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Developing countries & climate change policies

I have been thinking about climate change issues in developing countries like China. The following notes provide some preliminary thoughts. I’d welcome comments.

Developing countries like China have low per capita energy consumptions, low efficiencies of energy use and, because of their population size, high aggregate greenhouse gas emission levels. They are also experiencing rapid economic growth. Currently they are not bound to control their carbon emissions by the Kyoto Protocol or other regulations. Indeed these countries are subject to low levels of environmental regulation generally.

What this suggests is that energy consumption and carbon emissions will be subject to two influences as these countries develop. Improved energy efficiencies will tend to reduce per capita consumptions and emission levels while increasing incomes are having stronger effects in driving both consumptions and emissions higher. China has already stated it will attempt to control carbon emissions by seeking to pursue ‘no regrets’ options of improved energy efficiency. But in the longer term we would expect that higher living standards will drive per capita energy levels towards levels enjoyed in developed countries. The short-term pursuit of ‘no regrets’ options is a sensible strategy since it both enhances cost efficiencies and reduces pressures from short-term emission growth. Longer-term developing countries can develop or purchase from developed economies less polluting coal or other electricity generation technologies as developing incomes increase and the capacity to employ less pollution technologies increases.

An obstacle to better longer term emission policies in developing countries is that currently these nations enjoy comparative advantages in a number of manufacturing areas because of the combined role of their low wage costs and the low prices they levy on use of the environment. As their economic development proceeds and wages increase, and as environmental restrictions in developed countries become more stringent, there will be increasing pressure on developing countries to rely on their low priced environments to preserve their comparative advantages. Indeed, it is in their self-interest to seek stringent environmental regulation in developed countries but to retain a lack of environmental controls for themselves.

While one can criticise the environmental stance of countries like the United States for not ratifying the Kyoto Protocol and for generally permissive policies towards carbon emissions eventually governments in the United States must respond to local public opinion. But neither local consumers nor international public opinion will have the same role in limiting pollution in countries like China if there continues to be a lack of accountability through the democratic process. While local environmental conditions are among the worst of any country the benefits of economic growth are being consistently favoured over the environment.

This is potentially a very dangerous outcome since within 20 years China will be the world’s biggest emitter of greenhouse gases. Moreover, China is one of the countries that will be most adversely affected both by generalised global warming and the direct harm it is carrying out on its citizens through local pollution.

Finally, the failure of China and other developing countries to implement effective carbon management policies reduces the incentives of industrial firms to practise effective carbon management in developed countries. Rather than investing in research or in new less-polluting technologies manufacturing businesses are encouraged to relocate in countries without stringent carbon controls. This has a global impact of reducing the international community’s ability to adjust to climate change or, equivalently, it increases the costs of adjusting to such change.

Countries like China, Australia and the United States which do not tax or limit their carbon emissions are imposing an external cost on the international community. An enforcement mechanism that countries could develop to pressure these countries to address the issue of climate change would be a countervailing tariff administered by the WTO similar to that proposed by Stiglitz on all goods that involved a significant carbon content. Countries that imposed a globally determined carbon tax would be exempt from such tariffs on their exports and could use the revenue as a significant source of income.

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