Selected Issues in Economics of Greenhouse Gas Emission Mitigation

Abstract

This article states the fundamental concepts of economics that are used to address the issue of climate change mitigation and based on empirical examples, it explains the complexity of solutions towards mitigation compared to standard economic problems. Anthropogenic emission of greenhouse gases is a ‘bad’ generating transboundary negative externality. In absence of a global government or global market, it’s therefore a challenge to internalize such an externality. However, international agreements evolved over time to address climate change mitigation in a politically fragmented world. The roles of such supra-national bodies, supported by national governments to surrogate market mechanisms and/or to create a form of global governance to internalize the externality remained important. Although mitigation goal is a global goal, in a politically fragmented world policy instruments are mostly designed and implemented by national governments. Designing instruments for emission mitigation is a challenge since there are several layers of complexities. This article demonstrates how optimal design of a tax policy requires careful consideration of several facts – including the fact that emission mitigation involves not only carbon dioxide (CO2), but of a number of greenhouse gases with different warming potential and atmospheric lifetimes. Also, emission mitigation involves cost. This article demonstrates how the method of Levelized Cost of Conserved Carbon allows industries or other economic units to get a clear comparison of the cost of emission mitigation measures vis-à-vis their mitigation potential. Finally, it shows how in a bio-physically constrained system, new indicators related to carbon footprint can provide a useful measurement tool.