Balancing Efficiency and Fairness: Kaldor-Hicks Improvement?

Abstract

This chapter mainly discusses two issues related to achieving carbon neutrality: innovation and fairness. We believe that innovation (efficiency enhancement) is critical to carbon neutrality, and the attendant fairness-related issues need to be addressed. To efficiently achieve carbon neutrality, we believe the following measures should be simultaneously taken: (1) internalizing external costs by raising carbon prices; (2) fundamentally altering the mode of production by expediting eco-innovation; and (3) improving the social governance system by encouraging low-carbon lifestyles, and reaching a consensus on environmental protection among the general public. Among these measures, we believe innovation is the key, as it can help reduce carbon emissions per unit of energy consumption as well as energy consumption per unit of GDP. In the long term, we believe innovation is also the major driving force for economic growth. In retrospect, we find that each technological revolution has led to a reshaping of the global economic landscape, and countries with an early start to innovation usually achieved economic advances in the end. Eco-innovation is a general-purpose technology innovation that has a greater effect in terms of improving productivity. Nevertheless, innovation does not happen overnight or without hindrances. Eco-innovation features double externality, and as a result sees slower progress and faces more barriers than general innovation. Public sector policies and capital investment (green finance) need to be coordinated, in our view, to inspire innovation among enterprises and to remove the systemic obstacles to innovation. Carbon neutrality may cause fairness issues both domestically and internationally. Globally, principles of fairness and each country’s stage of development should be taken into consideration to avoid unfair distribution of rights, responsibilities and interests among different countries. Domestically, emission reduction may lead to fairness problems between different social classes, generations, sectors, and regions. Hence, fiscal policies should play a more important role in income distribution and cross-cycle adjustments to prevent worsening imbalances in residents’ income distribution and regional development.