The structure of this book

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In the next chapter, Ian Moffatt provides a concise guide to the science of climate change, with a focus on the construction of climatic data, the causes of climate change and the growth rate of greenhouse gases, and climate change modelling methodology. He concentrates upon climate change over the last two centuries, a period short enough for astronomical and geological processes of climate change to be assumed constant. Thus attention can be focused on the climatic impact of the changing composition of greenhouse gases in the atmosphere over this timeframe. The science underpinning climate change models is illustrated by means of a simple thermodynamic model of the greenhouse effect. More sophisticated models are then discussed, together with the related degree of uncertainty associated with such complex processes. Finally, he examines scenarios exploring possible climate futures, their associated physical impacts, and alternative policy issues and options.

At the 1992 Earth Summit in Rio de Janeiro, the United Nations Framework Convention on Climate Change (UNFCCC) was adopted by more than one hundred nations in order to develop an international coordination framework for addressing climate change. In Chapter 3, Joanna Depledge explores the evolution of the climate change regime over the ensuing 12-year period. After outlining the history of the regime, she focuses first on the Convention and the further development of its rulebook. The chapter then turns to the Kyoto Protocol, looking at its provisions and rulebook, before offering some remarks on the road ahead.

In the following chapter, Jason Shogren discusses what insights economics can offer policy makers in the debate over rational climate protection policy. These include identification of market failure, the costs and benefits of pursuing action (or inaction) for climate protection, risk reduction strategies and the creation of economic incentives that will assign a price to climate protection. However, the fundamental longer-term economic insight identified by Shogren is the evaluation of risk and associated hedges against uncertainty at local, national and global levels.

In Chapter 5, Michael Grubb gives an overview of the economics of the Kyoto Protocol. The intention of the agreement is to tackle the threat of climate change by establishing an efficient regulatory framework that sets an international 'price' on emissions of CO2 and other greenhouse gases. The core mechanism for achieving this is quantified emission commitments, that are given market-based flexibility through the use of emissions trading and other international economic instruments, and with negotiations on subsequent period commitments mandated to follow. Grubb provides an explanation of the basic structure of the Protocol, illustrated with respect to some of the key debates that went into its formation. He then examines the practical economic consequences of the final agreement as elaborated at the Marrakech COP 7 conference, including the economic consequences of withdrawal by the Bush administration. He concludes with some thoughts on the future of the Kyoto system.

Carbon taxes and emissions trading are both policy instruments that in a competitive and transparent market setting are capable of bringing about desired levels of greenhouse gas emissions reductions at the lowest cost. In Chapter 6 Fanny Missfeldt and Jochen Hauff show that both instruments can reach a given emission target at minimum cost in the context of a perfectly competitive, fully transparent and static market. However, when discussing the actual introduction of tradable permits as a policy tool, it is essential to analyse their properties under more realistic assumptions. Issues examined in this chapter include uncertainty, market power, and transaction costs which all make the case for the cost-effectiveness of a tradable permit approach less clear-cut. The authors then address the issue of carbon taxes, at both the international and domestic levels, and highlight the constraints that have restricted their implementation to date.

Cost-Benefit Analysis (CBA) is widely used as a tool for policy and project analysis. In order to improve the quality of decision making using Cost-Benefit analysis, attempts have been made to incorporate the environmental impacts of projects and policies. Many technical problems persist, however, in applying CBA to environmental issues. In Chapter 7, Nick Hanley and Dugald Tinch address some major problems in applying the CBA method to decisions over climate change, and question the appropriateness of CBA in this instance as a way of informed social decision-making. They point out that the costs of a policy must be lower than the perceived benefits for it to be adopted and non-adoption indicates that the costs are thought to be higher than the benefits. It therefore seems rational to suggest that decision makers should be informed by some quantifiable measure of the size of costs and benefits, rather than relying on implicit notions of what these costs and benefits are.

In the following chapter, Warwick McKibbin and Peter Wilcoxen outline the role that economic models have played in the climate change debate. They argue that economic models can play a very useful role but need to be used carefully to form the core of a structured debate rather than the source of definitive answers. Models are particularly useful for analysing the myriad of issues arising in the debate on greenhouse policies because it is impossible to solve the many interde-pendencies without using a framework that captures these interdependencies transparently. The ultimate usefulness of an economic model is not so much in the numerical magnitudes it produces (although these are very useful in placing debates in context) but in improving our understanding of the key underlying mechanisms that determine any set of numbers. As an illustration of how models are structured and used, they present an outline of the G-Cubed multi-country model and summarize the key insights from this model and others in the climate change debate to date. These insights include issues about baseline projections as well as the evaluation of the costs and benefits of alternative greenhouse policies.

Policies that target energy prices (either directly through taxes/subsidies or indirectly through emission caps) are likely to play an important role in any effort to combat global climate change. Although there has been considerable research effort into the impacts of possible energy pricing policies, there remains a number of unresolved issues and a need for continuing research. In Chapter 9, Brian Fisher and Mike Hinchy summarize the long standing disagreement between proponents of bottom up and top down models over the appropriateness of assumptions and plausibility of results from respective types of these models. In the specific case of the removal of fossil fuel subsidies, the main uncertainty is the size of the second-order repercussions of such a move. It is possible that the reduction in global carbon dioxide emissions could be smaller than suggested by the analysis of first-order impacts.

The Kyoto Protocol created the Clean Development Mechanism (CDM) and Joint Implementation (JI) to generate emission reduction credits that can be used to offset domestic emissions in Annex I countries. In order for the credits generated from CDM or JI projects to be credible, projects have to show that emission reductions they generate are 'additional' to any that would occur in the absence of the certified project activity. Further, the emission baselines against which a project performance is compared need to be environmentally sound, and project monitoring needs to be rigorous. In Chapter 10, Jane Ellis examines issues related to assessing a project's additionality, setting baselines, and monitoring and verifying the emission mitigation effect of projects. She also suggests means to achieve the appropriate balance between environmental integrity and practical feasibility.

Historically, developing countries have been relatively minor sources of GHG emissions and, with just a few exceptions, are likely to remain so for the foreseeable future. Yet they are likely to suffer disproportionately more than developed countries as the impacts of climate change are realized. In Chapter 11, Anil Markandya and Kirsten Halsnaes look at the present and projected share of GHG emissions of developing countries, what different GHG emission allocation rules would mean in economic terms, and evidence on the possible impacts of climate change on developing, in contrast to developed, countries. They then discuss how climate policies are determined, the role of self-interest in the negotiations, and how developing countries have been included in the agreements. Finally, they review mechanisms that have been created specifically to assist developing countries adopt low carbon technologies, whilst simultaneously providing low-cost abatement credits for developed nations.

In the final chapter, Tony Owen reviews life cycle analyses of alternative energy technologies in terms of both their private and societal (that is, inclusive of externalities and net of taxes and subsidies) costs. The economic viability of renewable energy technologies is shown to be heavily dependent upon the removal of market distortions. In other words, the removal of subsidies to fossil fuel based technologies and the appropriate pricing of these fuels to reflect the environmental damage (local, regional and global) created by their combustion are essential policy strategies for stimulating the development of renewable energy technologies in both the stationary power and transportation sectors. However, a number of non-quantifiable policy objectives are also of significance in the planning of future technology options. Currently, the most important of these would appear to be security of oil supplies and their associated transportation and distribution systems.

We hope that this collection of essays will prove helpful both to individuals working in climate change and to those entering the area and seeking insight into the current directions of research and policy. We also hope that the book illustrates the advantages and limitations of environmental economics as a discipline through which environmental problems can be understood, and by which appropriate responses can be chosen.

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