New Economy in Progress

Part 3 of New Paradigm Knowledge Base: Greening Prosperity

 

The most recent report by the Intergovernmental Panel on Climate Change (IPCC, 2019) suggests that the current trajectory of the global economy with its high level of carbon emissions is incompatible with the goals of the Paris Climate Agreement to keep temperatures from rising by 1.5 degrees or more  above pre-industrial levels. As the authors of the report state, it is therefore reasonable to argue that the current form of market-based emissions trading has failed. The EU-ETS, which is still the largest emissions trading scheme in the world, has produced prices for carbon that are too low and too volatile to achieve a transformation of the European economy.

Researchers and policy makers have therefore suggested alternatives and additions to the existing emission trading schemes. Some of the options to combat market and regulatory imperfections are described below:

  • A price floor: According to recent research, emissions trading schemes need to be augmented by a price floor (Edenhofer, 2017). Setting a minimum price on emission allowances could address the market distortions arising from short-sightedness and regulatory uncertainty by simultaneously raising short-term prices and signaling a commitment to stick to the long-term emissions cap. This could avoid a hockey stick scenario, under which prices rise slowly in the beginning but then accelerate in the future.
  • A carbon tax: Policy makers and economic experts have recently stepped up their discussions over the possibility of a tax on carbon emissions. The German Council of Economic Advisors has suggested that a carbon tax could supplement the existing EU-ETS and would be relatively easy to implement (Sachverständigenrat, 2019).
  • Investment in infrastructure: Putting a real price on carbon might not be enough to bring about a zero-carbon economy; it will require large-scale public action and investment to create the necessary infrastructure. For that to happen, climate policy will have to be integrated into governments’ overall economic strategies.
  • Fair transition: Since the yellow vest movement in France there has been intensive debate over how to design climate policies that also help address today’s other main paradigmatic challenges such as the rising income gap between the rich and the poor. For example, this may lead to strategies in which lower income groups are disproportionally compensated for increases in carbon prices.
  • Defining the challenge in a broader manner: As climate economists Michael Jacobs and Laurie Laybourn-Langton argue in recent work for the Forum New Economy, there is much more to be protected than just the climate. A broader approach should also integrate the risks of species extinction, air pollution and other environmental dangers.

Read Part 2: Greening Prosperity: What went wrong?

Read Part 3: Greening Prosperity: New Economy in Progress

References

  • Anderegg, W. R., Prall, J. W., Harold, J., & Schneider, S. H. (2010). Expert credibility in climate change. Proceedings of the National Academy of Sciences, 107(27), 12107-109.
  • Black, R., Bennett, S. R., Thomas, S. M., & Beddington, J. R. (2011). Climate change: Migration as adaptation. Nature, 478(7370), 447.
  • Sachverständigenrat (2014). Mehr Vertrauen in Marktprozesse. Jahresgutachten 2014/15 (Nr. 2014/15). Jahresgutachten.
  • Brown, O., Hammill, A., & McLeman, R. (2007). Climate change as the ‘new’ security threat: Implications for Africa. International affairs, 83(6), 1141-54.
  • Coase, R. H. (1960). The problem of social cost. In Classic papers in natural resource economics. Palgrave Macmillan, London, 87-137.
  • Edenhofer, O., Roolfs, C., Gaitan, B., Nahmmacher, P., & Flachsland, C. (2017). Agreeing on an EU ETS price floor to foster solidarity, subsidiarity and efficiency in the EU. Energy Tax and Regulatory Policy in Europe, MIT Press, Cambridge, MA, 31-61.
  • Sachverständigenrat (2019). Aufbruch zu einer neuen Klimapolitik. Sondergutachten des Sachverständigenrates zur Begutachtung der gesamtwirtschaftlichen Entwicklung.
  • Hauer, M. E., Evans, J. M., & Mishra, D. R. (2016). Millions projected to be at risk from sea-level rise in the continental United States. Nature Climate Change, 6(7), 691.
  • IPCC (2019). Summary for Policymakers. In: IPCC Special Report on the Ocean and Cryosphere in a Changing Climate [H.-O. Pörtner, D.C.Roberts, V. Masson-Delmotte, P. Zhai, M. Tignor, E. Poloczanska, K. Mintenbeck, M. Nicolai, A. Okem, J. Petzold, B. Rama, N. Weyer (eds.)]. In press.
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  • Koch, N., Grosjean, G., Fuss, S., & Edenhofer, O. (2016). Politics matters: Regulatory events as catalysts for price formation under cap-and-trade. Journal of Environmental Economics and Management, 78, 121-39.
  • Kollenberg, S., Taschini, L. (2015). The European Union Emissions Trading System and the Market Stability Reserve: Optimal Dynamic Supply Adjustment, CESifo Working Paper 5380.
  • Pigou, A. (2017). The economics of welfare. Routledge.
  • Reuters (2019). Experte - CO2-Preis entscheidend für Erfolg von Klimaschutz. https://de.reuters.com/article/deutschland-klima-edenhofer-idDEKBN1W421A.
  • Salant, S. W. (2016). What ails the European Union׳s emissions trading system? Journal of Environmental Economics and Management, 80, 6-19.
  • Storm, S., & Schröder, E. (2018). Economic growth and carbon emissions: The road to ‘hothouse earth’ is paved with good intentions. Institute for New Economic Thinking Working Paper Series, (84).

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