15.4 Climate change and international economic policy
3 min read•july 22, 2024
Climate change is reshaping the global economy, impacting agriculture, infrastructure, and health. Its effects are unevenly distributed, with developing countries and coastal regions facing greater risks. These changes are altering productivity, commodity prices, and public finances worldwide.
International trade policies play a crucial role in environmental . While trade can exacerbate environmental issues through increased emissions and resource exploitation, it also facilitates the spread of clean technologies. Trade agreements increasingly include environmental provisions to promote sustainable practices.
Climate Change and Global Economic Implications
Global economic impact of climate change
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- Reduced agricultural productivity due to changes in temperature and precipitation patterns
- Shifts in growing seasons and crop yields (wheat, rice, maize)
- Increased risk of droughts, floods, and extreme weather events damaging crops
- Increased frequency and severity of natural disasters leading to infrastructure damage and economic losses
- Hurricanes, typhoons, and cyclones destroying buildings, roads, and power grids (Hurricane Katrina, Typhoon Haiyan)
- Wildfires causing property damage and disrupting economic activities (Australian bushfires, California wildfires)
- Rising sea levels threatening coastal cities and communities causing displacement and
- Inundation of low-lying areas and increased coastal flooding (Miami, Mumbai, Shanghai)
- Need for coastal protection measures and relocation of populations
- Health impacts affecting labor productivity and healthcare costs
- Spread of vector-borne diseases (malaria, dengue fever) due to changing climate conditions
- Heat-related illnesses and mortality during heatwaves (Europe, South Asia)
- Uneven distribution of climate change impacts
- Developing countries more vulnerable due to limited resources and adaptive capacity (sub-Saharan Africa, South Asia)
- Low-lying island nations facing existential threats from rising sea levels (Maldives, Kiribati)
- Macroeconomic consequences
- Potential reduction in global GDP growth due to cumulative effects of climate change
- Increased volatility in commodity prices particularly in the agricultural sector
- Strain on public finances due to costs of adaptation and mitigation measures
Trade policies and environmental sustainability
- Environmental of international trade
- Increased greenhouse gas emissions from transportation of goods across long distances
- Exploitation of natural resources to meet global demand leading to deforestation, biodiversity loss, and ecosystem degradation (palm oil, timber)
- Carbon leakage: relocation of carbon-intensive industries to countries with less stringent environmental regulations
- Trade agreements and environmental provisions
- Inclusion of environmental chapters in trade agreements to promote sustainable practices and harmonize environmental standards
- Potential conflicts between trade rules and environmental policies such as restrictions on subsidies for renewable energy
- Role of trade in promoting clean technologies
- Facilitation of technology transfer and diffusion of eco-friendly innovations through trade (solar panels, electric vehicles)
- Reduction of tariffs and non-tariff barriers on environmental goods and services to encourage their adoption
International cooperation for climate challenges
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- International treaty established to address the global response to climate change
- Provides a platform for negotiations and agreements on emission reduction targets and adaptation measures
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- Landmark global accord signed in 2015 aiming to limit global temperature rise to well below 2℃ above pre-industrial levels
- (NDCs): voluntary emission reduction pledges submitted by countries
- Mechanisms for , technology transfer, and capacity building to support developing countries
- Challenges in international cooperation
- Balancing national interests and global responsibilities in climate action
- Ensuring equitable burden-sharing and support for developing countries
- Addressing the free-rider problem and ensuring compliance with commitments
Market instruments for low-carbon transitions
- mechanisms
- : imposing a price on carbon emissions to incentivize emission reductions and shift towards cleaner technologies
- (ETS): setting a cap on total emissions and allowing the trading of emission allowances among participants (EU ETS, California Program)
- Effectiveness depends on the design, coverage, and stringency of the pricing system
- Subsidies and incentives for clean energy
- Government support for research, development, and deployment of renewable energy technologies (solar, wind, hydro)
- Feed-in tariffs and tax credits to encourage investment in clean energy projects
- Phasing out of fossil fuel subsidies to level the playing field for low-carbon alternatives
- Limitations and challenges
- Political feasibility and public acceptance of market-based instruments
- Ensuring a just transition for workers and communities affected by the shift away from fossil fuels (coal miners, oil and gas industry)
- Addressing carbon leakage and competitiveness concerns in the absence of a global carbon price
Key Terms to Review (29)
Adaptation costs: Adaptation costs refer to the expenses incurred by individuals, businesses, and governments to adjust to the impacts of climate change. These costs can include investments in infrastructure, technology, and policy measures aimed at minimizing damage from climate-related events. As international economic policies evolve, understanding adaptation costs is critical for ensuring that resources are allocated effectively to address the challenges posed by climate change.
Border adjustment mechanisms: Border adjustment mechanisms are policies that adjust the price of goods based on their environmental impact, particularly in relation to carbon emissions. These mechanisms aim to level the playing field between domestic producers adhering to environmental regulations and foreign competitors who may not be subject to the same standards. They are crucial in international economic policy discussions surrounding climate change, as they attempt to prevent 'carbon leakage' and encourage sustainable practices globally.
Cap-and-Trade: Cap-and-trade is an environmental policy tool that aims to reduce greenhouse gas emissions by setting a cap on total emissions and allowing companies to buy and sell allowances to emit a certain amount. This market-based approach incentivizes businesses to lower their emissions and invest in cleaner technologies while also providing flexibility in how they meet regulatory requirements.
Carbon pricing: Carbon pricing is an economic strategy aimed at reducing greenhouse gas emissions by assigning a cost to carbon emissions, typically through mechanisms such as carbon taxes or cap-and-trade systems. By putting a price on carbon, it encourages businesses and consumers to decrease their carbon footprint, thus contributing to climate change mitigation efforts within the framework of international economic policy.
Carbon taxes: Carbon taxes are levies placed on the carbon content of fuels, aimed at reducing greenhouse gas emissions by making fossil fuels more expensive and encouraging cleaner energy alternatives. By assigning a cost to carbon emissions, these taxes create financial incentives for businesses and individuals to reduce their carbon footprint, driving innovation and investment in sustainable practices. They play a crucial role in addressing environmental concerns while promoting sustainable development and tackling climate change.
Christiana Figueres: Christiana Figueres is a Costa Rican diplomat known for her pivotal role as the Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC) from 2010 to 2016. She played a crucial part in the international climate negotiations that led to the landmark Paris Agreement in 2015, which set ambitious targets for global greenhouse gas emissions reductions and aimed to limit global warming to well below 2 degrees Celsius.
Climate finance: Climate finance refers to the financial resources that are allocated for projects and initiatives aimed at addressing climate change, including mitigation and adaptation efforts. This funding is critical for supporting developing countries as they seek to implement strategies to reduce greenhouse gas emissions and enhance resilience to climate impacts. Climate finance plays a crucial role in international economic policy by facilitating cooperation and investment in sustainable development goals.
Climate resilience: Climate resilience refers to the capacity of a system, community, or society to adapt to and recover from the adverse impacts of climate change while maintaining essential functions. This concept encompasses the ability to anticipate, prepare for, and respond to climate-related stresses and shocks, ensuring sustainability and long-term stability. Effective climate resilience involves integrating environmental, social, and economic strategies to protect ecosystems, livelihoods, and infrastructure against the changing climate.
Comparative Advantage: Comparative advantage is the economic principle that explains how countries or entities can gain from trade by specializing in the production of goods and services for which they have a lower opportunity cost compared to others. This concept highlights the importance of efficiency in resource allocation and trade dynamics, emphasizing that even if one party is more efficient in producing all goods, trade can still be beneficial when each focuses on their strengths.
Decarbonization: Decarbonization refers to the process of reducing carbon dioxide emissions associated with fossil fuel combustion, aiming for a more sustainable and environmentally friendly economy. This transition involves shifting from carbon-intensive energy sources to cleaner alternatives, such as renewable energy, which is essential for mitigating climate change and promoting long-term ecological balance.
Economic displacement: Economic displacement refers to the situation where individuals or communities lose their livelihoods due to changes in the economy, often triggered by external factors such as technological advancements, policy shifts, or environmental changes. This phenomenon can lead to significant social and economic challenges, especially when linked to issues like climate change, which can disrupt traditional industries and force populations to adapt or relocate.
Emissions trading systems: Emissions trading systems (ETS) are market-based approaches designed to reduce greenhouse gas emissions by allowing countries or companies to buy and sell permits to emit a certain amount of carbon dioxide or other pollutants. This system creates a financial incentive for polluters to reduce their emissions; those who can cut emissions at a lower cost can sell their excess permits to others who face higher costs, leading to a more efficient overall reduction in emissions.
Externalities: Externalities are costs or benefits of an economic activity that affect third parties who did not choose to incur those costs or benefits. They can be either positive, like education improving society, or negative, such as pollution harming health. Understanding externalities is crucial for addressing environmental concerns and promoting sustainable development, as well as shaping international economic policies that effectively tackle climate change.
Globalization: Globalization refers to the increasing interconnectedness and interdependence of economies, cultures, and populations across the world, driven by trade, investment, technology, and information exchange. This phenomenon impacts various aspects of life, including economic growth, cultural exchange, and labor markets, highlighting both opportunities and challenges in a rapidly changing global landscape.
Green bonds: Green bonds are fixed-income financial instruments specifically earmarked to raise funds for projects that have positive environmental impacts, such as renewable energy, energy efficiency, and sustainable agriculture. These bonds provide investors with a way to support environmentally-friendly initiatives while earning a return on their investment. The rise of green bonds is a critical response to climate change, linking financial markets with international economic policy aimed at fostering sustainable development and reducing carbon emissions.
Integrated Assessment Models: Integrated assessment models (IAMs) are analytical frameworks that combine knowledge from various disciplines to evaluate the interactions between human and environmental systems, particularly in the context of climate change. They help policymakers understand the potential economic impacts of climate policies by integrating data on emissions, climate change effects, and mitigation strategies, making them crucial for international economic policy discussions related to climate change.
Kyoto Protocol: The Kyoto Protocol is an international treaty adopted in 1997 that commits its parties to reduce greenhouse gas emissions, based on the premise that global warming exists and human-made CO2 emissions have caused it. It is a significant step toward sustainable development and environmental protection, aiming to hold countries accountable for their emissions and promote collaboration to combat climate change.
Nationally Determined Contributions: Nationally Determined Contributions (NDCs) are the commitments made by countries under the Paris Agreement to reduce greenhouse gas emissions and adapt to climate change. Each country's NDC reflects its own ambitions and circumstances, taking into account national priorities and capabilities, making it a flexible framework for addressing global climate challenges while respecting individual nations' sovereignty.
Nicholas Stern: Nicholas Stern is a prominent British economist known for his work on climate change and its economic implications, particularly as expressed in the 'Stern Review on the Economics of Climate Change' published in 2006. His research emphasizes the need for sustainable development by balancing economic growth with environmental protection, highlighting the urgent need for action against climate change to avoid significant future costs.
Paris Agreement: The Paris Agreement is an international treaty adopted in 2015 aimed at combating climate change and limiting global warming to well below 2 degrees Celsius, with efforts to restrict the temperature increase to 1.5 degrees Celsius above pre-industrial levels. The agreement marks a significant commitment by countries worldwide to reduce greenhouse gas emissions and promotes sustainable development through climate action and collaboration.
Public Goods: Public goods are goods that are non-excludable and non-rivalrous, meaning that individuals cannot be effectively excluded from using them, and one person's use does not diminish another's ability to use them. This characteristic leads to challenges in financing and maintaining such goods, as private markets may underprovide them, necessitating government intervention, especially in contexts like climate change where collective action is vital for global benefit.
Renewable energy subsidies: Renewable energy subsidies are financial incentives provided by governments to support the development and adoption of renewable energy sources, such as solar, wind, and bioenergy. These subsidies aim to lower the cost of renewable energy technologies, making them more competitive against fossil fuels while promoting environmental sustainability and reducing greenhouse gas emissions. The role of these subsidies is crucial in shaping international economic policies that address climate change and facilitate a transition toward cleaner energy systems.
Resource Scarcity: Resource scarcity refers to the fundamental economic problem of having seemingly unlimited human wants and needs in a world of limited resources. This concept highlights how environmental, economic, and social factors can lead to the depletion of natural resources, making it essential for countries to develop policies that promote sustainable use and conservation. Resource scarcity is crucial in shaping international economic policies as nations navigate the complex challenges posed by climate change, energy consumption, and resource management.
Sustainability: Sustainability refers to the ability to meet present needs without compromising the ability of future generations to meet their own needs. It encompasses economic, social, and environmental dimensions, emphasizing the importance of balancing these aspects to achieve long-term viability. In the context of climate change and international economic policy, sustainability highlights the need for practices that ensure ecological health while promoting economic growth and social equity.
Sustainable development: Sustainable development is the practice of meeting the needs of the present without compromising the ability of future generations to meet their own needs. It emphasizes a balanced approach that integrates economic growth, environmental protection, and social equity, ensuring that all aspects of society can thrive sustainably. This concept is particularly relevant in the context of climate change, as it aims to create strategies that not only mitigate environmental impacts but also promote economic resilience and social well-being.
Trade Barriers: Trade barriers are government-imposed restrictions that limit international trade, aiming to protect domestic industries and markets from foreign competition. These barriers can take various forms, such as tariffs, quotas, and non-tariff measures, each impacting the flow of goods and services between countries. Understanding trade barriers is essential in discussing the debates around free trade, the economic effects of tariffs, and the implications of international economic policy on issues like climate change.
Trade sanctions: Trade sanctions are restrictive measures imposed by one or more countries against another country to influence its behavior, often related to political, economic, or social issues. These measures can include tariffs, import or export bans, and other trade barriers designed to affect the targeted nation’s economy. In the context of climate change, trade sanctions can be utilized as tools to encourage compliance with international environmental agreements or to penalize countries that fail to adhere to climate-related commitments.
United Nations Framework Convention on Climate Change (UNFCCC): The United Nations Framework Convention on Climate Change (UNFCCC) is an international treaty that aims to address global climate change by promoting cooperation among nations to mitigate greenhouse gas emissions and adapt to climate impacts. Established in 1992, the UNFCCC sets the framework for negotiating and implementing policies to combat climate change, emphasizing the importance of sustainable development and equity among countries in their efforts to reduce emissions and support vulnerable nations.
World Bank: The World Bank is an international financial institution that provides loans and grants to the governments of low and middle-income countries for the purpose of pursuing capital projects. It aims to reduce poverty and support development by providing financial and technical assistance, making it a crucial player in global economic stability and growth.