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Wednesday, 10 September 2008 20:15

Nick Stern said: "Climate change is the greatest market failure the world has ever seen...".

He's right, despite the attacks on the work of the UN's Intergovernmental Panel on Climate Change ("Climategate").  The seriousness of the climate change problem has been confirmed by the recent report of the US National Oceans and Atmospheric Administration.

Virtually all environmental problems -- be they chemical waste in local rivers, desertification in Africa and Australia, diminishing stocks of dolphins and whales, Chinese acid rain showering over Japan, loss of biodiversity or climate change -- are all great market failures.  Government should act at the local, national, regional and global levels.  For most national environmental problems, the answer is taxation applying the  'polluter pays principle'.  Internationally, we need a successor to the soon expiring Kyoto Protocol on climate change.  We need to put a price on carbon.  The cost of inaction far exceeds the cost of action on this matter.

Humankind is part of the environment.  And as we progressively destroy the world’s environment, we are destroying ourselves.  The environment is a perfect example of the tragedy of the commons.  Individuals acting independently in their own self-interest will ultimately destroy the environment, even though it is clearly not in anyone's long term interest for this to happen.

Many enconomists argue that there is an environmental Kuznets curve to describe the relationship between globalization and the environment.  As we globalize and develop, the environment gets worse.  Then after a point, it turns for the better.

Globalisation spurs economic growth.  This increased scale of economic activity will increase the scale of environmental damage.  Further, as a developing country progresses, it will usually advance from an agricultural-based economy to a manufacturing-based economy.  This is usually dirtier for the environment.

But then, the Kuznets curve starts to turn positively again.  As development continues, manufacturing will decline in relative importance.  The services and knowledge-based sectors will expand.  This is better for the environment, although computer waste is a growing problem.  Many big cities like London, Tokyo and Los Angeles are much cleaner now than they were several decades ago.  Globalisation can also help through increased trade and investment in clean technologies, goods and services.  And new-found wealth can be used to clean up the environment for those countries which have employed "grow now, clean-up later" strategies.  

Lastly, in wealthy, advanced societies citizens will usually push governments to implement stronger environmental policies.  There is evidence to support this for local and national environmental problems, but much less so for global problems like climate change.  Western countries are free riders.  That's why negotiations for a successor to the Kyoto Protocol are stuck.  Don't forget that we are responsible for most of the historic buildup in carbon emissions.  And some small island states like Tuvalu will likely sink under the rising oceans.

Thank goodness we have non-governmental organizations like WWF, Friends of the Earth, and Greenpeace fighting for the environment.  Without them, nothing would happen.  Thankfully also some city mayors and US state governors are also active in trying to address climate change.  Some enterprises are also active, as climate change presents many exciting business opportunities.  But we still need a successor to the Kyoto Protocol.

Nick Stern argues that key elements of future international frameworks on climate change should include: carbon emissions trading; technology cooperation; action to reduce deforestation; and adaptation.  There is already climate change in the system, and climate change is now occurring and will continue to occur, even if we cut emissions today.  "The poorest countries are most vulnerable to climate change.  It is essential that climate change be fully integrated into development policy, and that rich countries honour their pledges to increase support through overseas development assistance.  International funding should also support improved regional information on climate change impacts, and research into new crop varieties that will be more resilient to drought and flood."

Most regrettably, rich OECD countries are offering paltry amounts of assistance relative to the prospective damage which will be caused by climate change and relative to the weight of their historical responsibility.

As Nick Stern said, "Climate change is the greatest market failure the world has ever seen...".  And to understand the immensity of the paradox of climate change, you only have to read "Collapse: How Societies Choose to Fail or Succeed" by Jared Diamond.  In history, too many societies have collapsed because of environmental factors like deforestation, soil problems, water management problems, overhunting, overfishing, the effect of introduced species on native species, over population, andincreased per-capita impact of people.

If we don't take climate change seriously, it could be the end of us! 


STERN REVIEW: The Economics of Climate Change


Intergovernmental Panel on Climate Change


National Oceanic and Atmospheric Administration


United Nations Framework Convention on Climate Change


"Collapse: How Societies Choose to Fail or Succeed" by Jared Diamond

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