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The Bali Two-Step: “Deep” reductions…but “We need to grow, and we need to grow rapidly,”

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As word of the all night negotiating binge was broadcast far and wide, there was cause for celebration. It turns out that the developed world was not so far apart and that language in Bali could be agreed upon. So, instead of binding reductions of say 20% to 40% by 2020, they settled for “deep”. The US grooved, the Europeans waltzed and voila, a road map for more talks. But can we afford to dance?

The developing world says no:

“We need to grow, and we need to grow rapidly,” said Munir Akram, a Pakistani diplomat who heads the G77, the major bloc of developing countries at the Bali conference.
“It’s a question of justice and humanity,” he said. “We cannot afford to allow our development to be stalled or reversed.”

But in Canada does this affordability refrain make sense? For some, like the manufacturing sector or low income households, climate policy needs to be concerned with income effects. Practically, this means that climate policy needs to separate the emission signal from compensating due to income concerns. For example, a broad-based emission signal, like a carbon tax, could be complemented by measures to compensate on the income side. This could be done through recycling revenue from a carbon tax or auctioned permits (from cap and trade) to those most adversely affected, like trade exposed sectors or low income households. This does not mean that we exempt some sectors from the price signal all together, and shift the cost burden to the rest of us.

But what about the rest of us, can we afford “deep” reductions? Nic Rivers and I have been doing some modeling using a macroeconomic model of the Canadian economy and find that deep reductions will cost, but will not ruin. We find that at emission prices of say $100, national GDP impacts are small and in the order of 1% to 1.5%% below a “no climate policy” level, which is less than forecast growth. With some creative tax shifting and revenue recycling (reducing labour taxes for example), this can be more or less halved. For this cost, we get emission reductions of about 20% below current levels, which is the federal government’s Turning the Corner target.

So, even with deep reductions, we will continue grow and have the national income to compensate those most adversely affected. But, just like the Bali-two step, I suspect that climate policy will continue to be one step forward and two steps back.

Written by Dave Sawyer

December 15th, 2007 at 1:31 pm