CONTEMPORARY ECONOMICS 309
amount of pollution would be emitted
because polluters would face the full
costs of their actions. Therefore,
another proposed solution to the
climate problem is to create a market
for pollution through emissions
trading. This involves a government
(or, in some cases, a number of
governments working together)
determining an acceptable level of,
for example, CO 2 emissions, and
then auctioning permits to firms
whose business involves the
discharge of carbon dioxide. The
permits are tradable, so if a firm
needs to increase its emissions, it
can buy permits from another that
has not used its quota. This kind of
plan has the advantage of rewarding
the firms who cut their emissions
and can then sell their surplus
permits. It can discourage firms
from exceeding their quotas and
having to buy extra permits.
However, the total amount of
emissions remains the same and
is controlled by a central authority.
The Kyoto Protocol
While emissions trading programs
are certainly a step in the right
direction, the problem needs to
be tackled globally to avert the
risk of climate change. However,
international agreements such as
the Kyoto Protocol have failed to
achieve universal ratification. In
1997, 141 countries took part in
discussions, but by 2012 only 37
countries had agreed to implement
its targets for greenhouse gas
emissions. The US has consistently
rejected the terms of the agreement,
and Canada pulled out in 2011.
Even those countries that pledged
to curb their emissions have often
failed to meet their reduction targets.
Developed countries such as the US
and Australia argue that it would be
too harmful to their economies;
developing economies such as
China, India, and Brazil argue that
they should not have to pay for the
pollution caused by the West (even
though they themselves are fast
becoming major polluters). On the
other hand more eco-advanced
nations, such as Germany and
Denmark, agreed to reduction
targets of more than 20 percent.Economic modeling
Economists have devised various
models for studying the economic
impact of climate change, such as
Nordhaus’s Dynamic Integrated
model of Climate and the Economy
(DICE), first presented in 1992
(see opposite). This links together
CO 2 emissions, the carbon cycles,
climate change, climatic damages,
and factors affecting growth.
Most economists now agree
that climate change is a complex
problem with the potential to cause
serious long-term damage. The
solution is far from obvious, but
in 2007, Nordhaus said that he
believed the secret to success lies
not in large, ambitious projects,
such as Kyoto, but in “universal,
predictable, and boring” ideas,
such as carbon taxes. ■India’s growing needs
India’s growth rate for 2012
was predicted to be 7–8
percent for the year. The
country’s business leaders
are aware that if this rate of
growth continues, there will
be a huge energy shortage.
The fear is that the shortfall
will be met by the use of
low-cost “dirty” coal and
diesel fuel, so efforts are being
made to increase efficiency
while also encouraging the
use of renewable energy
products, using solar, wind,
and geothermal technologies.
Economists hope that
renewable energy forms,
together with nuclear energy
(judged to be a “clean” energy
provider) can combine to meet
all of India’s growing needs.
However, so far the renewable
energy forms, such as solar,
are not commercially viable
industries on a large scale.
This means that they will
need a short-term boost from
state subsidies to expand.
This is provided for in India’s
ambitious National Action
Plan on Climate Change,
introduced in June, 2008.Solar panels capture sunlight in
the Himalayas in northern India.
Solar power may be an efficient
source of renewable energy in
India, where sunshine is intense.Hurricane Katrina destroyed much
of New Orleans in 2005. The cost of the
damage, estimated at $81 billion,
focused worldwide attention on the
economic effects of climate change.