The challenging economics of climate change

The challenging economics of climate change

Global climate change has become one of the dominant discourses in the scientific and public policy arena. Studies from scientific research show that global warming is now a real phenomenon, as there has been an unusually rapid increase in the Earth’s average surface temperature over the past century, primarily due to the unprecedented accumulation of carbon dioxide resulting from the burning of fossil fuels, together with emissions of other human-induced greenhouse gases. The effect of this temperature rise includes increased frequency of severe weather events (such as heat waves, hurricanes, and tornadoes), proliferated intensity of storms, and sea level rise. These changes, no doubt, pose serious threats to the welfare and existence of mankind and other living things on Earth by impacting the functioning of the ecosystem, biodiversity, and human health.

The economics of climate change refers to the study of the economic costs and benefits of climate change, and the analysis of the economic impact of actions targeting at limiting its effects. However, calculating the economics of climate change is challenging due to the fact that there are huge uncertainties in the estimation of both the costs and benefits related to climate change. The precision of the time horizon, over which benefits and costs of climate change would accrue, is debatable. Also, there are uncertainties over thresholds for climate change impacts and the pace and form of technological innovation that can take shape in the future.

Furthermore, the effects of climate change are not uniform across countries. Different parts of the world are likely to be affected differently: countries closer to North and South poles will experience warmer temperatures and once inhospitable land will experience melting of ice. Small island nations are at risk of extinction due to rising sea levels. Low-lying islands and countries are at a greater risk of flooding both from rising sea levels and increased precipitation. Countries near the equator are likely to experience unbearable heat. Some of the countries are already experiencing more frequent events of severe weather.

The economics of climate change is further complicated by the fact that most of the developing countries can’t afford the costs of mitigation or adaptation. The 2018 Environmental Performance Index (EPI) of Yale University ranks 180 countries on 24 performance indicators across 10 issue categories covering environmental health and ecosystem vitality. These metrics help provide an estimation at a national scale of how close countries are to establishing environmental policy goals. According to the EPI, most of the developing countries in the south dominate the lower part of the ranking. Among the bottom 10 countries in the ranking, three (Bangladesh, India and Nepal) are from South Asia. Bangladesh’s position is 179 out of the 180 countries.

There are also considerable debates in the discourse on climate change with respect to the policies and actions needed to address the challenges. Two instruments are widely referred to in the policy discussion. The first is the carbon tax, which is the mandatory fee charged for the emission of a given quantity of carbon dioxide or some other greenhouse gas. The second is carbon trading, which is buying and selling of carbon credits—abstract instruments (like money) where each represents the right to emit one tonne of carbon dioxide or an equivalent amount of other greenhouse gases. The other policies include technology promoting programmes. One other instrument, which is less explored but can be effective, is the liberalisation of trade in environmental goods (EGs), which can play a crucial role in protecting the environment as well as promoting international trade in EGs.

Trade has a positive effect on the environment only if environmental policy advances alongside trade liberalisation. However, most of the developing countries are seriously lagging behind in conceptualising as well as in building national capacities to implement these aforementioned instruments.

One important challenge in the economics of climate change is the political economy aspect of it. Both the global and national political economy factors are critical in addressing climate change issues. US President Donald Trump’s unfavourable attitude towards the warning of devastating effects of climate change, and eventually the US’s withdrawal from the Paris climate agreement, have created uncertainties for a global partnership. At the national level, many developing countries, due to their national priorities of industrialisation and lobbying power of different quarters, find it extremely difficult to contain the polluting industries. Therefore, developing countries have an uphill task in future given the challenging economics of climate change.

Dr Selim Raihan is Professor, Department of Economics, University of Dhaka, and Executive Director, South Asian Network on Economic Modeling (SANEM).

Source: The Daily Star.


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