…environmental economics and the implications of environmental policy

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“Acting on climate change is a drag on economic growth”… But so is inaction

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The climate change policy debate in the media and behind closed doors goes something like this…”it is too expensive, we can’t afford it.” I call this “globe and mail” economics, where questions of affordability dominate and questions of benefits aren’t asked. This is happening in Bali now (see here) and it is certainly going on in Canada. But does this focus on affordability matter?

From an economist’s narrow efficiency lens, it does. The economist would prefer a policy that enables cost-effective reductions at the level of abatement where the costs and benefits are balanced. While economists have said quite a lot about the merits of emission pricing to enable cost-effective reductions, there is less of a contribution to the policy discourse on the desired level of abatement. Simply, information on the scope and scale of the possible benefits of action are too uncertain to lead to recommendations of policy stringency.

As a result, our climate debate is informed by a conceptual understanding of the abatement or adaptation benefits but a very acute understanding of the costs.

Because of this information asymmetry, it is likely that we will continue to be locked into a policy cycle of questioning the appropriateness of action to attain targets, regardless of their stringency. Indeed, without a balanced view of what we get for what we spend, we will continue to set targets, discuss policy options, reveal the associated costs and then ultimately question the affordability and distributive impacts of target attainment.

As climate policy transitions to a longer view, as it has under the Regulatory Framework’s (Turning the Corner) that aspires to substantial reductions by 2020 (-20% below current) and 2050 (-60% to 70% below current), this lack of a balanced view will become particularly acute. This is because the scale of the action implied under these longer-term targets is substantial. With a Canadian economy about doubling bymid-century and a GHG intensity that is only moderately declining, total Canadian emissions will about double by mid-century. To achieve the mid-century objective, therefore, GHG intensity improvements will need to be 20 times greater annually than the forecast no climate policy levels. And recent modeling suggests that emission prices will need to rapidly climb to in excess of $200 per tonne of CO2e to hit the targets. The need for such costs to achieve domestic abatement targets will only intensify domestic questions of cost, affordability and distributional impact.

So, an important climate policy challenge for Canada and indeed globally is to reveal the benefits of action and then, perhaps, the climate debate in Canada can proceed in more balanced and measured fashion. But then again, economic ruin is a better story.

Written by Dave Sawyer

December 9th, 2007 at 12:39 am