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Traditionally, global warming has long been an undesirable economic outcome due to the failure of market mechanism. Producers or consumers often do not take into account the costs of damaging the environment in association with their activities, since the “traditional” market has not been able to capture the so called “externalities” in economic jargon. Nevertheless, global climate change has raised substantial international attention, particularly on greenhouses gas (GHG) emission, as the economic costs from a global perspective (in contrast to the perspective from the one or country which produces) have increased enormously with the rising global temperature. Developed countries have been the largest emitter, but the developing world is going to take over the place in 2020 as they undergo rapid industrialization. While the impact of global warming varies in different regions, this becomes a global issue and any inaction would eventually make everyone in the globe suffers.
Cost of climate change
Climate change does incur an economic cost, irrespective whoever pays the bills and in what form. Such as, the change of water resource distribution leads to severe drought and rainfall variation in different regions. Productivity of agricultural products, as a result, would be affected and thus the food supply. While there is a wide-range of estimates on such global output loss, some of them (e.g. Stern Review 2006) came up with an estimate that the overall cost of inaction to the climate change could be 5% of global GDP per year. Besides, health costs in association with climate change would be another major expenditure outlay incurred, as various diseases are more easily disseminated under high temperature. For example, China’s health costs attributable to air pollution are estimated to be some US$68 billion a year, or about 4% of GDP, according to the World Bank.
Emission trade – resolving through the market
Given the significant costs of climate change, a number of regulatory and fiscal measures have been introduced to reduce GHG emission, such as cogeneration and low-emission motor vehicles in the OECD countries, carbon and energy taxes that are based on the carbon or energy content of the energy products, respectively. However, not all of them are very effective. For example, some countries provide subsidies to energy-intensive industries to offset, some even more than offset, the additional costs from carbon tax. Thus, such uneven treatments across different countries have resulted in numerous disputes over unfair competition.
Some market-based instruments have emerged recently, e.g. emission trading, tradable renewable energy certificates, etc. These are based on the premises that the optimal solution should be achieved in the free market condition and it is believed to be a more effective mean to allocate the cost of mitigating GHG mission. Trading of carbon emission credit is being increasingly encouraged across borders and is also compatible to the WTO agreement. 172 countries and regional organizations, which represent 61% of emission, have ratified the Kyoto Protocol Agreement to reduce 6 major greenhouse gases by a total of 5.2% of the 1990’s emitting level by 2012. Under the agreement, members agreed and were allocated emission quota. They are allowed to sell their unused credit to countries which emit more than their quota allowed. They could also sponsor carbon projects that reduce GHG emission in other countries as a way of generating tradable emission credits.
So far, carbon emission trading makes up the majority of GHG emission trading and has increased steadily. According to the World Bank, carbon-emission trading has grown by 83% CAGR on the project base, from 78mtCO2e (million metric tones of carbon dioxide equivalent) in 2003 to 874mtCO2e in 2007. In money terms, the amount has increased by 105% from US$31 billion in 2006 to US$64 billion in 2007.
Despite the rapid development, the trading size of GHG-emission credit so far remains relatively small when compared to the global merchandise trade of US$12 trillion or global service trade of US$2.8 trillion in 2006. Besides, the existing carbon trading systems have mostly concentrated on regional trades. For example, the European Union Emission Trading Scheme is a multi-national scheme but it is only limited to the EU-members; and the Renewable Energy Certificates are only transferable within some American states. Nevertheless, the growing attention to the global climate issue would force more countries to better collaborate as we all live under the same “roof”. And the emission trade could evolve into a new impetus to the international trade.
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