When such negative externalities occur within a community, bylaws can
be enacted by local government to alter individuals’ behaviour. We thus
have bylaws in some cities preventing the use of wood-burning stoves.
When negative externalities occur within larger regions, governments
often step in to correct the market failure, and so we get provincial
governments enforcing such laws as banning the dumping of toxic waste
in waterways.
In the case of greenhouse-gas emissions, however, the negative
externality is truly global. The GHG emissions that come from a coal-
burning electricity plant in Canada or China rise into the atmosphere and
disperse around the globe. They add to the atmospheric stock of existing
GHGs and therefore contribute to the ongoing process of climate change.
In both cases, the costs are imposed on people all over the world. As
Professor Nicolas Stern says in his famous 2006 report written for the
U.K. Treasury, “Climate change is the greatest market failure the world
has ever seen”—its solution will require collective action on a global scale.
The Kyoto Protocol
The global scale of the problem motivated the United Nations to sponsor
a set of conferences, aimed at developing a coordinated solution to
climate change. In 1997, this process was brought to the world’s attention
with a major conference held in Kyoto, Japan, at which many countries
signed an international agreement aimed at reducing GHG emissions.
This agreement came to be called the Kyoto Protocol, and within a decade
had been ratified by the parliaments of 166 signatory countries.