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Getting the price right on climate

IMF-MIT study shows immediate — but realistic — actions are needed to confront climate change.
Chinese countryside.
Chinese countryside.

As global leaders prepare to gather for the Rio+20 sustainable development summit in Brazil next week, the International Monetary Fund (IMF) and a collection of economists from MIT and other organizations has released a report to help leaders confront the price tag associated with climate change. The publication —Fiscal Policy to Mitigate Climate Change: A Guide for Policymakers — details the most effective methods to reduce emissions and contain costs, namely through carbon pricing.

Until now, leaders have focused on slowing warming to 2 degrees Celsius to prevent catastrophic changes associated with climate change. Because this would mean taking drastic measures to hold emissions at about today’s levels, researchers at MIT argue that leaders should be realistic and start smaller because the time to act is quickly running out. Their research — “Emissions Pricing to Stabilize Global Climate” — is a chapter within the IMF guide.

“Negotiations on the exact emission-reduction target have been going on for a long time without much substantial progress,” says Sergey Paltsev, lead author of the MIT study and associate director for economic research at the Joint Program on the Science and Policy of Global Change. “But it is better to start with some policy that reduces emissions because even a small initial step is important as it sets the process on track.”
IMF Managing Director Christine Lagarde points to a tax or trade system.

“Perhaps we can help with a simple concept that everybody can understand — getting the prices right,” Lagarde said this week in a speech at the Center for Global Development. “Getting the prices right means using fiscal policy to make sure that the harm we do is reflected in the prices we pay. I am thinking about environmental taxes or emissions trading systems under which governments issue — and preferably sell — pollution rights.”

The MIT research suggests an emissions price — organized through either a tax or cap-and-trade system — of about $20 to $40 per ton by 2020 to help the world community reach less stringent targets that would keep warming to 2.9 or 3.6 degrees Celsius.

“These less stringent targets are more realistic and reachable, and they still reduce the risk of more severe climate impacts,” Paltsev says. But, he warns, “we have never experienced such changes and do not know exactly how the Earth will respond, so the smaller the changes we make, the greater the risk of something unexpected and bad happening.”

Still, making small changes is better than not acting at all, Paltsev says, and we shouldn’t wait for technology to fix the problem for us.

“We can wait for a miracle technology, like biofuels with carbon capture and storage, to appear and become economical — allowing us to reach more stringent targets — but then we place our bets on something which may or may not materialize,” Paltsev says.

The longer the global community waits to take action, the higher the price tag could be and the less likely the world will be able to meet even less stringent targets. This could mean “unprecedented levels of damage and degradation” if current trends in production and consumption continue, United Nations Undersecretary General Achim Steiner said in a recent statement. He added, “The moment has come to put away the paralysis of indecision, acknowledge the facts and face up to the common humanity that unites all peoples.”

Andrew Steer, special envoy for climate change for the World Bank, agrees.

“We will turn the tide against climate change only when core economic policymakers wake up to the urgency of the issue and factor it into their fiscal and economic policies,” he said in a statement.

Making progress one step at a time

Even if all countries were able to agree on a uniform path forward, slowing emissions would require a complex burden-sharing system including incentives and compensation for emerging and developing countries — continuing an ongoing struggle about who pays what to confront the challenge.

While such an international effort may take time, the Green Climate Fund — formed in Cancun, Mexico, in 2010 — could help developing countries. Meanwhile, major emitters like the United States, the European Union and China could establish a relatively small carbon tax, the revenue from which could be returned to citizens to balance out the higher energy prices and increase public support. The idea is similar to parts of a proposal by Sen. Maria Cantwell, D-Wash., in the United States.

Still, cap-and-trade — a system invented by American economists — is far from being implemented in the United States, as countries around the world take steps to implement the system — like China.

“Just as many of our best innovations are produced in China, they may beat us in implementing such a system,” John Reilly, a co-director of the MIT Joint Program on the Science and Policy of Global Change and an author of the IMF chapter, said recently. "We're really being left behind.”

China is not the only country that has an edge on the United States. The EU, Australia, New Zealand and South Korea have already begun to set hard emission limits, and cap-and-trade programs are gaining traction in Brazil and Mexico as well.

Joëlle Chassard, manager of the Carbon Finance Unit of the World Bank, said in a statement that it was heartening to “see increasing interest in, and support for, new market-based mechanisms to mitigate climate change.”

Paltsev agrees that these systems are encouraging and useful, even at the local level. But, he says, “It is also important to harmonize the efforts” and “all major emitters, including the U.S., need to participate.”

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