What are the economic barriers to reducing carbon emissions?
If it is difficult to reduce our greenhouse gas (GHG) emissions, in particular CO2 emissions, it is because they are the foundation of the entire functioning of our societies and economies. How we travel, eat, are housed, heat our homes, produce the goods we consume, organize our cities, etc.: all our habits rely on fossil fuel combustion – coal, oil or gas. It would therefore be simplistic to only bring up the economy to analyze the barriers to reducing emissions.
However, two major economic barriers can be taken into consideration. The first lies in the horizons taken into account in decision-making: they are often guided by the need for very short-term profitability. It is consequently impossible to take the impacts of climate change into account. The second is due to the price systems which (partly) guide consumption, production and investment choices, and which do not reflect the real costs of the use of fossil fuels. These fossil fuels are still widely subsidized: fossil fuel subsidies currently amount to between USD 250bn and USD 500bn a year (according to the estimation methodologies used), i.e. 2 to 4 times more than all the renewable energy subsidies around the world. In addition, the costs of fossil fuels for society are only very partially taken into account in prices, in particular the cost of air pollution in terms of health and the cost of damage caused by climate change. Consequently, despite a positive trend, only 20% of global emissions are covered by a form of carbon pricing.
Conversely, what economic and financial drivers would speed up the ecological transition?
The first economic driver logically involves realigning prices with the real costs of fossil fuels, reflecting both the production costs and social costs (in terms of GHG emissions and local air quality). While carbon prices are necessary for the transition towards low-carbon economies and ways of life, they are not a magic wand which would single-handedly bring about the transformation. This is for a whole host of reasons: because there are limits to the value which can be given to carbon, depending on the context of the various countries, because markets are not perfect, because there are the issues of risks, access to capital, information asymmetry, contradictory incentives, etc. The transition will require a set of policies, including carbon prices, but also regulations, loan and guarantee systems to make “low-carbon” investments less risky, etc.
How are the climate and global inequalities linked?
Climate change and inequalities are linked in two ways. Generally speaking, both at the level of countries and individuals, the less wealthy are the most vulnerable to climate change, whereas the wealthiest are responsible for the bulk of GHG emissions. Consequently, there is a sort of “double penalty”: those who bear the brunt of – and will bear the brunt of – the impacts of climate change are those who contribute the least to the problem, even if the impacts of climate change (heatwaves, droughts, rising sea levels…) also affect rich countries.
“Rich” or “developed” countries are responsible for some 70% of the build-up of GHGs since the industrial revolution. In addition, emissions today remain closely linked to the GDP of countries: as a proportion of the population, the emissions of the USA reach some 20 tCO2eq per person per year, those of the European Union and China are close to 8 tCO2eq per person per year, those of India just over 2 tCO2eq per person per year and those of Senegal or Burkina Faso, for example, are between 1 and 2 tCO2eq per person per year.
Are inequalities also visible within countries?
Yes, they are. We find these inequalities within countries. The poorest households are generally the most exposed and the most vulnerable to the impacts of climate change. The level of wealth of an individual is not the sole determinant of their carbon emissions. But it remains the first, ahead of all the other determinants, such as their urban/rural location, their age, etc.
Consequently, today, worldwide, the richest 10% are responsible for some 50% of greenhouse gas emissions, while the poorest 50% only account for 10% of emissions.
Furthermore, the adaptation capacities of less developed countries are weaker and climate change exacerbates pre-existing tensions and difficulties.
The distribution of the damage therefore closely links climate change to the issues of inequalities, which are highly prevalent today.
Are these inequalities taken into account in the analysis?
The economic calculation tools used often take little account of these issues of distribution. If we imagine two projects with the same cost which reduce the damage caused by climate change for a neighborhood, for example, two investment projects in protection infrastructure: one would avoid EUR 100,000 of damage for middle-class households, the other would avoid EUR 50,000 of damage for poorer households. If we have enough to finance just one of these projects, which one do we choose? The simplest cost-benefit analysis tools would give priority to the first because it provides more benefits. But there are also tools from welfare economics or social choice economics which take into account the impact of damage on well-being and could give priority to the second. These tools exist, but they need to be implemented in practical cases.
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Another significant implication of inequalities in the distribution of damage concerns the models used to calculate the mitigation value, i.e. the value of projects which reduce GHG emissions. This value corresponds to the value of the damage avoided. It can vary between 1 and 10, depending on the way in which inequalities are represented. It is important, as this value is used in the choice of public investments and is taken into account to decide on the scale of public policies such as carbon taxation.
Climate change is consequently a multiplier of inequalities, whereas they have already reached intolerable levels today. If there is no swift action to reduce GHG emissions, climate change will have an amplifying effect between countries and within countries.
Yet actions to reduce GHG emissions must not neglect their own impact on inequalities and on poverty and precariousness. Indeed, we need to pay attention to ensuring that policies to reduce emissions do not exacerbate situations of energy insecurity or prevent access to energy. In this respect, carbon taxation is interesting, as part of the revenues it generates can be used for the fight against energy insecurity.
Can economic growth and raising living standards be reconciled with controlling global warming, particularly in developing countries?
If there is no action to mitigate climate change, its impacts could undermine development and poverty eradication. Controlling global warming is therefore a prerequisite for sustainably raising living standards. Furthermore, studies show that both the way out of poverty and universal access to energy can be achieved without leading to a significant increase in GHG emissions. In addition, a number of co-benefits are related to actions to reduce these emissions. For example, the use of efficient stoves reduces them, but above all improves air quality and therefore health. Similarly, reducing CO2 emissions caused by motor vehicles in cities also reduces emissions of fine particles and other pollutants, which suffocate large cities.
Yet it would be naive to think that there are only co-benefits and synergies between climate change mitigation and development. There are also conflicts which will need to be managed and losers in the transition which will need to be protected and supported. For example, certain mitigation solutions which use bioenergies more are likely to exacerbate tensions over land and water use, and push up food prices, thereby making the poorest households more vulnerable.
Finally, as emissions are so low in the least developed countries, it is unrealistic to think that they will be able to develop without increasing their emissions. This means that very strong action to reduce emissions in developed countries is necessary. In our countries, the all-powerful “GDP growth” indicator must therefore be called into question.
How can development assistance contribute to the transition towards low-carbon economies?
It seems to me that the challenge above all lies in mobilizing the co-benefits I have mentioned. They will allow countries to avoid being confined to carbon-intensive paths and act as a driver for redirecting investments towards low-carbon systems.
The opinions expressed on this website are those of the authors and do not necessarily reflect the official position of their institutions or of AFD.