In recent years, the need to act quickly in the face of climate change has become evident, to the point of referring to this phenomenon as a “Climate Crisis.” How can we deal with this situation? In this article we propose measures to mitigate its effects or, at least, try to do so. It is a collective challenge that must be faced by the regulatory bodies, companies and each individual household.
Regulation plays a key role in the fight against climate change. Thus, it is necessary that the measures taken by the regulator are implemented as soon as possible and that they emanate from a clear and stable framework. The longer they take to implement, the more costly adaptation will be for businesses and households.
One of the proposals that generates the most consensus among economists is the introduction of mechanisms that make greenhouse gas (GHG) emissions more expensive, since it modifies the incentives of companies when they invest and they produce, and from households when they purchase and consume. Ideally, these mechanisms should adequately reflect the cost of emitting GHGs into the environment, and the revenues that would be generated could be used to compensate consumers for rising prices of carbon-intensive goods, investing in new infrastructures that are low in emissions and which support technological innovations.
However, knowing the appropriate price to charge of emissions is not a trivial matter. Some estimates suggest that, to reach the targets of the 2015 Paris Agreement, it should be between £30.86 and £61.71 per ton of CO2 in 2020, and between £38.57 and £77.13 by 2030, a figure that varies within each economy dependent on its individual characteristics. Likewise, the IMF estimates that, with a CO2 price gradually reaching £58.28 per tonne in 2030 in the G-20 countries, global warming could be delimited to below 2°C. However, according to the World Bank data, currently only 20% of GHG emitting businesses are actually being taxed, so the current global average price of CO2 emissions is only £1,540.000 per ton.
There are two mechanisms which make GHG emissions more expensive:
Emissions market. In this system, the regulator sets a maximum limit to the total amount of tons of CO2 that can be emitted per year and region and, within the established limit, companies receive or buy emission rights with which they can trade with each other based on of your needs. The maximum limit decreases every year, which encourages companies to emit less CO2 and invest in more environmentally sustainable technologies. Currently, the largest emissions market in the world is in the EU: the European Trading System (EU ETS) was one of the first emissions markets and regulates 45% of GHG emissions in the region. In this system, some emission rights are distributed free of charge (a percentage that decreases year by year) and, as can be seen in the graph, the final price that adjusts supply with demand has been relatively volatile. Emissions tax. The regulator sets a price to the GHG emission that increases progressively (instead of a quantity that decreases, as in the emissions market). In this way, with future progressions announced right from the outset, companies can adequately decide how to plan and invest more efficiently in new technologies.
However, setting a price for emissions entails some challenges that the regulator must take into consideration:
Carbon emissions. The climate challenge is global and has no delineating boundaries. In the event that there is no international coordination and carbon emissions become more costly in some countries than in others, the effectiveness of the measures that can be taken will be dramatically reduced, since companies would simply relocate their production centres to other areas if the impact upon their competitiveness becomes too high. For this reason, and the absence of international coordination, various economists have expostulated that it would be beneficial to establish set precise tariffs upon imports of carbon-intensive products (to compete on equal terms within the domestic markets) and in turn subsidise those companies that export (so that they can compete within the international markets).
Political Repercussions. By making carbon-intensive products more expensive, some vulnerable groups (such as low-income households or the transport sector) will be affected more than the rest of society and become firmly resistant to these policies, as happened with the movement of the yellow vests protestors in France (17 November 2018 — 1 May 2021). Specifically, according to IMF estimates, a carbon price of €68 would make energy consumption more expensive by approximately 45% and gasoline by 15%. Hence energy transition needs to be both fair and as inclusive as possible to make it work. Two solutions have been proposed to this potential problem:
- directly compensate the groups that are most affected by the enforcement of this policy through revenues collected from the price of emissions;
- Return the revenues collected to every citizens of the region equally as a subsidy of a fixed amount (lump-sum rebate).
According to the World Bank, there are currently 57 initiatives in the world that make carbon emission more expensive (either through an emissions market or through taxation). Among them, Sweden’s carbon tax stands out, priced at £98.56 per tonne and which covers 40% of Swedish CO2 emissions (taking into account that emissions already included in the EU ETS are exempt). This measure was introduced in 1995 and has contributed to reducing CO2 emissions by some 25% since then.
However, the price of emissions is not the only solution nor is it sufficient enough to mitigate the effects of climate change. To be effective, it must be accompanied by other measures that offer sustainable alternatives to both consumers and companies (improvements in the energy efficiency of infrastructures, improvements in urban and interurban mobility or aid for research in new technologies, among others).
Although all GHGs contribute to climate change, man-made increases in temperature are mainly explained by CO2 emissions. See IPCC (2013). “Climate Change 2013: The Physical Science Basis“. See Stiglitz, J. E., Stern, N. et al. (2017). “Report of the high-level commission on carbon prices“. IMF (2019). “Fiscal Monitor: How to Mitigate Climate Change.” This measure is found in a document signed in 2019, among others, by 27 Nobel laureates and 4 former presidents of the US Federal Reserve Council, C. L. (2019). “Economists’ Statement on Carbon Dividends.” The Wall Street Journal. January 16, 2019. See the article “Political instability in Europe: France in the eye of the storm” of MR04/2019. See note 4, 5, 9. https://carbonpricingdashboard.worldbank.org/ . See Gaspar, V. et al. (2019). “Fiscal Policies to Curb Climate Change“. IMFBlog.
The climate challenge affects the whole of society and it is crucial that the role of the private sector also becomes very active and urgently. It is, therefore, essential that companies make a real commitment to the sustainability of the planet, which requires that they integrate into their mission the interests of all those groups that contribute to the modelling of business values: customers, shareholders, employees and the whole of society.
Along these lines, a wide range of indicators that go beyond economic benefits are gaining more and more importance, such as the SDGs (Sustainable Development Goals), 17 goals approved by the United Nations to eradicate poverty, protect the planet and ensure prosperity for all. To analyse the specific areas in which companies can contribute to the sustainability of the planet, the information provided by the UN SDGs Observatory, which assesses the degree of compliance with the SDGs in companies of the United Kingdom SDG global indicator data, is very useful. Regarding environmental issues, the second report of the Observatory analyses the progress of UK listed companies in 2021 in areas such as the use of renewable energy, water consumption, waste management, information and level of emissions and environmental policies. The report confirms that whilst some improvements have been made over the previous year’s report there is still a very long way to go: Carbon dioxide (CO2) emissions in the UK are provisionally estimated to have fallen by 10.7% in 2020 from 2019, to 326.1 million tonnes (Mt), and total greenhouse gas emissions by 8.9% to 414.1 million tonnes carbon dioxide equivalent (MtCO2e). Total greenhouse gas emissions were 48.8% lower than they were in 1990.
Likewise, it must be highlighted that this commitment to sustainability is in no way at odds with the economic benefit of companies: those that commit to taking measures in line with the SDGs do benefit, in the short term, of greater loyalty from their customers, greater employee engagement and lower capital expenditure. There is though a risk to the reputation of companies that are perceived to be part of the problem and whom purposefully avoid curbing their effects on climate change. In the mid and long term, those that have not been able to or have flatly refused to adapt or innovate in this direction will face serious difficulties when confronted with new environmental legislations or by being rejected by their consumers whom are becoming increasingly aware of the stresses imposed upon our ecology.
Households are crucial to accelerating these changes within the regulatory and business environment. If citizens do not demand stricter regulation on GHG emissions, it will be more difficult for the elected representatives to set an acceptable price upon compliance (at the very least) with the Paris Agreement. And without a change in consumer attitudes towards and preferences for carbon-intensive products, the companies that produce them will not be incentivised toward innovating into green technologies.
For a change in the attitudes and preferences of individuals to occur, the constraints placed upon the battle against climate change set out in this article must be expeditiously overcome. For example, if we are unaware of the damage that our actions have cause to the environment, we will be unable to make the correct decisions. Furthermore, we often believe that an individual person’s actions against climate change are inadequate, what an economists would call the “free-rider problem.” In the social sciences, the free-rider problem is a type of market failure that occurs when those who benefit from resources, public goods (such as public roads or hospitals), or services of a communal nature do not pay for them at all or do everything within their power to under-pay. Free riders are therefore, a grave problem because while not paying for the good (either directly through fees or levies or indirectly through taxes), they continue to access or use the resources at virtually no cost. So to a certain extent an individual person’s actions against climate change are inadequate, simply because of the fact that a having a low-consumption level appliance if the rest of the world uses appliances which pollute far more. Yet, the actions that a person does take, has the ability to influence those around us and can create an ethical cluster of people who also begin to change and therefore influence others in turn.
In short, we must bear in mind that in our battles against climate change there will always be so winners and some losers who are entitled to restitution. We must also keep in mind that if we do not enter into this battle, there will be no winners. The consequences of climate crisis are precisely this, a crisis, and therefore if we wish our children and grandchildren to have any kind of future at all, we have a duty to act immediately and we must do so in a manner that is both just and determined. The alternative is that our children and their children will not be able to breathe, drink water, nourish themselves or see a living animal, that is of course unless you have millions stashed away for them to support themselves.