Eco-nomics: Unraveling the Green Threads of Climate Change Solutions

 Have you ever wondered what governments across the globe are doing to prevent climate change? From the Kyoto Protocol to ‘nudging’, we discuss the steps taken past and present by governments and organisations across the globe to combat climate change. Firstly, to understand why they take these steps, we must be aware of the economic principles such as externalities, coordination failure, and asymmetric information.

A global consequence

The Kyoto Protocol was drafted in 1997 to reduce greenhouse gas (GHG) emissions by “at least 5%” (Nordhaus and Boyer, 1999, pp. 94) by 2012. The treaty came into force in 2005 having been ratified by 197 countries by 2011. This represented around 63.7% of emissions. This on paper represents a large portion of GHG emissions. However, the protocol did not deliver satisfying results.

Figure 1: Atmospheric Carbon Dioxide from 1990-2024 (Lindsey, 2024)

One of the biggest issues with the Kyoto Protocol was that the developing countries were not required to cut their emissions which reduced the effectiveness of the protocol, resulting in growing level of GHG emission as shown in Figure 1. Furthermore, China, Australia and the USA opted out with Canada withdrawing later. This is an example of how there is a lack of coordination across large global powers when challenging climate change because if China and the USA (GHG change shown in Figure 2), the two largest economies in the world are dropping out of a global climate change pact then evidently, there is a coordination failure on a global scale.

Figure 2: GHG emissions as % change of 1990 emission levels (Maamoun, 2019)

In economics terms, the consequence borne by all countries is a “negative externality” due to the GHG generated by our economic production. The GHG affects society which is the third party in production. To combat this, carbon pricing is introduced. There is a cost applied to carbon pollution to encourage polluters to reduce the amount of GHG. This is a form of internalising the externality, causing the producer to bear the cost of the externality generated. When the cost of action is received, it creates an incentive for the producers to reduce their emissions and develop cleaner forms of production.

The hole in supervision

While the international community has initiated measures to enhance coordination and cooperation to mitigate market failures—like the Paris Agreement, which aims to synchronize global climate efforts and motivate nations to establish and meet emission reduction targets—these initiatives are often complicated by domestic and international politics, economic interests, and geopolitical dynamics, making the task of global climate governance intricate and formidable.

One major problem lies in the way that GHG emission levels are reported. Countries are expected to self-report their emission levels, which allows them to massively under-report. In fact, a report compiled by Climate Trace (Harvey, 2022) showed that GHG emissions from oil and gas facilities were three times higher than what was reported. When regulators lack means of verifying the reliability of data, conformers can utilize information asymmetry to their advantage. By under-reporting, the conformers can circumvent penalties while keeping unregulated levels of emissions. These are known as “moral hazards”, which occur when entities intentionally take risks knowing their actions are unobserved, while other parties bear the consequences. Since many of the GHG-heavy industries involve natural monopolies that operate on huge scales, the lack of penalties then becomes their incentive to maximise profit which eventually generates greater social costs. To mitigate the situation, a different form of approach comes into play.

A different approach

Unlike a “top-down” regulatory policy, a “bottom-up” approach can be effective when introducing new social norms, which would then nudge consumers’ behaviour for pro-environmental purposes. One specific approach is called “credibility-enhacncing displays”, which strengthens the credibility of a belief when it is put into action (Kraft-Todd et al., 2018). Most people already have sufficient knowledge of the danger of climate change, but observing peers' pro-environmental behaviours can actually motivate others to follow suit. Additionally, the display of an action solidifies existing beliefs, and publicly visible actions would push the effect even further. A field study found a 63% increase in residential solar panel installation when community promoters themselves installed the panel (Kraft-Todd et al., 2018). When community organizers installed solar panels themselves, residents would believe in what the former believe in, forming so called “second-order beliefs”. These beliefs then allowed residents to turn their beliefs into actions as shown in figure 3.

Figure 3: Flow of beliefs to actions

Moreover, the solar panels served as pro-environment statements visible to all other residents. Without regulatory actions, residents acted voluntarily due to both expectations from others and shared social values. Other strategies that emphasise ethical transparency and respect individual decision-making can reduce GHG emissions by similarly connecting personal beliefs with social values. Incorporating behavioural economics, nudges are able to reduce the carbon footprint and support community-led sustainability policies, setting a foundation for a sustainable future.

Although climate change is an increasingly harder problem that will take decades, if ever, to tackle, it is clear that we can start by accomplishing environmentally protective decisions. These range from sorting the recycling to purchasing a more emission-friendly vehicle. If everyone contributed and undertook these environmentally protective decisions, we would live in a much safer world. Yes, the governments are failing to reach their environmental policies and international cooperation seems less and less likely as the weeks go by but, individually we can all commit to decisions that will allow us a healthier world. There are also government failures that need highlighting through the underreporting of GHG emissions that will have worldwide consequences. The more pertinent problem is the incoordination of governments globally which soon needs to be addressed.

Bibliography

Harvey, F. (2022) Oil and gas greenhouse emissions ‘three times higher’ than producers claim, The Guardian, 9 November. Available at: https://www.theguardian.com/environment/2022/nov/09/oil-and-gas-greenhouse-emissions-three-times-higher-than-producers-claim (Accessed 16 April 2024).

Kraft-Todd, G.T. et al. (2018). ‘Credibility-enhancing displays promote the provision of non-normative public goods’, Nature (London), 563(7730), pp.245–248. DOI: 10.1038/s41586-018-0647-4.

Lindsey, R. (2024). ‘Climate Change: Atmospheric Carbon Dioxide’, Climate.gov, 9 April. Available at: https://www.climate.gov/news-features/understanding-climate/climate-change-atmospheric-carbon-dioxide (Accessed 17 April 2024).

Maamoun, N. (2019). ‘The Kyoto protocol: Empirical evidence of a hidden success’, Journal of environmental economics and management, 95, pp.227–256. DOI: 10.1016/j.jeem.2019.04.001.

Nordhaus, W.D. and Boyer, J.G. (1999). ‘Requiem for Kyoto: An Economic Analysis of the Kyoto Protocol’, The Energy journal (Cambridge, Mass.), 20(1_suppl), pp.93–130. DOI: 10.5547/ISSN0195-6574-EJ-Vol20-NoSI-5.