World is increasingly becoming globalized and with that many of the issues are also becoming global. Climate change is one of them, which affects all humans and life irrespective of whether they are in the US or in Madagascar.
What is the problem?
Problem is rising temperature of Earth. Because of increase in greenhouse gases, more of Sun’s radiations are absorbed in the atmosphere, thus, raising overall temperatures. As global population is increasingly consuming more resources, industrial production is growing rapidly and so are these greenhouse gases. Rise of emerging BRIC economies has added to the problem created by industrialized economies. China has already overtaken US as the world’s biggest pollutant.
What is the solution?
Solution is quite simple. Just cut the level of carbon and other emissions that we throw up in the atmosphere. Good news is; there is a complete agreement on this among leaders from most countries. Bad news is; there is a lot of Contention on how this is going to be implemented. To understand these Contentions, let’s see the Economics of it.
Economists call them externalities. Markets decide the price of a good or service based on its demand and supply. At that price, both buyer and seller recognize value to themselves by doing that transaction. But what if there is a third party who is being affected by this transaction, but not involved in Price Determination?
For example, I buy a 1500W music system. Both dealer and I are happy with this deal. He makes his due profit and I get satisfaction from listening to my favorite rock at high volumes. But, does this price include irritations I cause my neighbor? Has he been compensated for that inconvenience? NO.
Similarly, I buy a car. I pay a Price that includes cost of production of that car plus various markups. But, does the price include cost of treatment to an individual’s lung cancer which is caused by emissions from my car? NO. Or does it include compensation for flood victims in Bangladesh who have suffered because of emissions from my car? NO.
So, you see, many things we buy are priced cheaper, because they don’t include cost of various externalities. And because they are priced cheaper than they should be, they are demanded and cosumed more, inflicting even more damages to external third parties.
Now, coming back to our Climate Issue; Suggested method of cutting down on greenhouse emissions is by deciding on a global limit on allowed emissions and then issuing licenses for that limited amount. Production units that throw up these emissions would have to bid for these licenses. They will have to own license for each unit of pollutant they release in atmosphere. Thus, cost of pollutants thrown up will be included in their cost of production. So, consumers will be paying more for goods and services produced by them. Cost of Externalities will thus be included in Products they are buying.
Now the Politics; Other things same, this is going to add one more factor of input to Production. At country level, this may reduce aggregate supply and hence the GDP. This is why, there is a lot of contention between developed and developing countries on who should share how much of this burden. Contention is, since it is richer people who have mostly consumed these resources in the past and have not paid their due prices, the initiative should come from rich countries without any pre-requisites.
Anyways, however way these negotiations may turn out, we as consumers should understand that nature will ultimately make us all pay the price for these externalities if we don’t start paying them in easier installments now; while that option is still available!!
What is the problem?
Problem is rising temperature of Earth. Because of increase in greenhouse gases, more of Sun’s radiations are absorbed in the atmosphere, thus, raising overall temperatures. As global population is increasingly consuming more resources, industrial production is growing rapidly and so are these greenhouse gases. Rise of emerging BRIC economies has added to the problem created by industrialized economies. China has already overtaken US as the world’s biggest pollutant.
What is the solution?
Solution is quite simple. Just cut the level of carbon and other emissions that we throw up in the atmosphere. Good news is; there is a complete agreement on this among leaders from most countries. Bad news is; there is a lot of Contention on how this is going to be implemented. To understand these Contentions, let’s see the Economics of it.
Economists call them externalities. Markets decide the price of a good or service based on its demand and supply. At that price, both buyer and seller recognize value to themselves by doing that transaction. But what if there is a third party who is being affected by this transaction, but not involved in Price Determination?
For example, I buy a 1500W music system. Both dealer and I are happy with this deal. He makes his due profit and I get satisfaction from listening to my favorite rock at high volumes. But, does this price include irritations I cause my neighbor? Has he been compensated for that inconvenience? NO.
Similarly, I buy a car. I pay a Price that includes cost of production of that car plus various markups. But, does the price include cost of treatment to an individual’s lung cancer which is caused by emissions from my car? NO. Or does it include compensation for flood victims in Bangladesh who have suffered because of emissions from my car? NO.
So, you see, many things we buy are priced cheaper, because they don’t include cost of various externalities. And because they are priced cheaper than they should be, they are demanded and cosumed more, inflicting even more damages to external third parties.
Now, coming back to our Climate Issue; Suggested method of cutting down on greenhouse emissions is by deciding on a global limit on allowed emissions and then issuing licenses for that limited amount. Production units that throw up these emissions would have to bid for these licenses. They will have to own license for each unit of pollutant they release in atmosphere. Thus, cost of pollutants thrown up will be included in their cost of production. So, consumers will be paying more for goods and services produced by them. Cost of Externalities will thus be included in Products they are buying.
Now the Politics; Other things same, this is going to add one more factor of input to Production. At country level, this may reduce aggregate supply and hence the GDP. This is why, there is a lot of contention between developed and developing countries on who should share how much of this burden. Contention is, since it is richer people who have mostly consumed these resources in the past and have not paid their due prices, the initiative should come from rich countries without any pre-requisites.
Anyways, however way these negotiations may turn out, we as consumers should understand that nature will ultimately make us all pay the price for these externalities if we don’t start paying them in easier installments now; while that option is still available!!
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References: Essence of examples written above on externalities are from the book 'Naked Economics' by Charles Wheelan. This is an interesting book on Economics for those who do not want to get bogged down by complex equations, graphs and curves.
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Hi Sandeep
ReplyDeleteNamaste. Good analysis. One simple solution (which many leaders are not doing, esp in a small countries like Singapore) is "Alternative Investment". No not really the Alternative Investment subject in CFA. Especially in Singapore, getting from point A to point B doesn't require a car, unlike in other Asean countries like Thailand or Malaysis or outside Asia like US or Europe. Two ideas that can help to reduce car population:
1)let COE once issued in the primary market be traded in the secondary market like any commodity or stock etc. High COE price will incentise existing COE holder to give up car ownership.
2)encourage bicycles by have bike-friendly road like bicycle lane, bicycle parking lot. Govt officials for eg can take the lead by example role by using bicycle for routine patrol in estate etc.
Cheers
Brother Teoh