Table of Contents:
2. A short assessment on the actual situation of our atmosphere
2.1. The phenomena of global warming and the depletion of the ozone layer
2.2. The ecological point of view: necessities and trends in pollution
2.3. How to measure and calculate environmental sustainability and damage
3. The crux in controlling global emissions
3.1. Some historical evidence on global policy coordination efforts
3.2. Why it does not work: About nature as a good and political restrictions
3.3. The role of private companies
4. Instruments for an effective protection of the atmosphere and the ozone layer
4.1. A general overview
4.2. Quite a promising example: Emissions trading
4.3. Will it work in practice? Some evidence
4.4. Recent trends, developments and a brief outlook
The global economy is running faster and faster today. Welfare is maximized in most democratic societies. By shipping raw materials and semi- finished products around the world we are able to produce any good we wish to consume at the cheapest cost. If harmful side effects of profit maximization occur, there are mechanisms in liberal markets with totally flexible prices and wages which very often guarantee a first choice solution: For example, under the premise of free trade, political stability and flexible exchange rates, a weakening economy automatically shows falling exchange rates which help strengthen export quota and lower imports. By this, national demand, GDP and employment are stimulated again. As for the global ecological situation, it is an agreed fact that we are running into a trap of global warming. As a consequence, we will suffer hard from the depletion of the ozone layer in the near and middle future if we do not take strict steps against the emission of several "killer" gases.
Unfortunately, free market- mechanisms as presented above do not seem to work well in this important case. It is true that companies nowadays emphasize their green policies1, but it needs to be stressed that those remain under an economic restriction.
Politically, it can be said that the agreements reached on the Rio and Kyoto climate summits on the reduction of those killer gases will have little consequences because the defined goals will be failed.
No one seems to feel responsible to protect our planet against the harmful effects of global warming and ozone layer depletion - a fact that seems even more dramatic if you consider that mankind would only need to do away with some critical activities in order to protect itself against the inherent dangers. Taking also into account that technologies and some opportunities of replacing those activities already exist, it appears to be hard to understand why we do not take measures immediately. Does this mean a self-eliminating mechanism of our civilization?
This essay tries to find explanations and a logical reasoning on this issue.
First, the reader will be provided with a basic understanding of what substances harm the atmosphere in what way, including some results of recent research on the current trends in pollution.
After pointing out why it is high time to remarkably reduce the emission of certain gases on a global scale, some interesting approaches from the world of social sciences will be presented to explain why the problem has remained unsolved so far. They are also starting points to search for possible ways out of the dilemma.
A short description of the most accepted instruments for emissions policy will then be given, with an emphasis on the promising tool of emissions trading. In this context, it is found necessary to consider political, social and economic issues such an instrument will be exposed to before allowing mankind to control emissions levels.
2. A short assessment on the current situation of our atmosphere
2.1. The phenomena of global warming and the depletion of the ozone layer
Without the atmosphere, the average temperature on earth would be around 19°C below zero. Greenhouse gases in our atmosphere, however, absorb infrared radiation and trap short wave radiation, which allows temperature to rise up to the levels we are familiar with. The effect is easier to understand if you imagine these gases as a blanket keeping the earth warm. The most important greenhouse gases are carbon dioxide (CO2), chloro- fluorocarbons (CFC's), methane (CH4), and nitrous oxide (N2O). Industrialization has brought about the burning of fossile fuels like coal, gas and oil, thus emitting huge amounts of CO2 into the atmosphere. So CO2 concentration has risen by one third since 1800. As a consequence, we have to expect additional warming, like in a greenhouse.
It is important to know that CO2 is responsible for 60 per cent of the human- induced greenhouse effect. It seems to be a great problem that fossile fuels are our main source of energy at present, and they are needed even more desperately in developing countries.
Predictions say that during the next century, we will have to expect an overall rise in temperature by 2.5°C which would cause great changes on earth. Among these, there are large water resource problems in many areas, changes in disease patterns, a rise in global sea level and, probably, a rise in storm surges which, all in all, imply high human and economic costs. A characteristic of global warming is the existence of a long time lag between the pollutant emission and the impact. Moreover, the exact severity and characters of the mentioned impacts are uncertain in advance.
Economically, costs for land losses, refugee resettlement, coastal defence and others are feared to amount to 2.4 per cent of the gross world income, still excluding costs of political instability and wars for water resources.
Ozone exerts its beneficial influence on life on earth by absorbing ultraviolet radiation which comes from the sun in the high stratosphere, where we find the ozone layer. Meanwhile,ozone is harmful to people's health and vegetation if it is concentrated too high in the lower troposphere. N2O's and CFC's cause the ozone layer to diminish in the stratosphere. While N2O's also stem from natural sources, CFC's are manmade.
After being released into the atmosphere, most chemicals become dissipated. CFC's, by contrast, remain stable and rise up into the stratosphere, where they are broken down by sunlight radiation. By this, large amounts of chlorine are set free, which unfortunately are responsible for the destruction of ozone molecules. The subsequent depletion of the ozone layer is predicted to vary by season and in latitude, but it will be felt all around the world. The impact of coherently increased ultraviolet radiation on earth will, among others, increase the number of skin cancer deaths (which are believed to rise up to 3 million cases in the US by 2075). Probably it increases also the number of cataracts and infectious deseases. Furthermore, the effects on the ecosystem are more than alarming: By interfering with photosynthesis and damaging DNA, uv-radiation is likely to destroy the very beginning of the food chain in the oceans: phytoplankton (the single celled algae), which also accounts for half of the world's annual biomass production and absorbs great parts of the world's CO2 in the oceans. Scientists say that a 16 per cent reduction of ozone will end up in a 6-9 per cent reduction in global fish stocks. The photosynthesis effect will have unpredictable effects on crops and thus human nutrition.
In certain seasons, the ozone concentration over the Antarctic has already fallen by more than 50 per cent, which is called the "ozone hole". The hole is twice as big as the territory of the United States. But recently, a similar hole was discovered above the Arctic, and some thinning was found over the northern hemisphere and the tropes.
Even if the CFC production has been reduced or cut at zero in almost every nation by now, we will have to wait until the end of the next decade to have restored the ozone layer to 1975 values due to the long residence time of CFC's in the environment.2
2.2. The ecological point of view: necessities and trends in pollution
CO2, the most harmful gas, is a product of the combustion of fossile fuels and biomass, and it results from the use of nitrogeneous fertilizers. Some industrial processes like cement production and fossile fuels and biomass combustion support the presence of N2O in the atmosphere. Finally, CH4 is produced by the use of natural gas, by soil fermentation in agriculture and by wet rice agriculture.3
If mankind stopped the relevant activities, the greenhouse gases would stop rising in concentration and the greenhouse effect would start to diminish at some time in the future.
The processes that create greenhouse gases are crucial for nutrition and the economy, and this is why it is not easy for mankind to stop emissions.
So what can we do about it? As a first approach it may be recommended to adopt a different view on what is the atmosphere: If we regard it to be a sort of large deposit for greenhouse gases with a limited capacity, we might come to the conclusion that we had better accept those limits. In response, mankind would not emit more greenhouse gases than the capacity amount. Consequently, economic progress would (also) be based on progress in efficiency and innovations in the use of the atmosphere as a deposit.4
But this would lead us to a reduction of our industrial and leisure activities, e.g. by less traffic. In order to reach this goal, we would for example have to charge doubled petrol prices in Britain, where private traffic is responsible for two thirds of the rise in emissions of CO2, but this is as unpopular as a scrap of subsidies for coal mining, another fossile energy source. So in reality, we are confronted with a situation like this: Global warming that is ecologically safe figures around 0.1°C per decade. If the industrial activities remain constant worldwide, we will achieve a result of 0.27°C per decade. If the discussed targets of greenhouse gas emissions of the OECD countries (excluding the U.S., who did not accept them) were reached, the result would still be a plus of 0.25°C per decade.
While the concentration of CFC's in the atmosphere fell for the first time in 1995, the CO2 concentration is estimated to rise by 50 per cent between 1990 and 2015. It is interesting to know that the United States stands for almost 25 per cent of the world's CO2 emission, with a share in the world's population of less than 5 per cent.5
2.3. How to measure and calculate environmental sustainability and damage
Let us for an instance try and reflect on how much pollution is acceptable and how to evaluate efforts to environmental sustainability: How much CO2 emission is acceptable, how many square miles of new forests would be needed if we kept emissions too high,6 how many cases of skin cancer might be weighed by the benefits of CFC's? How much land loss and damage from catastrophes would we bear? What techniques are available to trace and control greenhouse gas emissions? How can a company be rewarded for using raw materials that help avoid emissions at production stages that lie before the entry of the product into the plant? Some of the questions are answered by scientists, others not: Modern laser technologies allow good monitoring of a company's emissions. Where this direct measuring is not applicable, an indirect method is employed that traces emissions from input data.
Measurement of global pollution is much more difficult: In order to estimate the ozone layer depletion, for instance, you first need to know the amount of greenhouse gases lost in sinks as forests and oceans, and the global gas emissions by natural and human sources. Moreover, you need to know the global warming potential of those gases.7
Generally, the exact effects of global warming can only be estimated. It remains also impossible to exactly localize environmental damage. The time lags between emissions and ecological effects seem to be considerable, but it is impossible to predict them exactly. In addition, there are not any or only few figures available for the various greenhouse gases that allow to compare avoidance costs to the costs that would have to be paid for the consequences of environmental damage. Only in the U.S. has a calculation for CFC's clearly favoured avoidance. But any calculation remains arbitrary to a high degree: The U.S. example values a human's life 3 million dollars, which is the only way to put the consequences (people's death) of environmental damage into figures.
Anyway, we should keep in mind that there remains a high degree of uncertainty about many aspects of the effect and damage by global warming.
4. The crux in controlling global emissions
4.5. Some historical evidence on global policy coordination efforts
In 1970, scientists in Arosa, Switzerland, registered that the ozone layer had diminished and related this to a higher CFC concentration in the stratosphere. In 1986, the ozone hole over the Antarctic was discovered. In reaction to these findings, 25 countries signed the Montreal protocol in 1987, which stipulates a gradual reduction of CFC production, differentiating between strict regulation for the developed world and less severe rules for developing countries. One of the consequences was that the rich countries stopped CFC production entirely in 1997. Such results seem encouraging when switching to the case of greenhouse gases, but there is some disappointment:
In 1992, government representatives from all over the world met at the Rio summit and promised to curb emissions of greenhouse gases to 1990 levels by the end of the decade. But the goals were not achieved; some rich countries exceed the proposed limits by over 40 per cent. In 1997, EU countries promised a 15 per cent reduction until 2010, which is far below the deliberations of Rio 1992.
The next summit took place in Kyoto, Japan, in 1997, called the UN Global Warming Conference. After much hard bargaining, the conference members agreed on the little ambitious goal of cutting emissions of six greenhouse gases by 5.2 per cent on average.
During the negotiations, the U.S. beha ved strategically thus bringing any agreement almost out of reach, e.g. by trying to impose the same duties on poor countries as on rich ones, or by trying to bargain over considerable reliefs for themselves and to keep emission limits as high as possible. The U.S. is the biggest polluter with greenhouse gases, so it seems logical that limiting emissions would cost the Americans more than any other country. In the end, the above mentioned agreement was reached, by which the Europeans, whose greenhouse gas emissions are less than half as high as those of the U.S. in figures per capita, are obliged to heavier cuts in emissions than the U.S.
In November 2000, the next global warming summit will take place in Den Haag, and it is hoped that the Kyoto deliberatio ns will be finally signed by the heavier polluters.8
4.6. Why it does not work: About nature as a good and political restrictions
There is a phenomenon that everybody knows well from their daily experience: a private garden tends to be kept more accurately and you will find here less rubbish than in a public park. Or compare the seats in a public bus with those in your car. Comparing the wall of a small semi-detached house with that of your railway station, you will probably find more graffity on the station's wall. The goods in better condition all benefit from their characteristic as private goods, the others are public to some degree.
Markets prove to work best when allocating private goods, which have two main characteristics: The first is known as exclusivity. This means that anyone who is unwilling to pay the market price for a good is excluded from its use. A public park is not exclusive because everybody may enter. The second crucial point is rivalness in consumption, which means that a good can be subdivided in a way that each individual who is willing to pay can exclude all others (rivals) from its benefits.
The atmosphere is a public good that does not meet the criterion of exclusivity nor that of rivalness: It is non-exclusive because nobody can exclude other people from using the atmosphere, even if those people remain unwilling to pay anything for it. And undoubtedly, the atmosphere is indivisable, so nobody can take a part of it for his own as property: Property rights can not be defined, and thus markets will not work.
This does not mean, though, that an overcharge of the atmosphere will not affect us negatively: As seen above, the greenhouse effect and the ozone layer depletion are likely to impose on private citizens a huge amount of material and non material costs. These costs are called external costs because companies that blow out greenhouse gases will not calculate the costs for "repairing" the damage on their product prices. Hence, free market prices for those products will turn out to be too low. In other words, firms that pollute do not have to pay, but they impose costs on society. A social optimum could only be reached if firms were forced to pay both internal and external costs.
The atmosphere is a resource with limited capacity that acts as a sink for gas emissions. This makes it quite valuable, but as an open access resource, nobody has to pay for its use by pollution. Today, everyone would profit from better air quality, and it would be efficient to the welfare of society taking action against global warming. But for the individual, any cost involving effort to clean up is not efficient at all: he would pay for it alone, while the benefits would be socialized. This situation is related to the free rider-problem, that means everybody hopes to consume a good atmosphere, but the others to be charged for it. It seems high time for government intervention, doesn't it?9
Many people still think that political governors are benevolent to society and only take decisions for the best of society. But far from it - modern economic theory proves that in reality, politicians first of all aim at maximizing their votes in elections in order to gain power and reputation. Their behaviour to reach those goals does not always coincide with what would be a wise thing for society:10 If lobby groups, e.g. farmers, miners, car drivers, the workers' lobby or lorry drivers are well orgnized and exert great pressure, the government is tempted to act in their interest in order not to lose votes in the next election, even if this brings about disadvantages for society as a whole. The recent fight by lorry drivers and farmers in France against rising petrol charges resulted in tax reliefs on gasoline. These will be paid for by the majority of society because the government's income gap by the tax reliefs has to be financed by someone. Similar tax reliefs were granted by Tony Blair in 1998 on domestic fuel and for the coal industry.11
The disastrous and extremely inefficient EU agriculture policy is the most prominent proof of the behaviour and the true incentives of politicians,12 and corruption in the European Commission or in recent German politics may be added to this.
In order to maximize votes, how will politicians decide on environmental matters? Damage from greenhouse gases comes into action with a time lag long after the gas emission. It seems that mankind is interested in staying well today rather than at some time in the future. So politicians are running the risk of losing an election by imposing green legislation which would affect their most important lobby groups today. Environ- mental damage caused today but felt in 30 years will have no influence on the votes for most politicians, who act as candidates today and not in 2030.
On the other hand, politicians might lose votes by clearly declaring this attitude because people on the street would still like to see politicians advocating green behaviour. As a result, there is some stimulus for politicians to make empty promises or to simply call innovative systems that could help clean up the atmosphere, as emissions trading schemes, too difficult to understand.13 We should keep in mind that not only markets fail, but also governments tend to fail the environment.
The elimination of CFC's is by far cheaper than that of greenhouse gases. It is therefore not surprising that in the absence of greater protest by lobby groups, the elimination of CFC's was imposed by legislation within quite a short time.14
The cheapest way of environmental protection would be to cut off subsidies which are actually paid to industries that pollute more than others and are economically inefficient. The case of coal mining in Germany shows that lobbying sometimes prevents even that.15 Strategic behaviour is widespread in international politics, too. The free rider problem occurs on a global scale as well. In addition, any politician who signs international treaties to reduce greenhouse gases will have to justify at home why he did so. Being obliged by such a treaty to enact respective legislation that imposes costs on polluters, he might risk losing votes if certain groups feel disadvantaged. This is especially the case if some countries do not sign the treaty and their companies are therefore able to produce at cheaper costs by maintaining less severe pollution standards. Home industry would then exert great pressure on politicians by threatening to move production to other countries and to cut jobs. This is why nobody can expect a country to unilaterally introduce legislation for emissions reductions. If the other countries all signed the treaty, it would be efficient for the single country to act as a free rider and not to sign in order to profit from comparatively lower production costs. If the others did not sign, a single government would be better off by not signing, too, in order not to accept competitive disadvantages for the domestic industries. The efficient behaviour of a government, thus, turns out to be not to sign any treaty at all.16
A solution is seen in a treaty signed by a homogeneous group of countries first, e.g. the western economies, to be followed later by all others.17
It may be regarded as evidence for the assumption that locally felt pollution is controlled and banned more efficiently: In the OECD, sulphur and NOx-emissions, which are greenhouse gases that also produce local pollution, were reduced by 25 per cent between 1980 and 1990, in spite of the great expense for reduction stated above.18
The strategic behaviour of the United States at the Kyoto summit (see above) fits perfectly into the free rider-argumentation. It is furthermore worth mentioning some details that need to be considered when setting up an international treaty on pollution. All of them might also serve for a politician to pledge for higher acceptance levels for his particular country. The most important ones are: the size in population; past efforts to clean up (which will determine marginal costs for further abatement); the particular industry structure; the climate; the economic situation.
Some countries will evidently never sign a treaty on curbing greenhouse gas emissions, as the oil exporting countries, that will surely turn out to be the losers of green policies. It may be reasonable to work out special aid programmes for those countries as an incentive to participatie in green policies. Poor countries, as well, find greater difficulties in financing the substitution of cheaper greenhouse gases with other raw materials.19
3.3. The role of private companies
Despite the misleading suggestions we receive from advertisements and interviews in newspapers, it is worth pointing out that privately financed companies base decisions on their output levels on a calculation that considers market prices and internal costs. External costs of environmental damage will not occur in calculations since firms do not pay for them. Only if external costs can be internalized somehow (see chapter 4), will product prices reflect the total cost of a product to society. Companies will accept higher taxation of emissions only on condition that corporate taxes are lowered by the same amount, since they will otherwise lose international competitiveness.
Nevertheless, a company has got some motives to show environmental concern:
If people can choose between two identical products (also in prices) the one which bears a green label, they will probably select the green product. This suggests that a green policy can be used as a strategic part of a company's advertising strategy.
Moreover, the green argument works very well in order to recruit the best employees.
Companies today are keen on discovering and capturing future markets in order to have a favourable market position in the future. It is predicted that source reduction strategies will become prevalent, which means that products will be re-designed, using input factors under a strictly environmental aspect. Developing skills in such re-designs might provide a company a first mover advantage in such future markets, which will raise profits. So it is market opportunity that keeps firms on the green line.
Finally, it can be expected that legislation on emission levels will become more severe in the future. Hence, a company making a long term investment decision today must predict correctly what legislation will have to be reckoned with tomorrow: It is efficient to adopt green technologies in order to avoid huge compliance costs in the future.20
There are, however, some striking examples of environmental innovation where a company reckons to profit in money terms or in a way mentioned above:21
A Swiss retailer ha s used his strong market position to oblige many suppliers to respect a detailed list of guidelines for green behaviour, for example to run a recycling system for packages or not to use aluminium as a package material for chocolate. The automotive industry has improved a lot in process efficiency and recycling. In Kalundborg, Danmark, a local co-operation of four companies of different branches shows that energy efficiency can be increased by 125 per cent.
5. Instruments for an effective protection of the atmosphere and the ozone layer
5.1. A general overview
Political instruments that are considered to bring about a reduction in emissions can be divided into legal requirements and prohibitions on the one hand and economic incentives on the other hand. The first way is ecologically efficient, while economically inefficient and often politically unfeasable: Setting product standards or emissions standards, for instance, will lead companies to meet those limits, but if over-fulfilling was possible at a very low cost, there would be no stimulus to the company for further cleaning up.
Economic incentives can be subdivided into the categories of direct alteration of price or cost levels and, on the other hand, market creation/market support. Direct alteration commonly takes place in the form of various types of taxation, charges and as subsidies. Taxation may be imposed on emissions, on users of polluting machines or vehicles and on products. Some difficulties arise when you assess the efficiency of taxation: Some industries depend more on the combustion of critical gases than others, therefore taxes will not always reach the goal of a reduction in emissions. A commuter who needs his car in order to go to work is also unable to avoid paying more without driving less. Energy taxes are sometimes also regarded to have an unfair distribution effect because energy expenses of poorer people are, in percentage terms, higher than those of the rich.
A basic condition for a well working tax is a high elasticity in prices, which means that demand falls more than just a little when prices rise. This is not the case for fuels, as shown above. Incentives like cutting taxation for gas used by less polluting gas powered vehicles, or subsidies to private and public transportation count for more effectiveness.
It remains unclear how high a tax needs to be in order to reach an emissions reduction target.
Fiscally, emissions charges and taxes imply the problem that the better they work, the less money the government will gain. This is reason enough why there will never be a complete substitution of our taxation system by ecologic taxation.
Market support occurs when public or semi public agencies take responsibility for stabilizing prices or certain markets, for instance the market of recycled paper. Market creation means that a market that naturally would not have developed is established. If you remember what was said above about the atmosphere as a valuable sink with a limited capacity of absorbing greenhouse gases, it seems imaginable that a world authority would establish a market for a limited number of certificates which are needed for permission to use this sink for industrial pollution. Of course, prices for these permits would follow because they would become as vital to industrial prodution as a raw material. This system is called emissions trading. It is the most efficient way of reducing emissions, but only today does it start to become more prominent among politicians. Finally, a short list of selection criteria shall help to choose the optimum instrument: economic efficiency, low information requirements, low administrative cost, adaptability to changing technologies, no regressiveness, dependability, dynamic incentives that encourage both environmental improvement and technology innovation beyond policy targets (where feasible), and political acceptability.22
5.2. Quite a promising example: Emissions trading
The system of emissions trading might come into force during the next decade, and it is interesting enough for a brief description:23
In order to obtain a well working scheme, an exact preliminary determination of the acceptable level of overall pollution needs to be made. If the system is designed for the whole world, deliberations on the emissions of the whole world would have to be made. Moreover, unique standards of pollution measurement must be set which are applicable to every polluter in the world.
In a second step, official permits for emissions need to be created and distributed. They have to sum up to the overall limit of emissions stipulated in step one. There is a choice between several ways for the initial issue of permits, e.g. a distribution according to numbers of inhabitants, industry structure of nations, or poverty. Grandfathering will possibly become the most acceptable way, which means the distribution according to historical levels of pollution (this will be liked particularly by the U.S.).
A reduction in emissions can then be achie ved either by a depreciation of the certificates over time, which means that after a year a permit might entitle to maybe only 98 per cent of the pollution allowed the year before. Or the overall limit of the first step lies already below the historical va lues.
Finally, in order to make the system run it is crucial that any polluter who emits less than his permits receives a credit, and that he is allowed to sell that credit. For this purpose, well working markets have to be created before.
A company will sell its credits as long as the revenues from selling are higher than the marginal costs for abatement. As a result, companies that have relatively low costs of emission avoidance will sell their credits, while those which would have to invest huge amounts of money in order to become cleaner buy the pollution rights; meanwhile, the overall environmental standards are safeguarded because the overall number of permits has remained unchanged. The instrument is more effective than strict regulation because in order to reach the desired degree of reduction in gas emissions, in the emissions trading system the companies which have to bear the lowest costs for cleaning up will take the necessary measures. By contrast, strict regulation would oblige every polluter to reduce emissions, irrespective of costs.24
However, some particular aspects still need a lot of thinking about: grandfathering, for instance, will reward energy intensive industries and firms that did not yet care about emissions because they obtain a bigger number of emissions rights.
Liquid markets could be provided for by stock exchanges, as the Sydney exchange already suggested. The fact that some emissions rights are already traded (for 1-3 $ per tonne) gives rise to hope that companies will trust in the system. But it will be vital to keep speculation under control, otherwise one company might buy all certificates of its industry sector and then enjoy all the benefits of a monopoly. Environmental Groups can also buy emissions rights in order to destroy them and by this prevent some emission.
The rich countries will even be stimulated to co-operate with developing nations: the latter normally have dirty industries because there is no money to pay for low emissions- programmes. European companies, instead, have already reached high emission standards. The marginal costs for further curbs in emissions are relatively high, so it is opportune for those companies to give money and knowledge to modernize plants in developing countries. They are paid with emissions credits that derive from the modernization efforts in the developing countries. This procedure is called joint implementation.
Moreover, there have to be strict control mechanisms, and illegal CFC trade and smuggling, as occurred in the U.S. and Europe, needs to be prevented.25
To conclude with, there is still an open question whether an institution ought to be rewarded for building up new sinks that will help arise the atmosphere`s capacities. This would especially apply to new forests. There are many arguments in favour of this, and by putting these reflections into practice, forestry would probably receive a completely new dimension. Companies could earn emissions rights from growing forests, and forestry might even create and sell new emissions rights. Australians have already developed a procedure to measure how much CO2 is stored in a tree. As a result, it is easy to predict huge investments into rural areas.
Emissions trading is found to be most practicable for CO2.
5.3. Will it work in practice? Some evidence
There are some typical objections to emissions trading: Some observers claim that it is only a means for industrialized countries to buy the rights to keep on polluting. It has to be said that this is true, but it is hard to understand why this is a problem because the overall emissions stipulated in the beginning remain invariant or even are lowered.
Politicians argue that the system is too complex, but there is already some proof that it is working quite well, as in the U.S. (see below) or even in an internal company scheme at Royal Dutch/Shell plc., which is also reported to work successfully.26
The argument of high costs for administration needs to be taken more seriously, but there may be some relief by the privatization of control.
Industrialists argue that market entry barriers to newcomers can arise because costs for new investments will rise by the price of the certificates whic h have to be bought before production can start. Hence, competitive behaviour will lose some of its relevance because the old suppliers feel safer. This problem, though, can be solved by a regular re-distribution of certificates (which must be given to newcomers, too) which replace the old ones. Environmentalists and parts of the public tend to find it morally wrong to permit pollution officially. The answer has to be that without any pollution, there would not be any industrial activity. And there is no way of better control at a lower cost. Besides, also taxes imply a permission to pollute, don't they?
Some problems could arise from legislation because industry might argue that CO2 emissions are also caused by traffic and private heating. Hence, the principle of equality could be infringed.
The U.S. made some practical experience with an emissions trading scheme for sulphur dioxide emitted by power plants. The basic result is that emissions were reduced faster and at a lower cost than predicted. Trade was quite rare, though, beause the government had not provided for liquid markets, and information on the present and future avail-ability of emission permits was hard to get. But companies developed a lively internal trade, i.e. between different plants within one company ("bubble policy"). Fears about speculation and market closeup by hoarding permits could not be proved to be wrong. In areas with high concentrations in pollution, "offsets" were introduced, which are a regulation saying that a new source of emissions is only allowed to be created if another one that causes more emissions is shut in turn. "Netting" stands for almost the same rule, but net emissions savings are not requested here. "Banking" is the expression for the permit to hoard emissions rights. While offsets enable politicians to control regional levels of emissions, banking restrictions might be a good instrument to avoid excessive speculation. All in all, the system has proved to work well and to meet the criteria for an optimum instrument against dangerous emissions (cf. chapter 4.1.).
Besides, it was found out that the technical potential for efficiency improvements of companies range from 15 to 40 per cent.
It can also be stated that emissions trading to a certain degree brings about the privatiza-tion of the atmosphere, because emissions rights help to overcome its characteristics of a public good.
Finally, emissions permits perfectly meet the polluter pays principle.
4.4. Recent trends, developments and a brief outlook
At the Kyoto summit in 1997, decisions were made on the absolute emission limits (see above) and the allocation of obligations to reduce emissions to countries and regions. The reductions might be understood as new limits, and therefore they can be interpreted as allowances for emissions. Scientific discussion now favours emissions trading schemes. So politicians might start talking about that at the next global warming conference in The Hague in November 2000. The EU is believed to promise the introduction of emission permits by 2005.
Developing countries are disadvantaged by a grandfathering scheme, so it can be expected that if emissions permits were introduced, the first issue of permission rights would have to take place according to numbers of inhabitants. Then industrialized countries would probably buy huge amounts of emission permits, thus providing financial aid to developing countries.
Debt for nature-swaps are planned, which mean that developing countries are granted debt reliefs on condition that they keep rainforests, for instance, intact.
On the national level, governments might prefer emissions trading, too: in Britain, a task force is investigating its risks and advantages compared with a tax system, and in Germany, industry and government have recently agreed on forming a task force which will be concerned with the implementation of emissions trading.
Probably, a hybrid system will result in which smaller companies will remain in a taxation system, while the big ones will trade with emissions.27
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1 For some examples, you may consult Geisen et al., 1992, p. 190 ff.
2 For further reading and a more detailed overview, it might be useful to consult the OECD (1994), p. 30ff.; The Economist (1996a), p. 18; and Turner/Pearce/Bateman (1994), p. 267ff. and 281ff., who also point out the harmful effects of global warming on specific regions as the Nile Delta and Bangladesh.
3 The following results are taken from: OECD (1994), p. 30ff.
4 The idea was taken from Wink (1999), p. 486.
5 The information was extracted from the following sources: OECD (1994), p. 30-36; Wink (1999), p. 486; The Economist (1996a), p. 18, and (1998a), p. 38; Turner/Pearce/ Bateman, (1994), p. 275.
6 It is worth remembering that plants, unlike human beings, breathe CO2 gases and thereby work as greenhouse gas reducers. For this reason, you will find the expression "sink" for forests later in the text.
7 The correct procedure for global warming calculation is: combined amount of ozone layer depleting substance lost in sinks minus emission of greenhouse gases multiplied by global warming potential, see: Opschoor/Reijnders (1994), p.24.
8 For further reading the following sources are recommended: on the CFC issue: Turner/Pearce/Bateman (1994), p. 286; on the Rio and Kyoto summits: The Economist (2000a), p. 68f., and (1997a), p. 17; on the remarks on the Kyoto summit: The Economist (1997c), p. 46; and furthermore Handelsblatt (2000).
9 For more detailed information see Klemmer/Werbeck/Wink (1993), p. 11, and Turner/Pearce/Bateman (1993), p. 72 ff.
10 Nordhaus (1975) was the first to investigate on political behaviour under this point of view.
11 See The Economist (1998a).
12 The EU agricultural policy protects European farmers at the expense of a larger group, the consumers, by a price guarantee for European produce. Although climate and labour costs clearly favour a production of corn, wheat, some fruit and others in warmer countries, especially poor nations, at far lower costs, many of those products are excluded from European markets by flexible tariffs that guarantee imports to cost the end-consumer more than domestic produce. But the tax payer does not only have to pay higher prices on the home markets - he aditionally finances huge subsidies that guarantee inefficient European farmers to be able to sell at a price below world market price outside Europe. The comparatively more efficient farmers from third world-countries, hence, are also excluded from world markets and stay poor. For further and more detaild reading see Dieckheuer (1998), p. 504ff.
13 Klaus Töpfer, a former German minister, did so in 1989, even if scientists had already proved his arguments not to hold water, see Töpfer (1989), p. 1. He says that the underlying models were based on idealized assumptions that did not meet reality, which is simply wrong, as it will be shown later.
14 See The Economist (1997b); for further information, see: Turner/Pearce/Bateman (1994),p. 79ff.
15 The basic idea was taken from The Economist (1997b), where it is pointed out that Britain adopted such a policy thus being the only country to reduce CO2 emissions in the early 1990ies.
16 The case described is, in a more general version, the very famous prisoner`s dilemma of game theory, which can not be presented here in more detail. See Turner/Pearce/Bateman (1994), p. 178; aditionally Arndt (2000); Wink (1999), p. 487.
17 See Klemmer/Werbeck/Wink (1993), p. 7.
18 See OECD (1994), p. 52f.
19 For more information, see The Economist (1997e) and Unander/Schipper (2000).
20 Sources: Turner/Pearce/Bateman (1994), p. 72 and 248ff; The Economist (1998a).
21 See Stigson (1993); Hunziker (1993).
22 The paragraph was based on the following sources: Turner/Pearce/Bateman (1994), p. 157ff., 159; 186ff.; 248ff.; Töpfer (1989), S. 4f.; The Economist (1996b), (1997d); Wink (1999), S. 486ff.
23 See Schnell (2000), p. 16-39; Turner/Pearce/Bateman (1994), p. 181ff. as for the general principles and discussion of an emissions trading scheme; in addition, it may be useful to read The Economist (2000a and b) for the remarks on speculation, the Sydney Exchange and forestry; moreover Klemmer/Werbeck/ Wink (1993), S. 11, The Economist (1998e), and Arndt (2000).
24 For an illustration by figures see Turner/Pearce/Bateman (1994), p. 183.
25 More information can be obtained from The Economist (1997d), and Schnell (2000), p. 25.
26 See: for the objections: Schnell (2000), p. 33ff.; Turner/Pearce/Bateman (1994), p. 186f.; The Economist (1997e); for the example of Royal Dutch/Shell plc.: The Economist (2000a).
27 Sources: Cansier (1996), p. 370; The Economist (1997e; 1998a); Arndt (2000); Handelsblatt (2000).