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America's Epic Market Failure: Climate Change America's Epic Market Failure: Climate Change

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America's Epic Market Failure: Climate Change

Addressing greenhouse gas pollution presents a deep political problem. As I'll explain in this week's National Journal Magazine, even as American landscapes start to exhibit symptoms of climate change, many Americans remain unconvinced that those symptoms are linked to a global warming trend. To many, the evidence just isn't sufficient, and the cost of action seems greater than the cost of watching and waiting. So the country is doing very little to combat a problem that is beginning to inflict real damage on its ecology and economy.

The inaction is not just a political failure. It's also an economic one. 

Five years ago, the British government produced a comprehensive review of climate economics that labeled climate change "the greatest and widest-ranging market failure ever seen." Environmental economists describe climate change as a market failure for two reasons. Markets don't take the social cost of greenhouse gas emissions into account. And the costs of emissions are spread globally, meaning that nations that take action to reduce emissions will pay more in economic costs than they receive in social benefits. 

"Markets do very, very well at efficiently dealing with situations when everything is internalized-- when you and I pay all the costs and get the benefits of our actions," said Robert N. Stavins, an economist who directs of the Harvard Environmental Economics Program at the John F. Kennedy School of Government. "If any of us don't pay all the costs, then we're going to do too much of it; if we don't get all the benefits, then we're not going to do enough of it." 

When you or I fuel up the R.V. for a road trip, we don't face what economists call the "social cost" of our action, because the environmental cost of burning fossil fuels isn't included in the price we pay at the pump. Because carbon emissions are essentially free, there's no price signal to push consumers, businesses or governments to reduce activity that's altering the global climate. 

But climate change isn't just an externality. It's also a global commons problem, Stavins said.   

"It doesn't matter whether the emissions come from Beijing, from Calcutta, from London or New York. They have precisely the same effect," Stavins said. "That means that for any individual country that's going to take action, it's going to pay the costs of taking action, but the benefits of it taking action--that is, the reduced damages--are going to be spread globally." 

The American economy runs on cheap fuel. It isn't just cars: our economy also depends on industrialized agriculture, energy-intensive manufacturing and products that contain fossil fuels, such as petroleum-based plastics. Other greenhouse gases, like methane, are also by-products of agriculture and industry. Incorporating the social cost of greenhouse gas emissions into prices--i.e., increasing them-- would be economically painful, and the impact would be immediate. 

If the whole world were to take action to reduce greenhouse gases, the benefits would outweigh the costs: the economic pain would be distributed worldwide, and global emissions would start to slow. But if one nation were to take action alone, the cost would outweigh the benefit. If the United States moved to address greenhouse gas emissions tomorrow, consumers and American businesses would suffer, but the sacrifice would only put a short-term dent in global greenhouse gas emissions--and the benefit of that sacrifice would be spread worldwide, rather than locally.

Climate change unfolds over a long period of time, and affects different areas differently. For the Maldives, rising sea levels mean catastrophe: an entire nation of inhabited islands sunk beneath the sea. For coastal New England, rising sea levels mean more flooded basements. Lopsided costs and benefits make global collective action even more difficult. 

Fortunately, economists agree widely on one simple solution to these market failures - stayed tuned to Restoration Calls this month to learn all about it.

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