Solve the climate crisis? Actually quite simple

How we change for the better / No. 62

Good morning from Berlin,

Climate change is caused by CO2 emissions. We all know that. And we are becoming increasingly aware of the consequences. Nevertheless, in total, global CO2 emissions continue to rise.

What needs to be done to reverse the CO2 growth trend as quickly as possible?

Economics has long understood the problem and also knows the solution.

🤷‍♂️ The Problem

The far too high CO2 emissions are the result of a dilemma. It is that if every country maximizes its utility, too little will be done to mitigate climate change.

How can that be?

Reducing CO2 is an effort. It costs time, money, resources, prosperity. From the result of the effort (less CO2) not only the country that reduces CO2 benefits but all countries worldwide.

More precisely, the CO2-reducing country benefits little since the benefits are spread across the globe. In addition: The smaller the country, the smaller the benefit for that country. Even my economically important home country of Germany causes only 2 per cent of global CO2 emissions.

As a result, too little is being done to combat climate change. Every single country hopes to benefit from the measures taken by other countries. 

In economics, such a dilemma is known in many areas; it has a fixed term: free rider behaviour.

💡 The Solution

To solve the free rider behaviour regarding CO2 emissions, national climate strategies must be replaced by a global one. If everyone is obliged to reduce CO2 emissions, everyone will benefit from the reduction. The problem: There is no world government that could enforce the obligation.

But there is a solution anyway. Economics Nobel laureate William Nordhaus pointed it out and called it the climate club. 

The core of the idea is to set the incentives for voluntary climate protection in such a way that it is worthwhile for the countries to pursue this climate protection. Free rider behaviour is to be made unattractive by the climate club.

How exactly is this supposed to work? By sanctions against the states that do not participate in climate protection.

Countries that want to reduce their CO2 emissions are forming a climate club. Trade between these countries is not subject to CO2-related sanctions. Anyone not part of the club will be sanctioned when trading with the club states, for example, in the form of a CO2 tax on imports into the club states. If the tax payments are higher than the costs of its CO2 reduction efforts, it becomes worthwhile for a country to become part of the climate club.

💪 How We Change for the Better

There are global agreements with the Paris Agreement and its predecessors, but they lack the possibility of sanctions. Deviating from the goals the countries have set themselves is largely without consequences. 

However, there are regional agreements, such as the European Union Emissions Trading System (short: EU ETS), which are pretty successful. And in an attenuated version of the climate club idea, the European Union is trying to persuade those states currently not doing much to protect the climate by taxing CO2-intensive imports. 

But a truly global climate club is not yet in sight. The topic has arrived on the stage of world politics, but there is still a lack of understanding within the general public, and thus of political pressure.

So what we need is not just a majority that is in favour of taking action on climate change, we need a majority that knows how to tackle climate change on a global level. Politics, at least in democracies, will then follow this majority.

Walk on, 

The Strolling Economist