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Economics in a world of environmental crisis

By TOBIAS UDSHOLT, based on an interview with ARILD ANGELSEN 02/10/2014

Environment

There is no scientific uncertainty that the global climate is changing, that greenhouse gases are contributing to a heating planet and that human activity bears the chief responsibility for these developments. Environmental economics entails the application of an economic framework of cost-benefit analysis to environmental conservation schemes. It may be tempting to question the applicability of economics in addressing climate change, when its basic principles are key to the economic growth and exploitation of resources which is currently destabilising the climate. It is, however, agreed that environmental degradation and climate change requires policy initiatives at a multilateral level as evidenced by the Kyoto Protocol of 1997. In this context, there is an inherent logic to allocating the limited means currently available to the most cost-effective policies to address a global tragedy of the commons. Efforts towards global forest conservation represent a case in point with forest conservation and replanting schemes representing “by far the most effective way of reducing greenhouse-gas emissions.” [1]

The Reducing Emissions from Deforestation and Forest Degradation (REDD+) is a collaborative international initiative to reduce emissions in the developing world. Originally launched by United Nations Framework Convention on Climate Change (UNFCCC), REDD+ is now in use and implemented by a wide range of agencies and states. Dr. Arild Angelsen, a former Senior Associate of the Center for International Forestry Research (CIFOR), has been heavily involved with development and research for REDD+. A Professor of economics at the Norwegian University of Life Sciences (UMB), Dr. Angelsen argues that “the key to environmental degradation is the problem of the commons – a market failure.” Payment for environmental services (PES) schemes is one way of correcting this market failure. Applied to REDD+ this entails incentivising and compensating communities with the aim of increasing the opportunity cost of deforestation. While the potential for a significant impact exists, the actual impact of REDD+ has been limited by, amongst a number of reasons, a lack of funding.

The failure to address environmental degradation goes further than a lack of funding for conservation schemes. Dr. Angelsen believes that while “a great number of economic resources exist that address environmental concerns,” these remain on the margin: “environmental issues are not sufficiently integrated into mainstream economics.” Regardless of the exact reasons for the under-appreciation of environmental issues within the mainstream, one could speculate that the implications of a lack of research and funding have hindered the design of successful market corrections. Indeed, transferring an economic logic to a practical scheme which reduces emissions  has proved exceedingly difficult to policy-makers. To effectively tackle these issues of public policy, Dr. Angelsen argues that “environmental and climate issues need to be included into mainstream economics curriculums such that it becomes part of the toolbox of any economist.”

Designing a system harnessing the framework of PES to schemes such as REDD+ in the developing world requires two key aspects, says Dr. Angelsen: “First, we must design a system that can deliver outcomes that are effective (reduce emissions), efficient (not too costly) and equitable (distribute costs and benefits in a fair way).  That is not easy: Emission reductions are measured relative to a reference level, and deforestation rates are highly fluctuating and hard to predict.”

“Second, someone has to pay. A PES system that cuts deforestation by half, and pays $5 per ton of carbon, will require $12-13 billion per year.  Environmental economics provides a toolbox to point out where our limited resources will have the largest positive impacts on climate. Who is to pay for that? That’s a political, or ultimately an ethical, decision. If PES is not widely used, it’s because there has been a lack of willingness to pay for the public good that deforestation represents.” Yet, an environmental crisis which is seen as too costly in the present is already having an immediate environmental and economic impact: an impact which is predicted to rise as the climate changes further. What then, is the cost of doing nothing? How can the environmental crisis be framed today such that the quality of life for future generations is not discounted?

The Intergovernmental Panel on Climate Change (IPCC) estimates that the “social cost of carbon [per ton of CO2 emitted] for 2005 [had] an average value of US$12.” The IPCC (2007) have stressed both that the cost is likely to increase over time and more significantly that “it is very likely that globally aggregated figures underestimate the damage costs.” And herein lays one substantial challenge to the premise of environmental economics: is it possible to achieve an accurate estimate of the cost of environmental degradation? By implication estimating the costs of the degradation of the environment must involve some commodification of nature – is it technically feasible or even ethically desirable to attach a price tag to nature?

While attempting to put a price on global inaction in the face of climate change can lead to a number of technical and ethical pitfalls, it is possible to discuss the effectiveness of existing schemes targeted at limiting emissions. An example is the billions which have been spent by the EU on reducing carbon emissions through the creation of the European Trading System (ETS) carbon market and through expensive renewable energy regimes in individual member countries. According to a recent study published in  Science, in the period 2005-2013, the reduction in the rate of deforestation in Brazil meant a cumulative reduction in predicted emissions levels amounting to 3.2 billion tonnes of carbon dioxide (Nepstad et al., 2014). The authors of the study attributed the reduction, at least partly, to the Brazilian national forest conservation efforts. The Economist estimates that the reduction in the rate of deforestation meant Brazil saved “six times as much carbon as ultra-green Germany did in the same period through one of the world’s most expensive renewable-energy regimes.”[2]

This is not a denigration of the admirable efforts of EU member states working to reduce their environmental impact. Rather, it is an attempt to put into perspective the sums spent annually all over the world in conserving the environment in various schemes versus the sum of “$12-13 billion per year,” which according to Dr. Angelsen has the potential to “cut deforestation by half.” Implementing REDD+ on the scale required to achieve such a target is a political economy issue dependent on various actors on national and local levels. Currently, there is a need for more research into the possible consequences of the application of PES in REDD+ partner countries (specifically research into the crowding out effect induced by financial incentive and the degree of leakage between nations). Nevertheless the case study of Brazil shows the significant potential of the reduction of deforestation as an effective way of reducing emissions.

Perhaps it is appropriate to revisit the infamous ‘Summers Memo’ of 1991 signed by then Chief Economist of the World Bank, Lawrence Summers. The author of the memo, Lant Pritchett, argued that it would be cost-effective to encourage migration of dirty industries to LDCs (less developed countries) where the cost of pollution was lower. The statement caused controversy at the time, yet using a similar vein of logic it can today be argued that in addressing a global tragedy of the commons, developed countries should expand their efforts in the most-cost effective arenas: reducing deforestation through a variety of policies initiatives, key amongst them providing a viable alternative to deforestation to local communities in the developing world. It is through this type of venue that the sub-field of environmental economics holds the potential to have a direct and positive impact.

TOBIAS UDSHOLT - Editor-in-Chief

2nd year BSc Political Economy student at King’s College London. His interests lie in environmental economics and climate finance.

Bibliography:

IPCC. (2008). Climate Change 2007: Synthesis Report. Retrieved from: http://www.ipcc.ch/pdf/assessment-report/ar4/syr/ar4_syr.pdf

 Nepstad, D. et al. (2014). Slowing Amazon deforestation through public policy and interventions in beef and soy supply chains. Science, 1118-1123. Retrieved from: http://www.sciencemag.org/content/344/6188/1118

 1 The Economist. (2014). Tropical forests: Seeing the wood. Retrieved from: http://www.economist.com/news/leaders/21613262-saving-trees-one-best-ways-saving-environment-seeing-wood

2 ibid.

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