Discuss about the Global Emissions and Economic Growth.
Climate change has become a pertinent issue in the world today. Climate change has been mainly in form of increased global temperatures, severe storms, and rising of the seal level. These poses a great risk in the existence of life on planet earth. According to studies, greenhouse gases are some of the primary causes of the changes in climatic conditions around the world. This becomes a matter of even greater concern given that human activities are some of the major sources of greenhouse gases. Governments, economists, scientists, and other sector which are directly affected by global change being in the forefront in trying to figure out the problems which might be faced by the change in climate. One such action was by the UK government which created a committee led by Stern in 2006 (Stern, 2006) to determine whether it was prudent for the government to spend some of its money to reduce the emission of greenhouse gases. This paper examines the need for curbing the emission of greenhouse gases and specifically CO2, in the light of the Stern report as examined by Kenneth J. Arrow (2011).
The issue of reducing the amount of CO2 and other greenhouse gases have largely been controversial. Those against it saying that the costs incurred are high compared to the social benefit received. With the release of the Stern report, this matter became even more controversial. Arrow, in his paper, “Global Climate Change: A Challenge to Policy, Chapter 2” revisits the Stern report. Using a higher time preference value than stern and a value of 2.1, Arrow examines whether the benefits of these costs are justified. Arrow, justifies that, the costs of mitigating the release of greenhouse gases is higher than the costs that the world will suffer in future due to an increased amount of CO2 in the air. Arrow further discusses the implications of failing to act and gives examples on how emission of green house gases could be reduced.
The level of greenhouse gas emissions in the world are a major cause of the changes in global climatic conditions. Carbon II Oxide forms the largest part of the total global emissions. Table 1 shows the ratio of the major greenhouse gases emissions in the atmosphere.
The problem of CO2 emission may not be problematic to the current generation, but in the near future, it is expected that the level of Carbon II Oxide present in the air, would have doubled compared to the amount that was present before the start of industrialization. Rise in the level of Carbon II Oxide present in the air would lead to an increase in the global temperatures. It is projected that if no efforts to reduce the level of carbon II Oxide are established and everything continues being business as usual, then the temperatures would rise by at least 2 degrees centigrade.
The following diagram shows the Mean Annual Temperature for New Zealand.
- The blue and red bars show the difference in the temperature averages between 1971 and 2000.
- The black dotted line shows the linear trend in the increase in temperature. The temperature is seen to increase at about 0.960C every 100 years (NIWA, 2010).
Rise in the global temperatures means more problems of food security. In most tropical countries, agriculture will be adversely affected and this would lead to cases of drought and famine. According to Arrow (2011) the agricultural productivity in Northern Russia and Canada will be affected positively. This is so because, as at present these places are too cold for agriculture to fully flourish and a rise in temperatures would make the conditions better. He further continues to state that glaciers will melt and this will result to a rise in sea level. If the sea level rises, some coasts will be submerged and in some instances whole islands. All these would be costs that the future generations will incur if the problem of rising Green House gases is not promptly addressed.
To support the assumption that lack of action right now may be costly than taking action, Arrow, goes forward and uses the social benefit discount rate formula, , to find whether an investment in the struggle to reduce the level of Carbon II Oxide in the atmosphere is truly beneficial. Stern (2006) further argues that the benefits of curbing the rise in the amount of greenhouse gases in the atmosphere are damages which are prevented from taking place. From the stern report, damages will include both market damages and non-market damages (Stern, 2006). The expected GNP of the end of the next century will be less by 13.6% than what it is supposed to be. Before considering the impacts of the climatic change conditions, the base gross rate was taken to be 1.3% per year and after considering the climatic change, then the growth rate will be 1.2%. In simpler terms, if actions were taken to reduce CO2 emission, then the growth rate will increase from 1.2% per year to 1.3% per year. Giving a value of 2.1 and a value of 8.5%, a social rate of time preference which is termed as very high (a high rate of social time preference means that people put more value to their present well-being than in their future well-being), Arrow (2011), concludes that, the present value of the cost used to mitigate climate change (considered to be at 1% of the total GNP every year), are lower than the social benefits that are received from taking action (increase of GDP from 1.2% to 1.3%). Thus, Arrow justifies that, taking action is better than taking everything business as usual.
This is not to say that, there exists no market failures. A market failure mainly involves situations whereby, as individuals continue to advance their own well-being, the results of their actions are not sufficient and could be improved (Varian, 2010). One source of market failure in trying to curb greenhouse gas emissions is externalities. Externalities are defined as the costs or benefits accrued by a party who did not choose to take that benefit or cost. US for example, is estimated to contribute about 25% of the total greenhouse gases emissions. These gases travel around the world and will not only affect USA but also other countries. The cost of the effects of these greenhouse gases on other countries, will not be compensated by USA. A further example is that, the future generations will not compensate the current generation the costs that they will incur in trying to mitigate the emission of greenhouse gases. These two are examples of a market failure.
Some of the ways which can be employed to reduce the level of CO2 emission in the world include, (a) using fuels that produce a higher proportion of energy in relation to the amount of CO2 they give out as a by-product of combustion, (b) improving technology to ensure that they are efficient in terms of combustion, this will mean more energy output per unit of fuel, thus reduce CO2 in the long-run, (c) developing technology that use a considerable lower amount of energy per unit of work done (reducing the use of energy means less combustion hence low CO2 emission, (d) reforestation, this is planting trees where they have been cut such as re-gazetting encroached land as forests and taking initiatives to plant trees, e) afforestation, this is planting trees where there were non, this does not only imply coming up with artificial forests but taking initiatives such as to plant trees along a highway and (f) reducing deforestation. Trees take up CO2 and give out Oxygen as a by-product. This will help to balance the level of CO2 in the air.
Stern (2006), gave the social discount rate as . In this formula is the social rate of preference at a certain time. This is the current value that any social benefit is given compared to the well-being in future. In considering the curbing of carbon II Oxide emission. It will measure the value social benefits that would be accrued in the future in relation their valuation today. If the social time preference rate for reducing Carbon II Oxide is high, then it means that the world will be more focused on their well-being in the present time and the near future while low preference rate will mean that people are more concerned about their well-being in the further future than they are of the present. This implication means that if the is high, then the social discount rate of reducing Carbon II Oxide emission will be higher. People would not be interested in reducing Carbon II Oxide since the benefits of such an undertaking will be felt in the future not as at now.
Is a projection on the growth rate of consumer consumption in the future. To properly calculate the social discount rate one must consider the change in consumption in future. is the measure of how elastic the social weight given to a change in consumption is. The two are calculated based on the economic assumption that as consumption changes presumably in the positive, then the value of consuming one more unit will decrease the social value in real terms. This is similar to the diminishing rate of marginal private utility when calculating private consumption. The term is aimed at discounting the rate of change in consumption.
Any degree of uncertainty on the value of may raise the value of . This is so since, speaking in terms of say insurance, holding of stock and stock markets, people would prefer to work with a certain outcome than an uncertain outcome. People will always try to avoid risk as much as possible, where the outcome involves an uncertainty then the degree of risk is high (Arrow, 2011). Therefore, if the projected value of the change in consumption is uncertain, then the social benefits will also be uncertain. This will lower the perceived social benefit that will be accrued from any social project such as taking care of the environment. This would work negatively for any trials to reduce the amount of Carbon II Oxide being emitted. The aspect of how one treats the future is a matter of discussion between both philosophers and economists. The question is, how can the impacts of the future, specifically change in the level of consumption, be discounted to fit into the present? If the future changes in the level of consumption are uncertain, then measuring the social benefit discount rate becomes problematic and will result to a higher
There are several implications that will arise if the social discount rate determined is high. A low social benefit discount rate will mean that the social benefits accrued from reducing Carbon II Oxide from the atmosphere today, have a low Net Present Value. This means that the benefits will be low compared to the money that is being used reduce these trace gases. With the continued involvement of human beings’ contribution to the rise in global temperatures this can be detrimental. Countries and people will argue that it is better to harvest the benefits of continued use of fossil fuels and other activities that may lead to rise in global temperatures today, than try to reduce such activities and in return have lower GDPs and economic growths. People have even argued that, the money which is being used to reverse global warming should be used on the worlds’ poor (Jonathan, 2010). Governments and individuals will therefore use less in curbing global warming and the implication is that as people continue doing business as usual, the level of CO2 would rise, world temperatures will increase, tropical storms will become more fierce, some countries’ costs and island might be submerged as sea level rises, weather patterns of the world will change, agriculture would be affected etc. In short, all the impacts of global warming might become a reality. It is important to notice that, in the last century, the rise in the level of CO2 in the air has much been contributed by human beings in terms of industrialization. So, as people continue to neglect the need for reduced CO2 emission, the levels might rise at a higher rate and the effects of global warming will be more evident. Table 4 shows the average rise in CO2 Emission by regions in the world due to fossil use and Cement Production (human activities).
Some of the policies that have been put in place to reduce the amount of Carbon II Oxide emitted into the air have been ways of reducing the amount of fossil fuels and other fuels that have a large CO2 content used in production of energy and power. The argument being that more research should be done on renewable energy such as wind and Photovoltaic Systems (solar energy).
To discourage the use of these fuels, governments have put up some of the following measures, (a) increased the tax that is charged on the use of these fuels, it is expected that with increased tax on fossil fuel such as coal, gasoline and natural gas, industries and individuals, will find it costly to be used for production of energy. They will therefore cut their usage and use only the amount that is enough for their processes and production. The idea is to make these fuels expensive and using the law of supply and demand, a higher price would mean less demand. Where demand is lower than the reduction of using these fuels would have been achieved. (b) Another approach which governments have used is setting up tighter regulations on the use of these fuels.
These approaches have not always worked in the positive, as Adam Morton (2017) argues, taxation of carbon has led to a significant increase in prices of power. Most power is produced from generators running on either coal, natural gas, shale oil or diesel. A taxation on Carbon, means that producing power becomes expensive. The cost is transferred to the final consumer of power in form of prices. This has seen the price of power doubling. Strict regulations on the mining of coal and the use of generator running on coal to produce power have also been enacted. This has led to many power plants shutting down as they cannot meet these conditions. Investors are also uncertain on the future of using these fuels for production of power. This has made them to shy away from investing their money in plants that use these fuels to produce power. Table 3 shows the average increase in petrol prices in Australia.
If taxation has had a direct impact on the prices of power, then this is another cost that Australians have to pay if they are to reduce the amount of carbon II oxide released into the air. Higher power prices mean more overhead costs for production companies and the transport industry. This would have the effect of raising the cost of living since the costs are always transferred to the consumer (Morton, 2017). Furthermore, as more power plants close down, those employed in these plants will lose their job. Such activities often lead to a reduce Nominal GDP. Thus, the cost of curbing greenhouse gases emission would be costly for Australians.
Using the formula of the social discount rate, , to find the net present value of such approaches, then the cost of reducing greenhouse emission into the atmosphere would be considered higher. A high cost when discounted, will lead to a lower Net Present Value since the benefits of reducing the amount of Greenhouse gases will not have increased. In terms of social benefits that are gotten from such an initiative, it will mean less benefits relative to the cost that is being achieved to realize these benefits. This will therefore mean a higher value of in Australia. To Australians, reducing the level of greenhouse gases emissions would be expensive.
The value of the social discount rate, can be affected by the time preference value that is given to. Where a social planner is involved in determining the value of, , then the effects could be higher. Social planners are concerned about the social well-being of any society, he or she as the decision maker, tries to achieve the best results of any social undertaking for all parties that are involved. However, in most case, the social planners are governments, in addition to achieving the best welfare conditions for their citizens, governments too have other goals too. In most cases, the public choice theory is used as an economic tool to explain the options that a government has when it comes to determining what is best for their citizens.
The public choice theory also contains studies on political behaviour especially on the self-interests of all groups, say voters, politicians and bureaucrats. In most cases, the behaviour of a county’s citizens will influence how the leadership of a country makes decisions (R.G, 1989). Politicians’ decisions are influenced by the voting patterns of voters and what the voters want. This can be explained better using public economics and game theory.
Reducing the amount of carbon emissions in most cases involves increasing tax on fuels that have high CO2 waste, closing down of industries that use fuel, and reducing the amount of such fuel used in the economy. This would lead to closing of industries, worker retrenchments, higher costs of living etc. this is in contradiction of what most governments struggle to give their citizens. Such an implication will mean that social planners will give the social time preference a higher discount rate. To them, the cost of reducing the carbon II Oxide and other trace gases is costly and does not translate to immediate social benefits. A good example of such an action is by the US government which withdrew from the Paris Climate Accord which its main aim is to control global warming. The main concern of the US government being that its citizens had much more to lose as at present if these proposals of reducing CO2 were implemented. If more social planners follow suit, then the value given to might decrease considerably.
An increase in the value of , means that, social planners are more interested in the well-being of a society today, and are giving it a higher value than the well-being of the society in the future. Moreover, unlike governments which have infinite lifespans, individuals have a higher time preference value since they have a short life, that means that they will be more concerned about the present than the future. Governments and social planners therefore, while calculating the social discount rate, will use a higher time preference to please the needs of their immediate society. They will as a result strive to ensure that a society’s well-being at the present is maximized despite the effects it will bring in the future. This will in turn mean a reduced Net present Value of the projects undertaken to reduce the emission of Carbon II Oxide. Given the equation , the increase in the value of , will translate to the increase in the value of . How social planners value , has a direct impact on .
It is the hope of Sterns’s report, (2006) and Arrow (2011), that social planners, in this case governments, will see the need of taking action against the increasing emission of Carbon II Oxide today. They both concur that, though the costs that will be incurred while curbing the rate of Carbon II Oxide in the atmosphere might be high today, they are much less than the costs that will be as a result of increased global warming in future. According to Stern: It is much better to act today and reduce CO2 emission than wait and suffer the consequences of failing to meet this challenge.
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