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The Economics of Cop26

Tuesday 2 November 2021

10 economic issues from Cop26

The weight of expectation hangs heavily on world leaders as they meet for the global climate summit in Glasgow this week. Reaching an agreement that limits global warming to 1.5 degrees is a challenging target, but one climate scientists believe has to be achieved.

Here are some thoughts on 10 Economic issues from Cop26:

1. Sustainability is a key factor influencing the policies used to reduce carbon emissions. Using fossil fuels to benefit people now has important negative consequences for future generations.

2. Burning fossil fuels for energy has significant negative externalities in the present (just look at the quality of air in many major cities) but it also has external costs for third parties in the future as the climate becomes more unstable and sea levels rise.

3. The atmosphere is a common pool (access) resource. Its non-excludability means there is an over-allocation of resources in a free market because without government intervention firms do not have to pay a price for emitting carbon into the atmosphere.

4. There is a free-rider problem in trying to reduce carbon emissions. Individuals, firms and governments that take action to reduce their carbon emissions will incur a high cost for doing this. Other individuals, firms and governments can choose not to limit their emissions and ‘free-ride' on actions of those who do.

5. Commercial pressure is building on businesses to reduce their carbon emissions. Banks, major investors and pension funds are increasingly moving funds away from businesses associated with the production of fossil fuels.

6. There is significant global growth in Investment and Innovation in sustainable sources of energy such as hydrogen, wave, wind and solar power.

7. Development of battery technology to make renewable energy transportable and storable will be a significant breakthrough in the use of renewable energy.

8. The poorest in the world will suffer the most significant negative impact on their welfare, but even the welfare of the richest people will be adversely affected. The political influence of the wealthiest people in the world could be a significant factor in successfully tackling climate change.

9. China is crucial to achieving the 1.5-degree target. They are the largest carbon emitter and any significant reductions they make will be very important. China’s political system means they can probably switch to more sustainable sources of energy more quickly than other countries.

10. Climate change is a truly global problem that affects everyone on the planet. Successfully achieving the 1.5-degree target will need an unparalleled level of international cooperation.

Possible points of discussion

1. Is it possible to rank the issues discussed above in order of importance?

2. Which of the issues considered do you think are most important in achieving the 1.5-degree warming target?

3. Are there any issues you could add to those considered above?


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