31 August, 2018

The economic market failure driving climate change

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It’s widely accepted that climate change is bad; extreme weather patterns, droughts, and wildfires are all becoming more and more frequent, and none of them do us any real favours. How has this happened...?

On the plus side, it’s generally acknowledged that we’ve identified the root of the problem. Over 97% of scientific evidence agrees that climate change is a direct result of human induced carbon emissions, and that if we can simply reduce these emissions we can prevent the growing crisis.


So, if the solution is so clear, why aren’t we doing it?


The bad economics behind climate change


To begin, we have to look at why carbon emissions were able to become a problem, and essentially this comes down to two key factors; the world’s atmosphere is free and open to all.


When you have a resource that is both cost-free and publicly available, you run into a ‘Tragedy of the Commons’ scenario.


The ‘Tragedy of the Commons’ refers to a social science theory originating from 1833, conceptualised by economist William Forster Lloyd.


Lloyd postulated that if you were to make land publicly available to cattle herders, free of cost, each herder would be incentivised to graze as many cattle on it as possible; they’re not paying for the usage, and the more cattle they graze the better their return, so why wouldn’t they?


However, because all herders were driven to think this way the public land (the ‘Commons’) would be pushed beyond capacity. As a result, the ‘Commons’ would suffer damage and the return for each herder per head of cattle would be less.


Unfortunately, a ‘reduced return’ isn’t sufficient incentive to change a behaviour; herders would still benefit from utilising the free resource, and they’d still be making a return per cattle grazed (albeit less per animal the more everyone overused the land). As such, if the herders continued thinking purely in terms of their own self-interest then there’d be nothing to prevent them from simply adding yet more cattle, which would in turn further damage the public land.


Allowed to run its course, the ‘Tragedy of the Commons’ concludes that without intervention the public resource will be depleted and potentially destroyed.


Climate change, as a result of carbon emissions, is a classic ‘Tragedy of the Commons’ problem.


Emitters are able to take full advantage of Earth’s free and publicly shared atmosphere (the ‘Commons’), and without a direct cost they are incentivised to do so. The harm they inflict individually is small, however collectively it adds up, the atmosphere is damaged, and our climate starts to change.



Can we make bad economics good and solve the problem?


Actually, yes!


The easiest and most effective way to tackle the ‘Tragedy of the Commons’ is to simply give each user a direct cost per usage. By internalising the cost in this way, socially irresponsible thinking starts to negatively impact returns, and consequently only the socially optimal amount of the ‘Commons’ will be used.


When it comes to climate change, the overwhelming opinion is that the best way to achieve this is to introduce a price on carbon emissions; a.k.a. a carbon price.


Unfortunately, whilst many businesses and communities have publicly advocated for a carbon price, governments have been slow to act and are indecisive at best. This is due to certain interest groups resisting carbon pricing and lobbying governments to either water down any form of legislation or abandon it completely.


After years of waiting (and countless failed political attempts), many people are now recognising that the governmental system is essentially ill-suited to tackle the problem, and an alternative is needed.


With the new opportunities provided by the blockchain, emmi believes they have the solution.


By providing a not-for-profit carbon trading and rating system, the carbon price can be set at a social level, and the social interconnectivity of the modern world will provide the ability to enforce a limit on carbon emissions. Furthermore, emmi has concluded that by rebating up to 90% of emission permit revenue back to emitters for future emission reduction projects it will significantly reduce the cost burden of the carbon price and help drive carbon emission reduction.


With the blockchain, a carbon pricing registry can be implemented that is transparent, trusted, and incorruptible, and society can step in where politics has failed.


Climate change is a global problem, but if we start locally, and think like a community, we can still fix it.