Question

Climate Change will have a disproportionate impact on developing countries. Many economists have proposed a tax on carbon on other greenhouse gases (generally referred to as a “carbon tax”). 2500 words max

a) Why do economists favor such a tax? What are the limitations of such a tax?

b) Suppose a carbon tax is not politically feasible. Design an alternative policy, or set of policies, to lower greenhouse gas emissions.

c) Do you think your proposal is politically and economically feasible?

Answer 1

Introduction

Climate Change poses a real threat to the economies of the world. With rapid urbanization and clearing of forests, the end result is that countries have over exploited their natural resources, as a result of which the global temperatures are soaring. Economists have widely analyzed these changes from the view point of reduced productivity, change in demand and supply patterns and have given staggering results on how Climate change has effected not only the environment but macro and micro level economics also.

Thus, since there is a rapid change in economics of any country, economists have advocated for taking measures, to reduce the climate change and help in long term strategies that promote reduction of greenhouse effect.

In this regard, developing countries are said to have a larger impact since most development takes place by using conventional resources such as fossil fuels and any rationing for them would slow down the growth rate. On the contrary developed countries can easily manage the restrictions but have already done enough pollution when compared with the developing counterparts respectively.

Case Specifics:-

a) Why do economists favor such a tax? What are the limitations of such a tax?

Economists favor carbon tax, so as to ensure that development is inclusive and at the same time the forces of demand and supply do not change. It is a well-known fact that high carbon emissions lead to decline in productivity because of which costs of operations rise and as a result of which the economic conditions of countries get effected. Carbon taxes discourage firms from engaging in practices that harm the environment and also at the macro level of countries.

However, this has its own limitations. Most developed countries are capable enough of paying higher taxes and engaging in pollution which in the long run would rather promote pollution. On the other hand, such a strategy does not guarantee alternatives to traditional sources of energy and is just punitive in nature.

Also, as explained, for developing countries that are already struggling with lower capital formation and other relevant problems, following taxes on pollution is extremely tough as it hampers the growth within the country respectively.

b) Suppose a carbon tax is not politically feasible. Design an alternative policy, or set of policies, to lower greenhouse gas emissions.

As agreed, carbon taxes are more punitive than encouraging, other strategies should and can be implemented to ensure that people get alternative choices to choose from such that the economy does not get hampered.

Specific industries such as the automotive industry have already started using electricity instead of conventional fossil fuel, the burning of which is a key contributor to global pollution.

Thus, to lower greenhouse emissions, all industries can be given alternatives and incentives to produce such products that relatively pollute much lesser. Allowing such companies to grow should be a key alternative at tackling with the problem. This will ensure that demand does not get impacted as in the case with regressive taxes, while at the same time would solve the problem of global climate change also.

c) Do you think your proposal is politically and economically feasible?

Indeed, the policy of incentives is economically and politically much more feasible since it allows consumers to become more aware and get better choices at a reasonable price difference.

Providing incentives is a qualitative measure as it corrects the problems from the roots itself and aims at changes the demand pattern of the consumers than tax countries and companies which can easily be paid by developed ones since they have higher capital availability.

Such policies are more economically feasible and are finding greater all round political support as well.

Please feel free to ask your doubts in the comments section if any.