Climate change has raised

Livemint     28th July 2021     Save    

Context: The crisis is stark, but the economic trade-offs involved in addressing it call for careful deliberation.

Challenges raised by climate change at a global stage:

  • Economic performance linked with Gross Domestic Product (GDP): This model is insufficient to monitor environment variables. 
  • Disruptive green shift: At the very least, it will involve high financial costs. 
    • Countries like India still have low carbon emissions per capita, as well as low carbon intensity for every unit of GDP, making it a scenario of climate injustice for India.
    • There’s another aspect of climate justice that is just as important: between current and future generations.
    • A lot depends on what economists call the discount rate, on how costs are shared between generations. This raises two important questions?
      • Should the discount rate in climate change economic models be low or high? – low rate puts a higher burden on the current generation.
      • Should the discount rate be chosen subjectively or taken from an objective number such as the long-term interest rate used to value investment projects?
  • Devising incentives: There are two contrasting ways in which incentives can be used to make the shift to a green economy as smooth as possible.
  • One option is to impose hard pollution quotas decided by a public agency. This could slip into a new version of the licence raj. 
  • The other is to use policy levers to change relative prices, either by imposing high carbon taxes or by subsidizing alternatives; this poses a problem of bias, for e.g. big subsidies for solar power might make it harder for other green options to attract investment.
  • A carbon tax is simpler because it punishes polluters but makes no distinction between green alternatives available right now and ones that can potentially emerge later.
  • Climate change mitigation policy revolves around states: Most heavy lifting in terms of climate change mitigation policy is being done by governments, given the negative externalities involved.
  • Keeping climate change in check is perhaps the biggest example of global public good, in the sense that its benefits are non-rival and non-excludable.

Way Forward:

  • Shift to green accounting: Shifting to a green economy will mean that changes in stock will matter too. A lot of economic activity converts stocks into flows. 
    • One example is to look at changes in natural capital in tandem with those in physical and human capital. Green national accounts would have to take that depletion into account.
  • Ensuring climate equity: Both between the developed and developing nations and between the present and future generations.
  • Involving and cities and private entities: Individual cities or companies can also draw up their own strategies to reach net carbon neutrality by 2050 or even earlier.
    • When former US President Donald Trump pulled the US out of the Paris agreement, individual states, companies and universities responded with voluntary pledges to cut their carbon footprints.