Business Unusual

How three letters could save the planet from climate change

The Nobel Prize for Economics for 2018 was awarded to two economists. One of them, William Nordhaus, created the theory to price the impact of climate change rather than try to regulate it directly. His model prices the cost of CO2 on the economy and charges it as a tax or a traded credit.

How bad is climate change?

Bad. After the Paris Climate Accord in 2015 in which the world’s governments committed to "holding the increase in the global average temperature to well below 2°C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5°C above pre-industrial levels".

Just 2°C. Hardly seems like much. Were you to be in a room at 21°C or 23°C you would not feel much difference either, but globally that difference is significant. It gets worse. The goal was 2°C above pre-industrial levels, since then we have already caused a 1°C rise.

The prospect at 2°C for significant change to weather, sea levels, droughts and damage to ocean eco-systems was clear and drastic, but some nations who were more at risk wanted to know what the scenario would be if or when we reached 1.5°C.

The new report was commissioned using almost 100 scientists who considered 6000 research papers and responded to over 40 000 comments from peers on the drafts. It is a very substantive review of the latest research.

To avoid the 1.5°C we not only need to get to zero emissions by 2040, but we also need to remove carbon from the atmosphere until the end of the century.

That is less time than it has taken to release the Toy Story movies; the fourth is due out in 2019, the first was in 1995.

It appears we will miss the deadline. Although even the most ardent denier would struggle to deny seeing the impact by 2040. Even with a lack of urgency by some, the efforts of others and advances in technology may allow us to avert the worst case scenario still.

The technology options are both the most compelling but also the least tested. The other mitigating factors call for reduced meat consumption and stabilisation of the population growth rate, but the key driver appears to be the use of a carbon tax.

Climate change will harm developing nations more than rich nations although the humanitarian and refugee consequence will affect all nations.

Carbon Tax

The idea has evolved over time but owes much of the thought and application to William Nordhaus. He argues that for all the targets and undertakings to address climate issues, the underlying problem is that the cost of CO2 rise (which is what is triggering the climate change) was not factored into the economy as a cost. If no-one has to account for the damage, there is little desire to change it.

If it can be determined what a unit of CO2 damage is in monetary terms, it can be added as a cost to those that emit CO2.

Business would then determine how to mitigate the cost, either by passing it on with the risk of becoming less competitive or by reducing CO2 output or switching to alternatives.

Funds that are raised can be channelled to subsidies for low or carbon neutral industries, or tax credits can be purchased from negative carbon emitters further encouraging zero carbon emissions and promoting more research in that direction.

It may seem like an obvious choice, and economically it is, but we don’t live in an economic model, the real world has other considerations like politics which complicates the matter.

What should South Africa do

South Africa is a significant carbon emitter on the continent as a result of our use of coal for power and Eskom's reduced ability to capture the emissions. We are also highly dependant on fossil fuel for transport and the state relies on the revenue from fuel taxes for its essential programs.

A carbon tax has been proposed for introduction in South Africa with a potential start date in 2020. Depending on what the carbon price is set at (currently it is R120 per ton) it will significantly increase the cost of fuel (an expected 20c per litre) and electricity. With an already low growth rate, it would not be an easy option to implement both politically and absorb the impact on the economy.

It would be further compounded when we begin to feel the impact of climate change. South Africa is at risk of crop failure due to droughts and higher temperatures while also being at risk from coastal flooding and more severe storms.

Even if South Africa does take the medicine to limit our emissions, we will need to rely on the majority of nations to also do so. If not, we will still experience all the downside of climate change but would have also suffered the effects of the tax.

Fortunately, most of the world's significant emitters are looking to address the issue. China, while being the largest emitter, is also significantly shifting its fuel and energy options away from fossil fuels.

Even in the US where it appears nothing will happen until at least 2020, beyond that a new government may change their current approach and re-align with the majority of industrialised countries.

Having said that, it is possible that the views that have taken hold in the US may become more popular in other places too. If that happens, then we will have a front row seat to a major disaster.

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