Making the case that a market could fight climate change

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Dylan Ruan, Living Lab Intern, UCSB Sustainability

When we make the decision to drive to work, turn on the air conditioning, or any other activity that leads to carbon emissions, we fail to consider the consequence of our actions because these impacts on the climate are an “externality”. Externalities are consequences of an economic activity felt by a third party. In many cases, this third party is the environment and its inhabitants, whether they be humans or animals. Fundamentally, this notion of an externality is why there is little incentive for individuals to reduce their carbon emissions.

One solution to this problem is to put a price on pollution.

This is the foundation for emissions trading and carbon taxes. A price has been placed on pollution and polluting activities. “When prices go up,” Meng said. “We reduce our activity of that particular type. This is government regulation that would help reduce emissions.”

Meng believes that environmental economics “is fundamentally about harnessing the power of markets to provide incentives for addressing environmental problems.” In the same way that markets exist to produce innovative goods, we can create markets that serve to tackle the problems of the environment.

In the wake of the recent COP21 climate summit, Meng argues that that an international cap and trade market could be one way to reduce global emissions in a cost effective manner.

The two most prominent emissions trading systems are located in the European Union and here in California AB32. 2015 is the first year that UCSB has opted into the state’s emissions market. In many ways, California’s government is at the forefront of launching climate action policy.

“The climate is a global public good, meaning what happens to the climate affects everyone. Isolated actions by any one country is not going to be enough,” he said.

If a handful of nations soldier on with their climate policies while the rest of the world sits back and watches, there would be no real change. There needs to be reductions all over the world. “We also know that the broader the coverage of a cap and trade program, the less costly it’s going to be to make the same amount of reduction. Systems that are integrated as a global market can reduce emissions at lower cost and drive innovation towards low-carbon sources of energy.” Meng said.

Dr. Meng currently teaches two courses at UCSB: Environmental Economics (ECON260B) and Economics and Policy of Climate Change (ESM229). His background in these fields allows him to see a future in which the economy could utilize a market-based solution to combat climate change.