Sunday, May 25, 2014

Climate Change

Climate Change:

I was doing a bit of research on climate change today in order to learn whether or not the costs of mitigating it exceed the costs of doing nothing. Most cost/benefit analyses find that the benefits of mitigating global warming outweigh the costs. However, the validity of these studies is uncertain since they have to make many assumptions. Also, scientists have little faith in them since measurements of the "optimal" level of mitigation are entirely subjective:

"[T]he decision over what "optimal" is depends on subjective value judgements made by the author of the study" (Azar, 1998)

This is quite unfortunate. However, one thing worth noting is that, according to a University of California study:

"A comprehensive assessment of global fossil-fuel subsidies has found that governments are spending $500 billion annually on policies that undermine energy security and worsen the environment." [1]

So, predictably, governments are doing the opposite of what they should be doing, which is not providing any subsidies for fossil-fuels whatsoever. Economic theory suggests that the best way to reduce fossil fuel emissions is to take away their subsidies and instead tax carbon emissions.

Pollution is in fact a negative externality which affects third parties without their consent. It is a market failure. Most economists would suggest dealing with this market failure by use of a Pigovian tax on carbon emissions.

Pigovian taxes are meant to discourage whatever is being taxed, in this case carbon emissions (and thus, pollution). Unfortunately, taxes are almost always harmful to growth, the question in this case is whether or not the benefit of reduced carbon emissions exceeds the cost of reducing them (through a carbon tax).

However, according to wikipedia:

"Global studies indicate that even without introducing taxes, subsidy and trade barrier removal at a sectoral level would improve efficiency and reduce environmental damage (Barker et al., 2001:568). Removal of these subsidies would substantially reduce GHG emissions and stimulate economic growth."

Thus, while we can't be sure that the benefits of a carbon tax would exceed the costs of it, research already suggests that removing subsidies to fossil fuels is a sure way to reduce carbon emissions. While many libertarians may oppose a carbon tax, I doubt any of them would oppose removing fossil fuel subsidies.

What do you all think? Is a carbon tax the way to go? Should we just remove fossil fuel subsidies? Or both?

University of California study:

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