The mother of all externalities

We are still waiting for the Harper government’s proposed “green plan” or “clean air act” despite a big launch in Vancouver the other day. Expectations are being lowered as more details come out. The tough talking rhetoric does not appear to have much substance behind it. According to a CP wire story today based on a draft leaked to environmental groups:

The bill amounts to little more than a set of minor amendments to the Canadian Environmental Protection Act (CEPA), according to a team of environmental lawyers who studied the draft. … [T]he bill does not appear to enhance federal regulatory authority to curb greenhouse gases or other pollutants.

At least the Harper government’s attempt at green-wash is putting environmental issues back on the public’s radar screen, that plus a rash of stories chronicling new data and outcomes of climate change. It is a shame that Harper has not put anything meaningful on the table in this exercise; for a short while there I thought that this might be a brilliant Nixon-goes-to-China (Harper-goes-to-Kyoto) manoevre. But no.

All of this has me thinking of the ecological economics literature I read back in grad school. Standard neoclassical models assume that there are no externalities, and in the teaching of economics, externalities are generally viewed as the exception. But when it comes to issues like climate change and air pollution, externalities are the rule. In addition to the private market transaction there are huge costs borne by third parties in terms of ill health, even death.

Putting aside air pollution, the externalities of climate change are massive. Here is a summary of the biggest externalities by the US-based International Center for Technology Assessment:

Sea levels are likely to rise by between 25 and 75 cm due to thermal expansion of sea water by 2100, and the sea level rise could be much greater due to the melting of landlocked ice. This will increase storm surges and coastal flooding.

Warming of the Earth will increase mean global precipitation by 1.5-2.5% per 1°C of surface temperature rise, increasing the risk of flooding and mudslides.

Northern mid-latitude continents will become more prone to desertification due to decreases in soil moisture.

Tropical storms will become more intense in warmer ocean waters.

There will be more extreme warm-weather events and fewer extreme coldweather

Approximately 1 million species of plants and animals are likely to become
extinct or nearly extinct by 2050.

Contemplating the costs these changes represent, they add:

The environmental and health costs of global warming will be astronomical. One United
Nations report conservatively estimates worldwide economic losses due to global
warming at $150 billion per year. Dr. Gerhard Berz, a researcher at insurance giant
Munich Re, projects annual worldwide losses of $304.2 billion, with some $68 billion of
these annual losses occurring in the United States. Experts agree that globally costs will
fall disproportionately on the world’s poorer nations.

The good economic answer then is something like “internalize the externality” so that market prices reveal the full economic cost. And yet this is where the political rubber hits the road. No one wants to upset drivers, who are on average more affluent than their cousins who ride the subway or bus. Industry, who normally issues a market-friendly line, goes ballistic at the mere suggestion that they stop imposing their costs on those who do not buy their products. So here is a case where a functioning market is pitted against the vested interests of a capitalist system.

Climate change is often painted as if we are all in the same boat, but I think there will be distributional consequences and they will probably exacerbate existing inequalities. The people who are getting rich fighting change will actually be better insulated from the effects of climate change by virtue of their wealth (at least over some medium-term horizon). And the people who fare the worst are those who never benefitted much to begin with.

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