Climate Change 2：Harnessing Economic Policy to Combat Climate Chang

Harnessing Economic Policy to Combat Climate Chang

The climate crisis stands as an intractable issue in the modern world, with carbon emissions emerging as a pivotal factor contributing to their growth and also representing a focal point for future policy initiatives. Resource misallocation due to unregulated markets is central to comprehending the ineffectiveness of emission control strategies. This report examines core economic principles such as private and external costs, analyzing how market failures manifest in the context of carbon emissions, particularly through instances like wildfires in the American West. It also explores how policy measures like carbon caps and subsidies might address these challenges by realigning market incentives with societal and environmental goals. By integrating diverse perspectives from current literature and empirical research, this analysis seeks to evaluate various economic policies' effectiveness. The objective is to provide a succinct yet comprehensive overview of how economic theory can inform actionable strategies for mitigating climate change.

Within the context of climate change, private costs are directly imposed on entities or corporations engaged in economic operations, particularly those involved in producing fossil fuels. However, these entities typically fail to account for external costs resulting from negative spillovers that affect third parties; these include broader impacts on public health and increased property damage from more frequent natural disasters as well as a decline in biodiversity (Fullerton & Stavins, 1998). These externalities play a key role in market failures since they represent costs not adequately considered within market transactions of goods and services.

An exemplary case is observed in the escalating frequency and intensity of wildfires across the American West. While the immediate expenses associated with firefighting and property damage are substantial, their impact pales in comparison to the broader environmental and health consequences experienced by populations unaffected by the initial activities that contributed to these wildfires, such as inadequate forest management and excessive carbon emissions (Abatzoglou & Williams, 2016). To be precise, as illustrated in Figure 1, federal fire suppression expenditures on federal lands averaged $2 billion annually from 2016 to 2020, with particularly costly years noted for 2017, 2018, and 2020 due to wildfires (Wildfire Financial Cost, n.d.). Additionally, the Annual 2021 Wildfires Report reveals that over 7 million acres were affected by wildfires in 2017, with an average of approximately 8 million acres burned annually between 2017 and 2021 (National Centers for Environmental Information, 2021; Congressional Budget Office, n.d.). The disparity between private benefits and public losses exemplifies a classic market failure scenario where market decisions fail to account for the true social costs of economic activities.)

Figure 1 Firefighting Expenditures and Deforestation During 2017 and 2020

Economic theory indicates that in the absence of intervention, the market cannot achieve an optimal allocation of resources when externalities are present (Pigou, 1920). Pigou originated a tax equivalent to the external cost - now referred to as a Pigouvian tax - as a means to rectify this kind of market failure. Theoretically, Coase (1960) posited that under specific circumstances, parties are able to negotiate arrangements to mitigate externalities. However, implementing such negotiations becomes increasingly impractical on a large scale concerning climate change due primarily to transaction costs and the widespread impact on various parties involved.

By highlighting the stark contrast between fast fashion and sustainable garments, the fashion industry serves as a stark example of market failure. Fast fashion thrives on relying on externalization rather than internalization. By focusing on rapid production processes coupled with a high volume of affordable apparel being sold at lower prices, it effectively shifts responsibility for its environmental impact onto consumers. Garments sold at lower prices do not account for these costs, resulting in excessive consumption and waste. According to Figure 2, addressing the ecological and societal challenges posed by this industry could generate an estimated aggregate economic benefit of 192 billion by 2030. Meanwhile, annual losses from prematurely disposed clothing amount to over 400 billion (World Resources Institute, n.d.). Annualized statistics reveal that this industry generates over 92 million tonnes of waste and consumes an astronomical 79 trillion liters of water each year (Nature Reviews Earth & Environment, n.d.). While sustainable garments made with eco-friendly materials... often command a higher price tag that more accurately reflects their true cost of production.

Figure 2: Total Benefits and Annual Amount of Garbage in the year 2030 of the Fashion Industry

Due to varying cost structures, the market often experiences significant issues through excessive production of fast fashion and insufficient production of sustainable garments. To satisfy low-cost clothing needs, industries frequently prioritize environmental sustainability, with the textile sector being one of the world's largest polluters (Niinimäki et al., 2020). The mismatch between market prices and social costs results in substantial market failure, manifesting as environmental degradation and labor exploitation.

Public goods, such as clean air and biodiversity, demonstrate the properties of non-excludability and non-rivalry. The former signifies that a single entity's consumption does not reduce the quantity available to others; conversely, the latter reflects an insurmountable barrier preventing individuals from being excluded. Such characteristics often result in market failures due to the free-rider problem impeding adequate supply of these goods (Samuelson, 1954). Ecosystem services such as pollination and climate regulation exemplify public goods often undervalued or overlooked in market transactions.

Despite their critical importance, markets often struggle to protect or adequately produce ecosystem services. As depicted in Figure 1, the total urban area in Europe expanded annually from 2000 to 2018; meanwhile, other regions such as cropland and grassland maintained stable or saw a decline each year. For instance, forests provide essential services like carbon sequestration and biodiversity habitats. These functions are frequently not compensated within market systems (Costanza et al., 1997). This lack of compensation leads to deforestation and biodiversity loss as land is converted into more valuable uses like agriculture or urban development. The integration of ecosystem services into economic policies is crucial to address this market inefficiency.

Figure 3 Ecosystem Extent Trends from 2000 to 2018 in Europe

To effectively address greenhouse gas emissions, carbon cap-and-trade systems set a cap on emissions, allowing market forces to determine the price of carbon, aligning it with its social cost (Stavins, 2008). Governments can incentivize emission reductions by gradually lowering this cap and redirecting subsidies from fossil fuels to renewable energy, correcting market distortions and fostering a greener economy (Parry et al., 2014). Concurrently, the shift from fossil fuels to green energy, driven by the need for sustainable practices, presents a dual challenge. While it promises reduced emissions and alignment with environmental goals, renewable energy faces hurdles in efficiency, energy storage, and supply consistency. This transition requires significant financial investment, risks to fossil fuel-dependent industries, and demands comprehensive policy frameworks and infrastructure updates. Navigating this complex shift requires a harmonized approach that balances the benefits and challenges, emphasizing strategic foresight, innovation, and cross-sectoral collaboration.

Crucial economic policies are vital in mitigating climate change. Market failures related to carbon emissions can be effectively addressed using tools such as Pigouvian taxes, carbon caps, and shifts in subsidies. These policy tools hold significant potential to mitigate climate change, yet their successful implementation requires meticulous planning to ensure that market incentives align with the long-term sustainability of the planet.

References

This study examines the influence of anthropogenic climate change on wildfires in western U.S. forests. The research was published in the Proceedings of the National Academy of Sciences, Volume 113, Issue 42, with page numbers ranging from 11770 to 11775 in 2016.

Coase, R. H. (1960). The problem of social cost. Journal of Law and Economics, 3, 1-44.

The importance of global nature's services and natural assets.

Fullerton, D., & Stavins, R. (1998). How economists see the environment. Nature, 395(6701), 433-434.

Joy et al. (2012) explore the interplay between fast fashion trends and sustainable practices in the context of ethical considerations for luxury brands. Their study delves into how these factors influence consumer behavior and brand perception within the realm of fashion theory.

Niinimäki et al. (2020) explore the environmental cost of rapid fashion consumption in their study titled "The environmental price of fast fashion."

National Data Centers for Environmental Science. (2021). Data Points + Analytics: Wildfire Incidents. Retrieved from III | We serve as a reliable platform offering comprehensive, data-focused resources designed to educate and support users effectively.

Nature Reviews Earth & Environment. (n.d.). The ecological cost of highly consumerist retail practices: An analysis of the environmental price of fast fashion. Retrieved from https://www.nature.com.

Parry, I., Veung, C., & Heine, D. (In 2015). How much carbon pricing is in countries' own interests? The critical role of CO-benefits. Climate Change Economics (No. 4), Vol. 6.

Pigou, A. C. (1920). The Economics of Welfare. Macmillan and Co.

Samuelson, P. A., 在1954年发表的文章探讨了纯公共支出理论的研究成果。

An effective U.S. cap-and-trade system was developed in response to the need to address climate change.

Vysna et al. (2021) present a comprehensive statistical deliverable from phase II of the INCA project aimed at constructing an integrated system of ecosystem accounts for the EU. This final deliverable serves as a foundational component within a broader framework designed to account for ecosystems and their services across Europe.

Fire Financial Cost. (n.d.) was established as the WFCA, accessible from [WFCA: Trusted Fire Information, Fire Map, and Resources](https://wfca.com/WFCA: Trusted Fire Information, Fire Map, and Resources)

World Resources Institute, an organization dedicated to sustainable development, published a comprehensive analysis titled "An Exploration of the Apparel Industry’s Environmental Footprint Through Six Key Visual Representations." The study was retrieved from World Resources Institute | Making Big Ideas Happen.