Tag Archives: subsidies

Addressing Climate Change

UN Climate Change Conference

UN Climate Change Conference

Clive Crook

has an interesting analysis of the New Republic’s recent editorials on the political economy of climate change. The short version is that the disconnect between climate change rhetoric and reality has undermined policy proposals to limit the impact of dramatic climate events. This is not to suggest that anthropogenic (human-driven) climate change is not occurring. It is, but its impact is difficult to assess and probably less-dramatic and immediate than climate change scientists have warned. To make matters worse, the impact of efforts to address climate change—by, for example, increasing the cost of polluting activities through taxes or regulation—are felt immediately. The consequence is that it becomes relatively easy to mobilize individuals to oppose legislation addressing climate change but it much more difficult to mobilize them to support it.

What we’ve done to date is to treat carbon emissions—one of the primary drivers of climate change—as a negative externality [glossary] and to attempt to establish policies which force firms and consumers to internalize those externalities. Cap-and-trade does this by creating a market in carbon emissions and requiring firms to purchase the right to emit carbon. Not surprisingly, most firms, especially those which already emit high levels of carbon, oppose such a policy. As The Economist’s Free Exchange blog notes, the introduction of a cap-and-trade system in the United States appears dead for the foreseeable future, given strong opposition by Republicans who will likely regain control over the House of Representatives in the fall.

Ultimately, the challenge of addressing climate change can best be understood as a collective action problem, in which the incentive for each rational actor (be it a state, a firm, or an individual) is to do nothing and to free ride [glossary] on the efforts of others to address the problem. This is because of the nature of efforts to address climate change. Preventing climate change is a classic example of a public good [glossary]. And because it is impossible to exclude someone who has not paid for a public good from benefitting from that same public good, the rational course of action for any individual actor is to free ride on the efforts of others.

At the domestic level, public goods are often provided by the state. National defense for example, is provided by the state because of its nature as a public good. Historically, fire prevention services might also have been considered a public good. But at the global level, the anarchic nature of the international system increases the incentives for states to free ride on the efforts of others, and the provision of global public goods is consequently much more contentious.

The solution is to change the way we think about the problem. According to Michael Shellengberger and Ted Nordhaus, long-term public investment in green energy provides a better alternative. Rather than increasing the cost of carbon emissions, reducing the cost of green energy is more politically palatable. There are problems with this solution to be sure. As the Free Exchange blog notes, research subsidies will likely not address the low-hanging fruit of easy, low-cost changes that have a minor (but important) impact. Further, absent changes which force the internalization of carbon price externalities, the incentives for green energy production are likely to be less dramatic than they might otherwise be. But in the political climate in which we currently operate, green energy subsidies might be the only path towards a more sustainable energy policy.

Reviving the Doha Round

Talks intended to re-start the Doha Round of World Trade Organization liberalization began on Monday.  The Doha Round, which had been designated the “Development Round” by its proponents, was supposed to address a wide array of issues of concern to developing countries, including liberalization of trade in agricultural goods, reducing agricultural subsidies, and access to essential medicines.  The talks originally broke down two years ago, largely because of the unwillingness of US and European officials to cut subsidies to their farmers.  Parties to the talks are expressing guarded optimism about the outcome.

What’s on the table?  The major sticking point continues to be the slow pace at which the United States and some members of the European Union are willing to remove agricultural tariffs and subsidies.  While the World Trade Organization (and its predecessor organization, the General Agreement on Trade and Tariffs, or GATT) has overseen a dramatic decrease of tariffs and non-tariff barriers to trade in industrial sectors, the agricultural sector has remained largely outside of liberalization efforts.  The European Union has offered to cut its agricultural subsidies by 60% (from €10 billion to €4 billion in annual subsidies).  The United States has offered to trim its agricultural subsidies to $7.6 billion per year.  Both sides face strong domestic opposition to the proposed cuts; both proposals have been dismissed as inadequate by the developing countries at the WTO talks.

Developing countries have long been told by the World Bank and International Monetary Fund that open markets and free trade are the most effective and efficient way to develop an economy.  From their perspective, resistance by the US and EU to liberalize their agricultural markets highlight the injustice of the world trade system, which appears to have one set of rules for the rich and another set for the poor.  That’s what makes the position of the developing countries, particularly of countries like Brazil and India, so compelling.  They have effectively turned the argument in favor of liberalization against countries which historically promoted it most.