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What's needed for real action on climate change?

Rochester Business Journal
September 27, 2013

All serious researchers and policymakers believe the climate change problem is the most salient environmental problem confronting humankind today. Despite early action to tackle this problem in the form of the 1997 Kyoto Protocol, very little has been done since then to fight this serious problem.
 
There was great hope that the 2009 meeting in Copenhagen of the parties to the United Nations Framework Convention on Climate Change would produce a meaningful accord for reducing greenhouse gas emissions. This hope was largely dashed because what emerged from this meeting was a watered-down "Copenhagen Accord," which promised only to hold the increase in the global average temperature below 2 degrees Celsius and obtained pledges from wealthy countries to reduce their emissions of GHGs by 2020 to achieve this target.
 
In the aftermath of the recession of 2008-09, the official communique from the Group of 20-the world's largest economies-at the 2009 London Summit stated clearly the intent of these nations to transition to low-carbon technologies and infrastructure. As a result, hope once again rose that world leaders would implement meaningful policies to combat the scourge of climate change. Yet even though some countries did take environment-friendly actions, observers have pointed out that most nations either were cautious or did very little to make low-carbon environmental investments.
 
This saturnine state of affairs raises the following question: If an explicit recognition of the problem and the worst economic crisis to affect the world since the Great Depression together are not enough to bring about policy changes to transition to a low-carbon economy, then will a global catastrophe be needed to generate meaningful action on climate change?
 
Edward Barbier, Douglass North and other economists have pointed out that in order to answer this question, it is necessary to comprehend the interaction between what they call institutional inertia, transaction costs and vested political interests. Institutions are the formal and informal rules that govern and organize economic and social behavior in nations. As nations develop, the surviving institutions become complex, they demonstrate a tendency to be invariant over long periods, and hence they are difficult to alter. Put differently, institutions display inertia.
 
In advanced economies, transaction costs are ubiquitous and include things like search and information costs, policing and enforcement costs and the expense of complying with governmental rules and regulations. Established institutions tend to reduce the transaction costs associated with production and market relationships, but these costs typically cannot be eliminated.
 
With regard to the climate change problem, research shows that these irremovable transaction costs are responsible for institutional inertia, which in turn is preventing a large-scale transition to a low-carbon economy. Because these transaction costs are in addition to the non-trivial economic costs of switching from fossil fuels to alternative energy sources, they magnify the economic costs and hence suggest that they cannot be overcome.
 
Estimates show that existing subsidies for global fossil fuel consumption and production amounted to $657 billion in 2008. The removal of these perverse subsidies would certainly improve energy savings, but it would also harm selected groups that benefit from the subsidies. Therefore, the greater the political bargaining power of these vested interests, the more difficult it is to implement policies that address the climate change problem.
 
As a result, the pattern of carbon-dependent economic development that has characterized much of the Western world in the last 100 years has continued, virtually unchecked. Looked at differently, the overall carbon dependence of the world economy actually has increased.
 
This insalubrious state of affairs tells us that a global catastrophe may well be needed to get our bickering politicians to get out of the "business as usual" mindset and take meaningful actions to precipitate the transition to a low-carbon world economy. This is a disturbing prospect in two ways. First, if a global catastrophe does occur, the world's poor nations-already burdened with a host of problems-will be hit hardest. And second, if the global catastrophe gives rise to irreversible changes, then even the most concerted actions are unlikely to prevent large losses in human welfare.

Amitrajeet A. Batabyal is the Arthur J. Gosnell professor of economics at Rochester Institute of Technology, but these views are his own.

9/27/13 (c) 2013 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or email service@rbj.net.


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