The Economics Book

308 ECONOMICS AND THE ENVIRONMENT

be considered in economic terms
as a public good (pp.46–47), which
tends to be undersupplied by
markets; pollution can be seen as
an externality (p.137), where the
social costs of an action are not
reflected in prices and so are not
fully borne by the person taking it.
For these reasons Stern described
climate change as the greatest
market failure ever experienced.

Unequal nations
The first hurdle for economists
such as Nordhaus and Stern was to
convince governments to introduce
measures that would be harmful to
their economies in the short run
but would mitigate more damaging
consequences in the long run. The
second was to find the most efficient
way of enforcing an emissions policy.
Not all governments were easily
persuaded. The more developed

economies, which are mainly in

temperate areas, are not likely to

suffer the worst consequences of

a rise in global temperatures. The

likely changes in climate will hit

poorer countries much harder. This

means that, in many cases, the

countries with the greatest

incentive to mitigate the effects of

climate change are those that are

producing the least pollution.

The worst polluters, such as

the US, Europe, and Australia,

have been reluctant to accept

that governments should impose

expensive policies. Even if they

did, the pollution is not restricted

to their land masses. The problem

is global and demands collective

action on a global scale.

The need for collective action

was first noted at a U.N. “Earth

Summit” in 1992, which called for

all its members to curb their

emissions of greenhouse gases.

Many governments have developed

environmental policies and

strategies for implementing those

policies. Regulation in the form of

punishments, such as fines for

excessive production of pollutants,

is one solution, but it is difficult to

set emissions quotas that are fair to

all businesses concerned. The fines

are also difficult to enforce.

Another option, which was first

suggested by British economist

Arthur Pigou in 1920, is the

imposition of taxes on pollution

(p.137). Levying taxes on firms that

emit greenhouse gases, and on

energy suppliers and producers for

the amount of carbon they release

into the atmosphere, would act

as a disincentive to pollute.

Taxes on fossil fuels would

discourage their excessive

consumption. Pigou’s idea is to

make individuals face the full

social costs of their actions, to

“internalize” the externality.

Carbon-trading schemes

Pollution can be viewed as a market

failure because normally there is no

market for it. Economists suggest

that if there was, the socially optimal

William Nordhaus devised a computer program called DICE to show
how the elements of climate change interact, and where the ecological and
financial costs lie. This financial modeling system allows governments to
factor in their current consumption, resources, and needs, and weigh up
the costs and benefits—to them and the Earth—of the choices available.

Price-type approaches

like harmonized taxes

on carbon are powerful

tools for coordinating

policies and slowing

global warming.

William Nordhaus

Carbon in atmosphere

Temperature
rises

Damage

to nature

Emissions

and absorption

from nature

Emissions

from industry

NATURAL

RESOURCES

INDUSTRY

PEOPLE

Emissions from

consumption

Greenhouse

gases trap heat

C

on

su

mp

tion Consu

m

pt

io

n

La

bo

r