COP27 is being held this month in Sharm El Sheik. These annual UN conferences are the primary opportunity for world leaders to collaborate on policy commitments in the collective push towards global climate goals. There tends to be a large chasm between the espoused goals of the attendees and their eventual commitments. Politics, bargaining and rampant short-termism all get in the way of truly radical progress.
The emission of greenhouse gases is the prime example of a ‘negative externality on a public good’. In plain language, it is individuals acting in their own interest and not considering the detriment of those actions on a shared resource, the environment.
Although we all collectively depend on a stable climate, people choose to ‘free-ride’ rather than adapt their behaviour. We (individuals and companies) consider the costs and benefits to ourselves of cutting our carbon footprints and recognise that the benefit of any small contribution we can make is minimal and far less than the additional cost and inconvenience. This occurs annually, on a global level at the COP conferences. Modi, Biden, Sunak (if he turns up) and every other world leader would benefit from coordinated climate policy but they fear the political consequences of imposing additional costs on the populations they represent. Instead they do the bare minimum and ‘free-ride’ on other nation’s policies.
When everyone takes this individualistic approach, we emit excessively and cause untold damage to the climate and therefore humanity. Individual decisions lead to a poor outcome for society today and into the future. This presents a pessimistic, but sadly realistic, view of human nature.
Hoping for individual altruism and behavioural changes is naive, but we have some alternatives. The first solution is a scientific one. Innovation in new technologies and systems that are both cheaper and cleaner than existing dirty solutions is the ideal long-run solution. However, there are substantial switching costs and time lags for this to take hold. Our current energy, transport and industrial systems are built on fossil fuels.
The second solution is economic. By changing the incentives for individuals we can reduce emissions and catalyse scientific innovation. We can either set a maximum level of emissions and require permits to emit or we can tax emissions. By imposing a private cost on individuals to emit greenhouse gases, policy makers can engineer conditions such that it is one’s own interest to act in a way that limits damage to the climate.
Many taxation and carbon trading schemes exist, but there are issues. The first is that the price that they place on carbon is far too low, either because the tax is not high enough or there are too many permits to pollute. Below we can see how the price placed on emissions has evolved over time under various schemes. They have risen but still fall far short of the roughly $135 that would be necessary to incentivise sufficient reductions in emissions. Although there are some jurisdictions with sufficient carbon prices, such as Sweden at the top of the graph, prices outside of western nations tend to be much lower or even non-existent. Higher prices on emissions are needed to reduce emissions today and provide incentive to innovate into green substitute technologies.
There is also an issue of embedded emissions, Sweden’s price on carbon is high but the price charged on carbon of goods consumed in Sweden is not. The global economy’s manufacturing heart is in Southern and Eastern Asia, where carbon is under-priced. When a Swede in Stockholm buys a table named Vittsjö from IKEA, nothing could be more Swedish right? But the table is probably made in China or Malaysia. IKEA and the Swede are in fact paying a much lower price on the emissions from production. Embedded emissions hide the full environmental impact of western consumption and limits the potential of disjointed climate policy/
The coverage of these schemes is also insufficient. Before 2000 almost no emissions had a charge associated with them. Today we are at about 22% of Global Greenhouse Gas Emissions covered. An improvement, but we are someway off the 100% that ought to be our goal.
In order to achieve real progress everyone must be sufficiently incentivised to protect the climate. The ultimate goal of a climate conference such as COP27 should be the coordination of governments to implement a common global tax or ‘cap-and-trade’ scheme on all emissions that is stringent enough to incentivise and catalyse the transition to the green economy that is in our and our descendant’s collective best interest.