely a ripple”.
  • Scientific American has a podcast explaining that climate change is getting worse: “We are on track for 3 degrees C of warming or more, this century”.
  • In a Project Syndicate post Bob Ward writes: “The scientific literature indicates that the level of atmospheric CO2 today is about 40% higher than the pre-industrial level. It is at its highest since the Pliocene Epoch about three million years ago, when the planet was 2-3 degrees centigrade warmer, the polar ice caps were much smaller, and the global sea level was about 20 meters higher”.
  • And if you are wondering: but what does it mean?, have a look at this infographic from Information is beautiful, explaining the implications of different degrees of global warming. 3-4 degrees centigrade warmer will have some scary results.

So how do economists think about this problem?We think that many natural resources are private goods that are rival and excludable in consumption and have clear property rights. Global warming and climate change involve aspects of the natural environment, which economists refer to as common good characteristics, or non-market resource characteristics. The earth’s atmosphere and the climate are utilised by all – no-one has to pay to live on earth! As a consequence, the environment suffers the effects of negative externalities, specifically the pollution that occurs during all our production and consumption activities.

The externality is the difference between the private and social costs. The market fails to account for the social costs since no-one owns their share of a sustainable environment to sell to polluters and as such no market or price exists. The result is the “tragedy of the commons”, whereby the common pool resource is depleted.  People are all deriving utility from the environment at a rate that is unsustainable.

Are there any solutions? It is not possible to stop economic activity to reduce the related pollution to zero, but there may be solutions in cooperation or coercion. Everyone could work together and cooperate to reduce our consumption and the consequent pollution to sustainable levels. This is an unlikely global solution as cooperation will be undermined by the dynamics of the so-called “prisoners’ dilemma”. Everyone will suspect that everyone else will continue consuming and polluting and they will do so themselves. Similarly, a user-pays approach may be possible, but will be limited to voluntary contributions. Since no-one owns the environment, it is not clear to whom payments should be made when you pollute. In the case of voluntary purchases of carbon credits, the payments may go towards, for example, forestry programmes that capture carbon. The alternative to cooperation is coercion. Government may sell pollution rights if they are able to set carbon caps, measure pollution levels, link it to the polluters and fine those that do not cooperate. Such cap-and-trade systems, along with carbon credits, are already functioning on a limited scale. Along with the creation of a carbon market, government may also levy carbon taxes on polluters. There are also a number of examples of this, but again it depends on the ability of the government to measure the pollution, link it to the polluters, set the tax rate and enforce it. Both the cap-and-trade system and carbon taxes also suffer from the above cooperation problem, but at a country level. If all governments believe that all the others will allow pollution, they will not create carbon markets or set carbon taxes. The limitations of climate summits attest to this.

Practically speaking, the effects of human activity on the environment will have to be mitigated by a combination of voluntary contributions and compulsory taxes.

Not everyone is keen on this path. Recently SA economist Chris Hart made a series of tweets about carbon tax. He asks some valid questions about the implementation of carbon taxes, but also sets requirements that would defeat the purpose.

A recent World Bank study shows that carbon taxes can be effective in reducing emissions, but there are caveats. Carbon taxes should be:

should be:

  • Imposed purely with the objective of targeted emission reduction;
  • Uniformly applied across all industries;
  • Designed to mitigate any adverse impacts on the poor; and
  • Complemented with adequate border provisions to avoid any “carbon” leakage.

My view is that if the youth is the future, we should make sure that we protect the an environment that sustains life as we know it. That will require putting our money where our mouths are.

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