The United Nations summit on climate change at Copenhagen in December is being preceded by an acrimonious debate on the impact of strict greenhouse gas (GHG) emission targets on economic growth.
Developing countries such as India argue that since carbon energy is vital to sustaining their rapid economic growth, any binding limits on GHG emissions will erode the competitiveness of their businesses and retard growth. Sceptics question the motives of developed countries advocating such restrictions after having themselves benefited from unrestricted emissions in the early stages of their development.
In an environment clouded by such suspicions, it is easy to lose sight of the threat posed by climate change to human lives, especially those in developing countries, and the fact that developing countries form an increasingly large share of GHG emissions. In the circumstances, it is inevitable that any meaningful effort to address climate change involve active participation of the developing countries.
Therefore, instead of blindly opposing emission caps and risk being left behind as the world moves forward with climate change policies, India and other developing countries should use the platform of the Copenhagen summit to present long-term, clearly defined and quantifiable counter-proposals that safeguard their interests while addressing one of the most important challenges facing the world.
This assumes greater significance since climate change could soon replace traditional issues that divide developed and developing countries—tariffs, labour standards, agriculture subsidies, etc.—and become central to global trade negotiations.
Economists such as Robert Stavins of Harvard University argue that gradual GHG emission reductions are both possible and affordable, and the costs are not as overwhelming as opponents project. He points to the fact that “from 1990 to 2007, while world emissions rose 38%, world economic growth soared 75%—emissions per unit of economic activity fell by more than 20%”.
Carbon tax and cap-and-trade have emerged as the two most favoured approaches to lowering GHG emissions. However, there are sharp differences in their effectiveness.
A cap-and-trade regime would place limits on GHG emissions and permit surplus emitters to purchase credits from those who emit less than their allocations. Accordingly, those who can reduce their emissions at the least cost can sell their saved carbon credits to those facing higher marginal costs.
However, the experience of the European Union’s Emission Trading Scheme reveals that cap-and-trade regimes can lead to a misallocation of subsidies due to the difficulty in determining the most efficient allocation of emission targets and projects eligible for carbon credits. There are transaction costs in effectively monitoring adherence to targets by sellers and buyers of permits, which is of great significance in developing countries as adherence and enforcement of basic environmental safeguards is marginal.
In contrast, a tax on the carbon content of the fuel, or the amount of carbon dioxide emitted per unit of energy, would put a uniform price on carbon emissions, is easier to administer, can cover all emission sources, and is less distortionary. It would transfer the cost of climate change to the emitters and discourage carbon-intensive fuels, encourage low-carbon fuels, and increase the commercial viability of renewables.
It also generates an assured revenue stream, which can be used to finance development and access to clean technologies by developing country firms. Further, as economists such as William Nordhaus of Yale University argue, a uniform global carbon tax avoids the international policy harmonization problems associated with cap-and-trade regimes, and can be easily integrated with the existing policies under the World Trade Organization.
Any sustainable global climate change policy has to acknowledge the responsibility of developed countries to larger emission reduction commitments and that of developing countries to a phased reduction in their rapidly increasing emissions. Therefore, while a universal carbon tax should be at the centre of the global efforts to control carbon emissions, it is also important that developed economies adopt cap-and-trade policies to achieve their larger share of emission reductions.
Since projects undertaken today will determine emissions for a generation, there is a need for immediate action to adopt clean technologies in manufacturing, infrastructure, transportation, power generation and other carbon emitting activities. It is imperative that the access barriers to these technologies are lowered, especially for firms from developing countries where such economic activity is occurring at a frenetic pace. These technologies should become global public goods, made readily available for all such investments across the world.
It is appropriate that rich countries, being responsible for most of the GHG emissions, finance the development of clean technologies and share them with developing countries. A global clean technologies exchange can be established to collect and transfer such technology and practices. This exchange can even pay royalties and franchise technology from private businesses.
Finally, to ensure that the costs of the transition are staggered over a longer period and thereby made affordable to all the stakeholders, it may be more effective to declare upfront gradually tightening emission standards on various sources such as electronic equipment, automobiles, construction and industrial activities. This would save firms and investors the uncertainty and steep costs associated with sudden and reactive policy changes.
There is no magic bullet to address this complex issue and only a multi-pronged and globally coordinated approach, drawing on carbon taxes, cap-and-trade and technology transfers to developing countries, can achieve the desired objectives.
Gulzar Natarajan is a civil servant. These are his personal views. Your comments are welcome at email@example.com