#Question: Climate Change — What is the best economic solution to the problem of climate change?
Hamilton Place Strategies

The UN climate agreement may not be enough.

That’s the takeaway from Climate Action Tracker (CAT), an independent scientific analysis produced by four research organizations tracking climate action.

Projections from CAT
FROM CAT: Limiting warming to below 2°C would only be achieved if subsequently, further and deeper reductions consistent with 2°C were incorporated as an explicit, additional post-2030 assumption, still not connected directly to the levels of effort represented by INDCs.

CAT analyzed Intended Nationally Determined Contributions (INDC’s) submitted by governments by October 1st of this year, which represented 71 percent of global emissions. While long-term projections are difficult, CAT finds that if these trends are locked in until 2030, limiting warming to below 1.5°C would likely become impossible and the goal of limiting to a 2°C increase would be threatened.

This does not mean we should just throw our hands up.

First, efforts are having a positive impact.

In the United States, CO2 emissions are down below levels seen in the late 1990s, despite an economy that’s roughly doubled in nominal terms and country with 50 million more people.

And progress is not just limited to the developed world. While much is made over emissions from China and India, which have grown significantly in recent decades, both have submitted pledges that are graded better than the U.S.’s submission by CAT.

Overall, CAT finds that pledges will limit warming to 2.7°C, below the current baseline of 3.6°C.

Second, CAT’s analysis assumes 2030 trends are locked in.

However, Think Progress has reported that recent drafts have suggested there may be a revisit in 2025, something CAT has called for. Therefore, absent any meaningful changes to INDC’s in the next few months, we have about ten years at the latest to change the political calculus.

We Need To Reduce The Political Costs Of Tackling Climate Change

Technology must be part of the solution and therefore, incentivizing investment in green technology is essential.

The most efficient way to accomplish this goal is a carbon tax, even a unilateral carbon tax for just the U.S.

According to Joshua Meltzer, “a carbon price will lead to growing U.S. demand for green technologies to reduce CO2 emissions, which will incentivize greater levels of global R&D into such technologies.”

Beyond a carbon tax, free trade in green technology should also be pursued to make sure we can fully capture the innovation gains from taxing carbon.

A carbon tax should not be in lieu of green innovation subsidies.

Carbon taxes might eventually have perverse effects. At the core of green tech adoption is falling prices. Solar adoption has increased as solar prices have fallen. And fallen they.

However, at a certain breakeven point when solar is less expensive than other forms of energy, the incentive for reducing prices will be reduced on the margins, outside competition among solar companies.

Further, carbon taxes will have less of an impact once green technologies are naturally cheaper so incentives for reducing prices will be reduced on the margin.

Therefore, we should continue to subsidize green technology innovation through prizes and research grants.

These efforts overcome typical counterarguments to these agreements by providing countries the tools to address climate most economically.

Many countries already have a carbon tax and the ARRA provided a number of green energy subsidies.

My colleague Brai Odion-Esene pointed to the chart to left to increasing carbon tax systems.

Meanwhile, the stimulus provided $400 million in funding for the Advanced Research Projects Agency-Energy (ARPA-E), which — according to their website — “advances high-potential, high-impact energy technologies that are too early for private-sector investment. ARPA-E projects have the potential to radically improve U.S. economic security, national security, and environmental well-being. ARPA-E empowers America’s energy researchers with funding, technical assistance, and market readiness.”

Described by Michael Grunwald as “a $400 million Manhattan Project tucked inside the $800 billion stimulus,” ARPA-E is providing incentives for innovation in the sector.

More work on these fronts will be critical over the next decade to secure the commitments needed — and ofcourse hitting them — to mitigate climate change’s worst effects.

Yes. We Should Do This Even Given The Uncertainty Of Impact Of Climate Change.

All policy recommendations are probabilistic. This is no outlier. Except there actually may be more certainty than most here. Further, a carbon tax can be justified on non-climate change reasons — its far more efficient than taxing labor and comes with proven health benefits.

We can also hedge our efforts by permitting free movement of people. The impacts of climate change will be assymetrical. Allowing people to move from high impact countries to low impact countries is just humane — fortunately it also comes well-documented economic benefits as well.