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Abstract:

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CEP Policy Analysis
Climate Change: Economic Sense and Non-sense of Carbon Mitigation Policies

February 2006
Paper No' CEPPA003:
Full Paper (pdf)

• It is predicted that climate change caused by human activities will raise global average temperatures by between 1.5 and 5 degrees Celsius over the next 100 years. This could raise sea levels by one metre or more and lead to a number of other catastrophic climate changes and related phenomena. It could also have some benefits. • Humanity’s main response to this problem is the United Nations’ climate negotiation process. The most important milestone of that process so far is the ‘Kyoto protocol’ which has set targets for reductions in greenhouse gas emissions and which came into force in February 2005. • Despite some attractive design elements, the Kyoto protocol alone is unlikely to make much impact on greenhouse gas emissions. This is mainly due to the failure of the agreement to include most of the world’s current and future emissions, which will arise in China, India and the United States. • If, as seems likely, this status quo continues, then research and development (R&D), which leads to innovations that can both reduce the intensity of carbon emissions and reduce costs, will become an even more important part of the strategy to fight climate change. • While the Kyoto strategy of internationally agreed emission targets might create some incentives to develop these technologies, the incentives are probably insufficient. This suggests that some additional direct support from governments is required.

• Another problem with targets is that by the nature of things, they have to be based on very unreliable forecasts of what can be achieved in the future at reasonable costs. Pressing ahead with ambitious targets – as is the current UK strategy – might therefore risk wasting large amounts of public and private money without having much impact on climate change. • To avoid the danger of excessive costs or politically disastrous non-compliance, target schemes should include a ‘safety valve’ mechanism. • We propose an innovative solution of a safety valve mechanism operating through a Global Environmental R&D Fund. Countries could convert excess carbon into contributions to a research fund that would be used to develop technologies to reduce climate change.