It’s no secret that climate change is one of the most pressing issues of our time.
The effects of global warming are already being felt, and if we don’t take significant steps to address the problem, things are only going to get worse.
So far, many solutions proposed to tackle climate change have been political – but what about economic solutions? Can the market help us save the planet?
In this guide, we’ll explore some potential economic solutions to climate change, and discuss whether or not they could be effective.
The economics of climate change for beginners
This guide will break the topics down into bite-sized chunks, explaining key concepts and ideas.
The first section will define the economics approach, explain why environmental issues are economically important, and discuss the major economic approaches to dealing with climate change.
It will also define market failures and externalities, both of which are crucial concepts in understanding the political debate over climate policy.
Section two will then discuss what steps you can take to participate in this initiative as an individual.
The economic approach to addressing climate change: An overview
As the effects of climate change have become more apparent, policymakers have considered a range of methods designed to decrease carbon emissions.
Economic or market-based strategies aim to combat climate change by putting a price on carbon emissions and prompting businesses to pursue cost-cutting measures.
Climate-related costs – such as rising sea levels and more frequent and severe heat waves, droughts, wildfires, and downpours – are often not factored into the cost of goods and services that emit greenhouse gasses.
Putting a price on these emissions provides an incentive for businesses to reduce them, and encourages innovation.
The impact of economic policies on global warming
So, can economic policies have an impact on climate change? And how effective are they?
This section will explore 8 proposed or enacted economic solutions to climate change. Each solution presupposes strong participation and political will on the part of the government to ensure these policies are properly implemented.
Introducing and increasing carbon taxation
Carbon taxation is legislation in which a government establishes a carbon tax rate in which emitters must pay for each ton of greenhouse gasses that they create. In practice, a carbon tax would be levied according to the amount of carbon released.
For example, frequent flyers on long-haul air flights would be charged a fee for each ton of CO2 emitted. A carbon tax would also significantly raise the cost of electricity generation from coal-fired power plants, for example.
To avoid paying the fee, businesses would need to take measures to lower their emissions levels. Because firms will adopt only those emission reduction efforts that are less expensive than the tax, the market will decide how much pollution is produced.
This concept could also be applied on a smaller scale to individual households. Carbon taxation could serve as an incentive for people to switch to more cost-efficient and renewable sources of energy such as solar power, which have less of an impact on the environment.
There are currently 27 countries with a carbon tax implemented, as shown in the figure below:
Aside from clear benefits to the environment, these policies can also be beneficial for the implementing country.
The income from the tax policy provides a significant income that can then be used for other purposes, such as the damage wrought by the use of fossil fuels. Governments could, for example, use money from a carbon tax to cut personal taxes, future deficits, or invest in clean energy and climate adaptation.
Better regulation of carbon taxing and carbon pricing
Carbon pricing refers to the idea of putting a “price” on carbon.
This can be a complicated and challenging task since emission prices are difficult to establish and vary widely.
The World Bank reported that there are 64 carbon pricing measures in effect across the world at various regional, national, and sub-national levels, with three more on the way.
In 2021 these initiatives covered 21.5% of global greenhouse gas emissions.
Map of regions and countries implementing carbon tax or with carbon pricing initiatives in 2021.
Ending subsidies of fossil fuels
According to the International Monetary Fund (IMF), fossil fuels, oil, gas, and coal are subsidized by $5.9 trillion in 2020 as a result of their production and combustion subsidies.
Ending, or reducing these subsidies, could go a long way to lessening the impact of the fossil fuel industry on the environment, by making these practices less affordable.
Subsidizing renewable energy
Subsidizing renewable energy balances the economy and the environment.
Subsidizing renewable energy has been implemented in many countries, from Uzbekistan to South Korea, and has demonstrated that government-sponsored initiatives can be successful if financial needs and environmental zeal are properly matched.
Making renewable energy more affordable is a great strategy to employ alongside policies such as carbon taxation and pricing.
Shifting focus from GDP to the genuine progress indicator
With justification, environmentalists argue that economics has traditionally placed too much emphasis on increasing Gross Domestic Product (GDP) and promoting economic growth. This has encouraged a consumerist mindset, which has tended to deprioritize environmental concerns.
Economic experts are increasingly conscious of the limitations of GDP and have developed alternative measures of economic well-being, such as the Genuine Progress Indicator (GPI)
According to Investopedia, “The genuine progress indicator (GPI) is a national-level measure of economic growth and prosperity. GPI is an alternative metric to GDP but which accounts for externalities such as pollution”. GPI is considered to be a better indicator of progress in the green or social economy.
If politics placed a higher emphasis on measurable goals, it could assist in moving society away from materialistic culture, and towards one in which environmental protection would be prioritized in household, business, and government decisions.
Including future generations in cost-benefit analyses
Traditionally, economists have assessed decisions based on current costs and benefits. However, environmental choices are not suitable for this method since so many long-term costs and benefits would affect future generations.
Incorporating future welfare considerations cost-benefit analyses when assessing projects could help with making more environmentally beneficial decisions.
For example, if we consider the opening of a new coal mine, it’s easy to evaluate the effect on employment, the economy, and present pollution levels. However, if we take into account how this new decision might influence future generations, it may tip the scale in favor of shutting down the mine rather than forcing a shift in energy consumption patterns.
Introducing and improving regulations and property rights
Businesses and consumers can use environmental resources for raw materials. These can often lead to overuse and exhaustion of natural resources.
Mines are left barren, fishing waters are emptied, and forests are cut down for lumber. Sustainable use of resources ensures that we do not use materials at a faster rate than that at which they can be restored.
One solution to this problem could be to give property rights to the environment itself. This could involve restricting or limiting the use of these areas, or introducing off-season periods to provide a “break” for the area.
Providing green loans for businesses
As defined by The World Bank, a green loan is a type of loan that allows borrowers to spend money on projects that contribute significantly to an environmental cause.
Green bonds can help to make environmental projects more affordable and incentivize individuals and businesses to take advantage of the economic benefit of utilizing these financing options.
Confused about how to make the shift to more eco-conscious marketing and financial decisions? We’re here to help!
While the economic approaches discussed above might feel policy-oriented, there are many ways that we can impact climate change as individuals.
Step 1: Research on “green” financial institutions or companies
With the internet right at your fingertips, it’s easier than ever to research a company’s best practices, products, and initiatives before committing to banking with them or using their products.
The need for sustainable lending and having a green asset ratio is crucial, as banks play a role in the future of sustainable financing. You might also want to consider neobanks as a conscious alternative way of handling your finances.
The green market is growing. Investors are becoming pickier. Money is flooding into any kind of environmentally friendly or sustainable asset. Now, investors and firms alike are grappling with what constitutes “green finance,” as well as whether their funds are green enough.
According to Bloomberg, availing of “green” assets has seen an amazing increase through the years, and these assets have increased in value.
Step 2: Learn about the products they are offering
Once you have determined that institution you want to have business with, learn about their offerings.
What products do they have to match your needs? Do they offer eco-friendly banking or offer carbon-neutral credit cards?
Would they be able to offer a green loan, financing for solar panel installation, or subsidize a green project?
Once you’ve found a company and product that you’re confident in, you’re one step closer to contributing to the economic fight against climate change!
We make it easier for your banking to be sustainable and eco-friendly
If you’re interested in learning more about economic approaches for addressing global warming – or if your business would like help getting started – reach out!
Our team at Aspiration is ready and waiting to work with you to create greener financial solutions to address your needs.
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