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The economics of climate change mitigation is a contentious part of climate change mitigation – action aimed to limit the dangerous socio-economic and environmental consequences of climate change.^[3]

Climate change mitigation centres on two main strategies: the reduction of greenhouse gas (GHG) emissions and the preservation and expansion of sinks which absorb greenhouse gases, including the sea and forests.

The economics of climate change mitigation are a central point of contention whose considerations significantly affect the level of climate action at every level from local to global.

For example, higher interest rates are slowing solar panel installation in developing countries.^[4]

Public good issues

The atmosphere is an international public good and GHG emissions are an international externality.^[5] A change in the quality of the atmosphere does not affect the welfare of all individuals and countries equally.

Heterogeneity

GHG emissions are unevenly distributed around the world, as are the potential impacts of climate change. Nations with higher than average emissions that face potentially small negative/positive climate change impacts have little incentive to reduce their emissions. Nations that avoid mitigation can benefit from free-riding on the actions of others, and may even enjoy gains in trade and/or investment.^{[6][obsolete source]} The unequal distribution of benefits from mitigation, and the potential advantages of free-riding, made it difficult to secure the Paris Agreement,^{[citation needed]} which aims to reduce emissions.

Intergenerational transfers

Mitigation of climate change can be considered a transfer of wealth from the present generation to future generations.^[7] The amount of mitigation determines the composition of resources (e.g., environmental or material) that future generations receive. Across generations, the costs and benefits of mitigation are not equally shared: future generations potentially benefit from mitigation, while the present generation bear the costs of mitigation but do not directly benefit^[8] (ignoring possible co-benefits,^[why?] such as reduced air pollution). If the current generation also benefitted from mitigation, it might lead them to be more willing to bear the costs of mitigation.

Policies and approaches to reduce emissions

Price signals

Carbon pricing

A carbon price is a system of applying a price to carbon emissions, as a method of emissions mitigation.^[9] Potential methods of pricing include carbon emission trading, results-based climate finance, crediting mechanisms and more.^[10] Carbon pricing can lend itself to the creation of carbon taxes, which allows governments to tax emissions.^[9]

Carbon tax

Carbon taxes are considered useful because, once a number^{[clarification needed]} has been created, it will benefit the government either with currency or with a lowering in emissions or both, and therefore benefit the environment.^[11] It is almost a consensus that carbon taxing is the most cost-effective method of having a substantial and rapid response to climate change and carbon emissions.^[12] However, backlash to the tax includes that it can be considered regressive, as the impact can be damaging disproportionately to the poor who spend much of their income on energy for their homes.^[13] Still, even with near universal approval, there are issues regarding both the collection and redistribution of the taxes. One of the central questions being how the newly collected taxes will be redistributed.^[14]

Some or all of the proceeds of a carbon tax can be used to stop it disadvantaging the poor.^[15]

Structural market reforms

Market-orientated reforms, as undertaken by several countries in the 1990s, can have important effects on energy use, energy efficiency, and therefore GHG emissions. In a literature assessment, Bashmakov et al. (2001:409) gave the example of China, which has made structural reforms with the aim of increasing GDP.^[16] They found that since 1978, energy use in China had increased by an average of 4% per year, but at the same time, energy use had been reduced per unit of GDP.

Emissions trading

In addition to the implementation of command-and-control regulations (as with a carbon tax), governments can also use market-based approaches to mitigate emissions. One such method is emissions trading where governments set the total emissions of all polluters to a maximum and distribute permits, through auction or allocation, that allow entities to emit a portion, typically one ton of carbon dioxide equivalent (CO₂e), of the mandated total emissions.^[17] In other words, the amount of pollution an entity can emit in an emissions trading system is limited by the number of permits they have. If a polluter wants to increase their emissions, they can only do so after buying permits from those who are willing to sell them.^[18] Many economists prefer this method of reducing emissions as it is market based and highly cost effective.^[17] That being said, emissions trading alone is not perfect since it fails to place a clear price on emissions. Without this price, emissions prices are volatile due to the supply of permits being fixed, meaning their price is entirely determined by shifts in demand.^[19] This uncertainty in price is especially disliked by businesses since it prevents them from investing in abatement technologies with confidence which hinders efforts for mitigating emissions.^[19] Regardless, while emissions trading alone has its problems and cannot reduce pollutants to the point of stabilizing the global climate, it remains an important tool for addressing climate change.

Degrowth

There is a debate about a potentially critical need for new ways of economic accounting, including directly monitoring and quantifying positive real-world environmental effects such as air quality improvements and related unprofitable work like forest protection, alongside far-reaching structural changes of lifestyles^[20][21] as well as acknowledging and moving beyond the limits of current economics such as GDP.^[22] Some argue that for effective climate change mitigation degrowth has to occur, while some argue that eco-economic decoupling could limit climate change enough while continuing high rates of traditional GDP growth.^[23][24] There is also research and debate about requirements of how economic systems could be transformed for sustainability – such as how their jobs could transition harmonously into green jobs – a just transition – and how relevant sectors of the economy – like the renewable energy industry and the bioeconomy – could be adequately supported.^[25][26]

While degrowth is often believed to be associated with decreased living standards and austerity measures, many of its proponents seek to expand universal public goods^[27][28] (such as public transport), increase health^[29][30][31] (fitness, wellbeing^[32] and freedom from diseases) and increase various forms of, often unconventional commons-oriented,^[33] labor. To this end, the application of both advanced technologies and reductions in various demands, including via overall reduced labor time^[34] or sufficiency-oriented strategies,^[35] are considered to be important by some.^[36][37]

Phasing out fossil fuel subsidies

This section is an excerpt from Fossil fuel phase-out § Phase-out of fossil fuel subsidies.

This section is in list format but may read better as prose. You can help by converting this section, if appropriate. Editing help is available. (June 2024)

Significant fossil fuel subsidies are present in many countries.^[38] Fossil fuel subsidies in 2019 for consumption totalled US$320 billion^[39] spread over many countries.^[40] As of 2019^[update] governments subsidise fossil fuels by about $500 billion per year: however using an unconventional definition of subsidy which includes failing to price greenhouse gas emissions, the International Monetary Fund estimated that fossil fuel subsidies were $5.2 trillion in 2017, which was 6.4% of global GDP.^[41] Some fossil fuel companies lobby governments.^[42]

Phasing out fossil fuel subsidies is crucial to address the climate crisis.^[43] It must however be done carefully to avoid protests^[44] and making poor people poorer.^[45] In most cases, however, low fossil fuel prices benefit wealthier households more than poorer households. So to help poor and vulnerable people, other measures than fossil fuel subsidies would be more targeted.^[46] This could in turn increase public support for subsidy reform.^[47]

Economic theory indicates that the optimal policy would be to remove coal mining and burning subsidies and replace them with optimal^{[clarification needed]} taxes. Global studies indicate that even without introducing taxes, subsidy and trade barrier removal at a sectoral level would improve efficiency and reduce environmental damage.^[48] Removal of these subsidies would substantially reduce greenhouse gas emissions and create jobs in renewable energy.^[49] The IMF estimated in 2023 that removal of fossil fuel subsidies would limit global heating to the Paris goal of substantially less than 2 °C.^[50]

Policies

National policies

International policies

Paris Agreement

Other policies

• Regulatory instruments: This could involve the setting of regulatory standards for various products and processes for countries to adopt. The other option is to set national emission limits. The second option leads to inefficiency because the marginal costs of abatement differs between countries.^[16]: 430

Initiatives such as the EU "cap and trade" system have also been implemented.^[53]

• Carbon taxes: This would offer a potentially cost-effective means of reducing CO₂ emissions. Compared with emissions trading, international or harmonized (where each country keeps the revenue it collects) taxes provide greater certainty about the likely costs of emission reductions. This is also true of a hybrid policy (see carbon tax).^[16]: 430

Efficiency of international agreements

For the purposes of analysis, it is possible to separate efficiency from equity.^[5]: 30 It has been suggested that because of the low energy efficiency in many developing countries, efforts should first be made in those countries to reduce emissions.^{[clarification needed]} There are a number of policies to improve efficiency, including:^[5]: 34

• Property rights reform. For example, deforestation could be reduced through reform of property rights.
• Administrative reforms. For example, in many countries, electricity is priced at the cost of production. Economists, however, recommend that electricity, like any other good, should be priced at the competitive price.^{[citation needed]}
• Regulating non-greenhouse externalities. There are externalities other than the emission of GHGs, for example, road congestion leading to air pollution. Addressing these externalities, e.g., through congestion pricing and energy taxes, could help to lower both air pollution and GHG emissions.

General equilibrium theory

One of the aspects of efficiency for an international agreement on reducing emissions is participation. In order to be efficient, mechanisms to reduce emissions still require all emitters to face the same costs of emission.^[5]: 30 Partial participation significantly reduces the effectiveness of policies to reduce emissions. This is because of how the global economy is connected through trade.

General equilibrium theory points to a number of difficulties with partial participation. Examples are of "leakage" (carbon leakage) of emissions from countries with regulations on GHG emissions to countries with less regulation. For example, stringent regulation in developed countries could result in polluting industries such as aluminium production moving production to developing countries. Leakage is a type of "spillover" effect of mitigation policies.

Estimates of spillover effects are uncertain.^[54] If mitigation policies are only implemented in Kyoto Annex I countries, some researchers have concluded that spillover effects might render these policies ineffective, or possibly even cause global emissions to increase.^[55] Others have suggested that spillover might be beneficial and result in reduced emission intensities in developing countries.

Comprehensiveness

Efficiency also requires that the costs of emission reductions be minimized.^[5]: 31 This implies that all GHGs (CO₂, methane, etc.) are considered as part of a policy to reduce emissions, and also that carbon sinks are included. Perhaps most controversially, the requirement for efficiency implies that all parts of the Kaya identity are included as part of a mitigation policy.^[56] The components of the Kaya identity are:

• CO₂ emissions per unit of energy, (carbon intensity)
• energy per unit of output, (energy efficiency)
• economic output per capita,
• and human population.

Efficiency requires that the marginal costs of mitigation for each of these components is equal. In other words, from the perspective of improving the overall efficiency of a long-term mitigation strategy, population control has as much "validity" as efforts made to improve energy efficiency.

Equity in international agreements

Unlike efficiency, there is no consensus view of how to assess the fairness of a particular climate policy (Bashmakov et al., 2001:438–439;^[16] see also economics of global warming#Paying for an international public good). This does not prevent the study of how a particular policy impacts welfare. Edmonds et al. (1995) estimated that a policy of stabilizing national emissions without trading would, by 2020, shift more than 80% of the aggregate policy costs to non-OECD regions (Bashmakov et al., 2001:439). A common global carbon tax would result in an uneven burden of abatement costs across the world and would change with time. With a global tradable quota system, welfare impacts would vary according to quota allocation.

Finance

This section needs to be updated. The reason given is: Most of the sources are from 2010-2011; field has progressed significantly since. Please help update this article to reflect recent events or newly available information. (June 2024)

Article 4.2 of the United Nations Framework Convention on Climate Change commits industrialized countries to " the lead" in reducing emissions.^[59] The Kyoto Protocol to the UNFCCC has provided only limited financial support to developing countries to assist them in climate change mitigation and adaptation.^[60]: 233 Additionally, private sector investment in mitigation and adaptation could be discouraged in the short and medium term because of the 2008 global financial crisis.^[61]: xix Zdroj:https://en.wikipedia.org?pojem=Economics_of_climate_change_mitigation
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