UN Partners
on Climate Change
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Background Information > Fact Sheets
The Politics and Economics of Reducing Emissions
Policies that provide a real or implicit price of carbon could create incentives for producers and consumers to significantly invest in low-greenhouse gas products, technologies and processes.
"Climate Change 2007,"
Intergovernmental Panel on Climate Change
Quick facts
- More than US$ 20 trillion is expected to be invested in energy infrastructure between now and 2030 that will have long-term impacts on greenhouse gas emissions.
- Subsidies, direct and indirect, for fossil fuels and agriculture, remain common practice.
- Models indicate that stabilizing emissions could cost an annual reduction in the GDP growth rate of less than 0.12 per cent to less than 0.06.
The Politics
- Governments — State authorities can play a major role in motivating the private sector to invest in innovative technologies by providing companies with incentives that are clear, predictable, long term and robust.
- Policies can backfire — Government policies can also be counterproductive. Direct and indirect subsidies for fossil fuel use and agriculture remain common practice, although those for coal have declined over the past decade, particularly in industrialized countries.
- A wide range of policies needed — Governments are successfully using a wide range of policies and measures to address climate change, including regulations and standards, taxes and charges, tradable permits, voluntary agreements, subsidies, financial incentives, research and development programs and information instruments. The most effective policy mix will vary from country to country.
- Policies to guide investments — Government policies and private sector investment decisions are critical for the more than US$ 20 trillion that is expected to be invested in energy infrastructure between now and 2030 that will have long-term impacts on greenhouse gas emissions.
- Removing barriers to innovation — For policies to be effective, governments need to pay special attention to identifying and removing barriers to innovation. These can include market prices that do not incorporate externalities such as pollution, misplaced incentives, vested interests, lack of effective regulatory agencies and imperfect information.
- Holistic Approach — Because no one sector or technology can address the entire mitigation challenge, the best approach is to adopt a diversified portfolio of policies and to address all major sectors.
The Economics
- Economists use models to estimate the economic impacts of efforts to reduce emissions. Economic modeling relies on a wide range of assumptions, which are critical to a model’s conclusions about the cost of stabilizing greenhouse gas levels. Key assumptions involve the discount rate; the emissions baseline, related technological change and resulting emissions; the stabilization target and level; and the portfolio of available technologies.
- Studies indicate that there is substantial economic potential for the mitigation of global greenhouse gases emissions over the coming decades.
- Economic models produce lower cost estimates when they use baselines with slowly rising emissions and when they allow technological change to accelerate as carbon prices rise. Costs are also reduced when the Kyoto Protocol’s flexibility mechanisms are more fully implemented. If revenues are raised from carbon taxes or emission schemes, costs may be lowered if the new revenues are used to promote low-carbon technologies and remove barriers to mitigation. Some models even give positive GDP gains because they assume that economies are not functioning optimally and that policies to mitigate climate change can help to reduce imperfections in the economy.
- Many economic models report the cost of reducing emissions in terms of "GDP loss." For example, by the year 2030 the global average macro-economic cost of ensuring that greenhouse gas levels eventually stabilize at 445-710 ppm ranges from less than 3 per cent to a gain of 0.6 per cent of GDP. This translates into an annual reduction in the GDP growth rate of less than 0.12 per cent to less than 0.06. This small loss should be compared to projections that the global economy is likely to expand dramatically over the next few decades.
- Economists use cost-benefit analysis to compare the costs of action with the costs of inaction (that is, of climate change damages). They quantify climate change damages as the social cost of carbon and discount it over time. The social cost of carbon gives a value to costs that are not recognized by the economy e.g. the cost of increased drought, storms and floods are not included in the monetary price paid to burn fossil fuels but they would be included in the social cost. However, due to large uncertainties in quantifying non-market damages, it is difficult to estimate social costs of carbon with confidence. As a result, estimates in the literature vary a great deal and are likely to be understated.
- Comparing the social cost of carbon estimates with the carbon prices for different levels of mitigation shows that the social cost of carbon is at least comparable to, and possibly higher than, carbon prices for even the most stringent scenarios assessed by the IPCC. In other words, the cost of stabilizing greenhouse gas concentrations at low levels tends to be comparable to, or lower than, costs of inaction.
- It is also important to remember that climate policies can bring many win-win benefits that may not be factored into cost estimates. These include technological innovation, tax reform, increased employment, improved energy security and health benefits from reduced pollution. As a result, climate policies offering significant co-benefits can offer a true no-regrets greenhouse gas reduction policy in which substantial advantages accrue even if the impact of human-induced climate change itself would turn out to be less than current projections suggest.
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