Tag: prisoner’s dilemma

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Feeding Godzilla



The World Meteorological Organization predicts that a ‘super El Niño’ is building. This has been nicknamed ‘Godzilla’. If forecasts are correct, this will be the most extreme El Niño in 1000 years.

El Niño is a natural phenomenon. It occurs when the surface temperatures in the central and eastern tropical Pacific Ocean warm and cause the trade winds that typically blow from east to west across the Pacific Ocean to weaken or even reverse direction. As well as increasing global temperatures and causing intense heatwaves, it can result in droughts in some parts of the world, such as eastern Australia, south-east Asia and southern Africa, and intense rain and flooding in parts of South America, eastern Africa and south-western North America.

Typically, in an El-Niño event, the surface temperature of the central-eastern equatorial Pacific Ocean rises by 1°C to 1.5°C above the average. In the current El Niño, it is forecast to rise by up to 4°C by the end of 2026 and into 2027. It is already between 2.2°C and 2.6°C above the average. The effects could be catastrophic and hence the term ‘Godzilla’.

Although El Niño is a natural phenomenon, its severity is a direct result of climate change. This in turn is a direct result of economic decisions, and the effects will have severe economic consequences.

The economic causes

Climate change is an external cost of private economic decisions. When people or organisations burn fossil fuels, the climate costs of the CO2 emissions are not borne by the emitter. They are an external cost. This is illustrated in the diagram below, which shows the costs and benefits of electricity production from fossil fuels. (Click here for a PowerPoint.)

In this example, to make things simple, we assume that the external climate costs begin with the first unit of electricity generated and increase at a constant rate. The marginal social cost (MSC) of electricity generation equals the marginal private costs (MPC) to the generating company plus the marginal external cost in production MECP.

As you can see, the MSC curve is above the MPC curve. The vertical distance between them is equal to the MECP. It is also assumed that there are no externalities in consumption, which means that the marginal social benefit (MSB) curve is the same as the marginal private benefit (MPB) curve.

Competitive market forces, with producers and consumers responding only to private costs and benefits, will result in a market equilibrium at point a: i.e. where demand equals supply. The market equilibrium price is Ppc, while the market equilibrium quantity is Qpc. At Ppc, with no externalities on the consumption side, MPB is equal to MSB. The market price reflects both the private and social benefits from the last unit consumed. However, the presence of external costs in production means that MSC > MPC.

The socially optimal output would be Q*, where P = MSB = MSC, achieved at the socially optimal price of P*. This is illustrated at point c and clearly shows how external costs of production in a perfectly competitive market result in overproduction: i.e. Qpc > Q*. From society’s point of view, too much electricity is being produced from fossil fuels.

Total social surplus equals consumer surplus plus producer surplus minus the external costs. At the market equilibrium (Qpc) this is areas eaPpc+ Ppcaf – fba (or hjk, as it is the same size). At the socially optimal level of output (Q*) total social surplus is areas ecP* + P*cgf – fcg (or hlm).

Although consumer-plus-producer surplus is higher at the market equilibrium (Qpc) than at the socially optimum output (Q*) by the area cag, the external costs are higher still by the area cbag (or ljkm). Therefore, total social surplus at the market equilibrium is smaller than at the socially optimal point by area abc. This is a deadweight welfare loss and represents the excess of social costs over social benefits at all outputs above Q*. Put another way, moving from Qpc to Q* would represent a gain in social surplus of the area abc, as the fall in external costs outweighs the fall in consumer-plus-producer surplus.

One of the reasons why external environmental costs cause problems in a free-market economy is that no one has legal ownership of the atmosphere. Therefore, nobody has the ability either to prevent or to charge for their use as a ‘dumping ground’ for CO2. Such a ‘market’ is missing. Control must, therefore, be left to the government, international organisations, local authorities or regulators.

But such control is often too little. For example, when President Trump came to office in January 2025, he announced that the USA would withdraw from the UN’s Paris Agreement on climate change and that his policy towards oil production would be to ‘drill, baby, drill’. Indeed, governments globally spend hundreds of billions of dollars a year in subsidising oil, gas and coal production and its use, partly from pressure from the fossil fuel industry and partly to reduce the cost of living for consumers. This embeds fossil fuel dependence.

Game theory can help to explain the slow process of carbon reduction. For an individual country, such as the USA, it might argue that its optimum solution would be for other countries to cut their emissions, while maintaining its own levels. This approach would yield most of the benefits to the USA and none of the costs. However, when all countries argue like this, no progress is made. It’s a prisoners’ dilemma. Only if countries believe that the other countries will (a) ratify an agreement to cut emissions and (b) stick to the approved terms, is the agreement likely to succeed. This requires trust on all sides as well as the ability to monitor the outcomes.

Another major problem area concerns equity. Most countries will feel that they are being asked to do too much and that others are being asked to do too little. High-income countries will want to adopt a grandfathering approach. The starting point with this approach would be current levels of pollution. Every country would then be required to make the same percentage cut. Low-income countries, on the other hand, will want the bulk of the cuts, if not all of them, to be made by the rich countries. After all, the rich countries produce much higher levels of pollutants per capita than do the poor countries, and curbing growth in low-income countries would have a far more serious impact on levels of absolute poverty.

But will a supersized El Niño persuade countries to make deeper cuts in carbon emissions? In recent months commitments to achieving net zero emissions have waned. But the following economic consequences may encourage some countries to make deeper emissions cuts.

Economic consequences of a Godzilla El Niño



Extreme droughts, heat, wildfires and harvest failures in some areas and extreme rainfall and flooding in others will have severe economic consequences, often for the poorest people. There will be reductions in crop yields and loss of livelihood. Food prices will rise globally. This will add to the inflationary pressures from higher oil prices caused by the Iran war.

Droughts and wildfires in south-east Asia and Australia could have disastrous effects on harvests of palm oil, coffee, cocoa, rice, maize, wheat and various tropical fruits. Droughts and heat reduce output from hydropower and possibly wind energy, and industrial production may slow as a result of extreme heat in workplaces.

In Europe, warmer winters and unusually wet springs promote rapid plant growth. When this is followed by summer heatwaves, the undergrowth dries out and provides fuel for the wildfires. A super El Niño will amplify this. France and Spain have experienced massive wildfires these past few months. In the UK, the 2026 summer has been the hottest on record. The costs in Europe of the heat and wildfires in terms of lost crops and animals have been immense.

Floods and storms damage roads, power grids, railways and buildings. This forces governments to spend money on repairs instead of long-term investments. People are displaced and many are likely to lose their lives.

Fortunately, El Niños fade after a few months to be replaced by the cooler La Niña. The problem is that, with global warming, the next El Niño in a few years could be even more extreme with even more serious economic consequences.

The hope is that governments wake up to the pressing need to reduce carbon emissions.

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Questions

  1. What is the current state of progress towards meeting the goals of the UN Paris Climate Agreement?
  2. Are there any externalities in consumption that affect global warming?
  3. How might technological progress make it privately profitable to reduce carbon emissions?
  4. How might global supply chains and shipping be affected by a super El Niño?
  5. What role can education play in tackling climate change and its effects?
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Economic games in the Iran war

Economists use game theory to understand decision making where the outcome for an economic actor – individual, firm, government, etc. – depends on the actions and reactions of other actors. It models how rational actors make optimal decisions based on their expectations about such actions and reactions of competitors. Sometimes these expectations will be based on considerable knowledge; sometimes they will be based on hunch or the degree of optimism or pessimism.

Perhaps the most famous game is the prisoners’ dilemma. This is where two or more firms (or people) independently attempt to choose the best strategy, thinking about how their rivals are likely to react. But they end up in a worse position than if they had co-operated in the first place. For example, if a firm is considering cutting price, it would gain market share if the other firm does not cut price; in such a scenario it is likely to gain by cutting price. If, however, the other firm is expected to cut its price, the first firm will have to cut price itself to avoid losing market share; in this scenario it will also cut price. Assuming the other firm reasons the same, the outcome is likely to be a price war, with both firms losing profit. However, if they both colluded to maintain prices or even raise them (assuming they can evade any legal restrictions on collusion), they will both gain.

Another example is the game of chicken. This is where two or more actors engage in brinkmanship, hoping that the other actor(s) will give in first. Take the above example of a price war. Assume that two firms are engaging in price cutting. They know that this will damage their short-term profit. But each hopes that the other will give up first and may then be willing to collude or, better still, be driven out of business. If either firm thinks it can win the game, it will reason that short-term pain is justified by long-term gain.

The war in Iran

A game of chicken is currently being ‘played’ by the USA and Iran. Iran is blocking the Strait of Hormuz; the USA is blockading Iranian ports, preventing ships from arriving or leaving. Both policies inflict economic pain. Blocking the Strait of Hormuz has driven up oil and gas prices and the prices of many other products exported through the Strait – products such as fertilisers, plastics, petrochemicals, sulphur, methanol and helium.

Each side hopes that the economic pain inflicted on the other will cause it to give up first.

But the game is ‘asymmetric’: the costs of continuing the blockades are different for each side and thus the pressures on each side to concede differ. For Iran, the blockade of its ports is massively curtailing its exports and is doing huge damage to its economy, already battered by bombing. But the war has so far seemed to allow the Iranian authorities to tighten their political grip and they may be prepared to play the ‘long game’ by rallying the Iranian population against the US and Israeli assault. The authorities may calculate that the Iranian people will be prepared to endure greater hardship for some time.

The USA is facing a much lower economic cost. Much of the hardship from the effective closure of the Strait of Hormuz is being borne by other countries. Energy and fertiliser shortages and the resulting rise in price of these critical inputs threaten a humanitarian disaster in some of the poorest countries. Harvests will be down, as will GDP; food prices will soar. There will be widespread economic hardship across Africa and much of Asia, particularly in those countries struggling with existing high debt burdens.

But for Donald Trump and his administration, those costs are likely to be seen as important only in so far as they affect the USA. However, oil prices are determined in international markets and, despite the US economy gaining from higher oil prices as the USA is a net exporter, the price of fuel to the US consumer has risen substantially. Petrol prices in the USA have risen some 45% since the start of the war and jet fuel prices have doubled, driving up air fares. With the prices of other key products, such as medicines, clothing and electronics increasing too, US inflation is now rising – aggravated by the effects of the tariffs on many products. These costs matter to the US consumer and, with mid-term elections approaching and with Donald Trump’s approval rate plummeting, the USA is likely to be more sensitive to short-term economic costs than Iran.

But the USA poses a much greater military threat to Iran than vice versa and this is seen in the USA as a major advantage in this high-stakes game of chicken. But the Iranian authorities’ willingness to endure further military strikes for what they see as long-term gain, may make them unlikely to concede first.

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Questions

  1. Explain the prisoners’ dilemma game and explain what is meant by the Nash equilibrium in the game.
  2. What is the Nash equilibrium of a game of chicken?
  3. Explain the asymmetries in the ‘game’ being ‘played’ by the USA, Israel and Iran?
  4. What other actors are there in the ‘game’ and do they play any significant role?
  5. How important is information and understanding held by the USA, Israeli and Iran about the likely consequences of their actions?
  6. What can mediators, such as Pakistan, do to de-escalate the situation?
  7. What are the likely long-term costs to the global economy if the blocking of the Strait of Hormuz persists for a number of months?
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Climate tipping points


Politicians, business leaders, climate scientists, interest groups and journalists from across the world have been meeting in Dubai at the COP28 climate summit (the 28th annual meeting of the Conference of the Parties (COP) to the United Nations Framework Convention on Climate Change (UNFCCC)). The meeting comes at a time when various climate tipping points are being reached or approached – some bad, but some good. Understanding these tipping points and their implications for society and policy requires understanding not only the science, but also the various economic incentives affecting individuals, businesses, politicians and societies.

Tipping points

A recent report (see first reference in articles section below) identified various climate tipping points. These are when global temperatures rise to a point where various domino effects occur. These are adverse changes to the environment that gather pace and have major effects on ecosystems and the ability to grow food and support populations. These, in turn, will have large effects on economies, migration and political stability.

According to the report, five tipping points are imminent with the current degree of global warming (1.2oC). These are:

  • Melting of the Greenland ice sheet;
  • Melting of the West Antarctic ice sheet;
  • Death of warm-water coral reefs;
  • Collapse of the North Atlantic Subpolar Gyre circulation, which helps to drive the warm current that benefits Western Europe;
  • Widespread rapid thawing of permafrost, where tundra without snow cover rapidly absorbs heat and releases methane (a much more powerful source of global warming than CO2).

With global warming of 1.5oC, three more tipping points are likely: the destruction of seagrass meadows, mangrove swamps and the southern part of the boreal forests that cover much of northern Eurasia. As the temperature warms further, other tipping points can interact in ways that drive one another, resulting in tipping ‘cascades’.

But the report also strikes an optimistic note, arguing that positive tipping points are also possible, which will help to slow global warming in the near future and possibly reverse it further in the future.


The most obvious one is in renewable energy. Renewable power generation in many countries is now cheaper than generation from fossil fuels. Indeed, in 2022, over 80% of new electricity generation was from solar and wind. And as it becomes cheaper, so this will drive investment in new renewable plants, including in small-scale production suitable for use in developing countries in parts not connected to a grid. In the vehicle sector, improved battery technology, the growth in charging infrastructure and cheaper renewable sources of electricity are creating a tipping point in EV take-up.

Positive tipping points can take place as a result of changing attitudes, such as moving away from a meat-intensive diet, avoiding food waste, greater use of recycling and a growth in second-hand markets.

But these positive tipping points are so far not strong enough or quick enough. Part of the problem is with economic incentives in market systems and part is with political systems.

Market failures

Economic decisions around the world of both individuals and firms are made largely within a market environment. But the market fails to take into account the full climate costs and benefits of such decisions. There are various reasons why.

Externalities. Both the production and consumption of many goods, especially energy and transport, but also much of agriculture and manufacturing, involve the production of CO2. But the costs of the resulting global warming are not born directly by the producer or consumer. Instead they are external costs born by society worldwide – with some countries and individuals bearing a higher cost than others. The result is an overproduction or consumption of such goods from the point of view of the world.

The environment as a common resource. The air, the seas and many other parts of the environment are not privately owned. They are a global ‘commons’. As such, it is extremely difficult to exclude non-payers from consuming the benefits they provide. Because of this property of ‘non-excludability’, it is often possible to consume the benefits of the environment at a zero price. If the price of any good or service to the user is zero, there is no incentive to economise on its use. In the case of the atmosphere as a ‘dump’ for greenhouse gases, this results in its overuse. Many parts of the environment, however, including the atmosphere, are scarce: there is rivalry in their use. As people increase their use of the atmosphere as a dump for carbon, so the resulting global warming adversely affects the lives of others. This is an example of the tragedy of the commons – where a free resource (such as common land) is overused.

Inter-generational problems. The effect of the growth in carbon emissions is long term, whereas the benefits are immediate. Thus consumers and firms are frequently prepared to continue with various practices, such as driving, flying and using fossil fuels for production, and leave future generations to worry about their environmental consequences. The problem, then, is a reflection of the importance that people attach to the present relative to the future.

Ignorance. People may be contributing to global warming without realising it. They may be unaware of which of the goods they buy involve the release of carbon in their production or how much carbon they release when consumed.

Political failures

Governments, whether democratic or dictatorships, face incentives not to reduce carbon emissions – or to minimise their reduction, especially if they are oil producing countries. Reducing carbon involves short-term costs to consumers and this can make them unpopular. It could cost them the next election or, in the case of dictatorships, make them vulnerable to overthrow. What is more, the oil, coal and gas industries have a vested interest in continuing the use of fossil fuels. Such industries wield considerable political power.

Even if governments want the world to reduce carbon emissions, they would rather that the cost of doing so is born less by their own country and more by other countries. This creates a prisoner’s dilemma, where the optimum may be for a large global reduction in carbon emissions, but the optimum is not achieved because countries individually are only prepared to reduce a little, expecting other countries to reduce more. Getting a deal that is deemed ‘fair’ by all countries is very difficult. An example is where developing countries, may feel that it is fair that the bulk of any cuts, if not all of them, should be made by developed countries, while developed countries feel that fixed percentage cuts should be made by all countries.

Policy options

If the goal is to tackle climate change, then the means is to reduce the amount of carbon in the atmosphere (or at the least to stop its increase – the net zero target). There are two possibilities here. The first is to reduce the amount of carbon emissions. The second is to use carbon capture and storage or carbon sequestration (e.g. through increased forestation).

In terms of reducing carbon emissions, the key is reducing the consumption of carbon-producing activities and products that involve emissions in their production. This can be achieved through taxes on such products and/or subsidies on green alternatives (see the blog ‘Are carbon taxes a solution to the climate emergency?‘). Alternatively carbon-intensive consumption can be banned or phased out by law. For example, the purchase of new petrol or diesel cars cold be banned beyond a certain date. Or some combination of taxation and regulation can be used, such as in a cap-and-trade system – for example, the EU Emissions Trading System (EU ETS) (see the blog ‘Carbon pricing in the UK‘). Then there is government investment in zero carbon technologies and infrastructure (e.g. electrifying railways). In practice, a range of policy instruments are needed (see the blog ‘Tackling climate change: “Everything, everywhere, all at once”‘).

With carbon capture, again, solutions can involve a mixture of market mechanisms and regulation. Market mechanisms include subsidies for using carbon capture systems or for afforestation. Regulation includes policies such as requiring filters to be installed on chimneys or banning the felling of forests for grazing land.

The main issue with such policies is persuading governments to adopt them. As we saw above, governments may be unwilling to bear the short-term costs to consumers and the resulting loss in popularity. Winning the next election or simple political survival may be their number-one priority.

COP28

The COP28 summit concluded with a draft agreement which called for the:

transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner, accelerating action in this critical decade, so as to achieve net zero by 2050 in keeping with the science.

This was the first COP summit that called on all nations to transition away from fossil fuels for energy generation. It was thus hailed as the biggest step forward on tackling climate change since the 2015 Paris agreement. However, there was no explicit commitment to phase out or even ‘phase down’ fossil fuels. Many scientists, climate interest groups and even governments had called for such a commitment. What is more, there was no agreement to transition away from fossil fuels for transport, agriculture or the production of plastics.

If the agreement is to be anything more than words, the commitment must now be translated into specific policy actions by governments. This is where the real test will come. It’s easy to make commitments; it’s much harder to put them into practice with policy measures that are bound to impose costs on various groups of people. What is more, there are powerful lobbies, such as the oil, coal and steel industries, which want to slow any transition away from fossil fuels – and many governments of oil producing countries which gain substantial revenues from oil production.

One test will come in two years’ time at the COP30 summit in the Amazonian city of Belém, Brazil. At that summit, countries must present new nationally determined commitments that are economy-wide, cover all greenhouse gases and are fully aligned with the 1.5°C temperature limit. This will require specific targets to be announced and the measures required to achieve them. Also, it is hoped that by then there will be an agreement to phase out fossil fuels and not just to ‘transition away’ from them.

Reasons for hope

Despite the unwillingness of many countries, especially the oil and coal producing countries, to phase out fossil fuels, there are reasons for hope that global warming may be halted and eventually even reversed. Damage will have been done and some tipping points may have been reached, but further tipping points may be averted.

The first reason is technological advance. Research, development and investment in zero carbon technologies is advancing rapidly. As we have seen, power generation from wind and solar is now cheaper than from fossil fuels. And this cost difference is likely to grow as technology advances further. This positive tipping point is becoming more rapid. Other technological advances in transport and industry will further the shift towards renewables and other advances will economise on the use of power.

The second is changing attitudes. With the environment being increasingly included in educational syllabuses around the world and with greater stress on the problems of climate change in the media, with frequent items in the news and with programmes such as the three series of Planet Earth, people are becoming more aware of the implications of climate change and how their actions contribute towards the problem. People are likely to put increasing pressure on businesses and governments to take action. Growing awareness of the environmental impact of their actions is also affecting people’s choices. The negative externalities are thus being reduced and may even become positive ones.

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Questions

  1. Use a diagram to demonstrate the effects of negative externalities in production on the level of output and how this differs from the optimum level.
  2. Use another diagram to demonstrate the effects of negative externalities in consumption on the level of consumption and how this differs from the optimum level.
  3. What was agreed at COP28?
  4. What incentives were included in the agreement to ensure countries stick to the agreement? Were they likely to be sufficient?
  5. What can governments do to encourage positive environmental tipping points?
  6. How may carbon taxes be used to tackle global warming? Are they an efficient policy instrument?
  7. What can be done to change people’s attitudes towards their own carbon emissions?
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Till death do us part? (updated)

You’ve had a busy day at work. You check your watch; it’s almost 5pm. You should be packing soon – except, your boss is still in their office. You shouldn’t really be seen leaving before your boss, should you? You don’t want to be branded as ‘that guy’ – the one who is ‘not committed’, ‘not willing to go the extra mile’, ‘not flexible enough’, first out of the door’ – you don’t want to have that label pinned on your performance appraisal. After all, your boss is still hard at work, and so are your other colleagues.

So you wait, pretending to work, although you do not really do much – perhaps you’re checking Facebook, reading the news or similar. And so does your boss, not wanting to be seen leaving before anyone else. But what example is this going to set for you and your other colleagues. You all wait for someone to make the first move – a prisoner’s dilemma situation. The only difference is that it’s you who is the prisoner in this situation.

Presenteeism

What we have described is an example of presenteeism. But how would we define it? If you search the term on Google Scholar or Scopus, you will come across a number of articles in the fields of health and labour economics that define presenteeism as a phenomenon in which employees who feel physically unwell choose to go to work, or stay on at work, rather than asking for time off to get better (see, for instance, Hansen and Andersen, 2008 and several others). This is also known as sickness presenteeism.

According to Cooper and Lu (2016), however, the use of the term can be extended to describe a wider situation in which a worker is physically present at their workplace but not functioning (by reason of tiredness, physical illness, mental ill-health, peer pressure or whatever else). As explained in Biron and Saksvik (2009):

Cooper’s conceptualisation of presenteeism implied that presenteeism was a behaviour determined by specific determinants (i.e. long working hours and a context of uncertainty). This tendency to stay at work longer than required to display a visible commitment is what Simpson (1998) calls ‘competitive presenteeism’ where people compete on who will stay in the office the longest.

The effect of presenteeism

Unsurprisingly, the effect of presenteeism on the wellbeing of workers and the economic performance of firms has been looked at extensively from different angles and disciplines – including health economists, organisational behaviour and labour economists – for a recent and comprehensive review of the literature on this topic see Lohaus and Habermann (2019).

Most of these studies agree that the effects of presenteeism are negative; in particular, they identify significant negative effects on the physical health of workers (Skagen and Collins, 2016); emotional exhaustion and mental health issues (Demerouti et al, 2009); persistent productivity loss (Warren et al, 2011); lower work engagement and negative feelings (Asfaw et al, 2017) – among several others. There seems, therefore, to be plenty of convincing evidence that presenteeism is bad for everyone – business owners, managers and staff.

So next time that you find yourself stuck at work working silly hours, feeling totally unproductive and just staying to be seen, email this blog to your boss and other colleagues – and ask them if they wish to join you for a drink or a walk.

You’re welcome!

(By the way, there’s a saying that in the UK the last one to leave the office is seen as the hardest working, whereas in Germany the last one to leave the office is seen as the least efficient!)

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References

Questions

  1. ‘Presenteeism leads to lower productivity and firm performance and should be discouraged by business owners and managers’. Discuss.
  2. Jack Ma, the Chinese billionaire and owner of Ali Baba, has defended his ‘996 work model’ (working 9am to 9pm for 6 days a week) as a ‘huge blessing’. Find and review some articles on this topic, and use them to write a response. Your response should be substantiated using relevant economic theory and empirical research.
  3. Have you or anyone you know found yourself guilty of presenteeism? Share your experience with the rest of the class, focusing on effects on productivity and your attitude towards your employer and work colleagues.
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Good COP and bad COP: reflections on the Glasgow climate change conference


The Climate Change Pact agreed by leaders at the end of COP26 in Glasgow went further than many pessimists had forecast, but not far enough to meet the goal of keeping global warming to 1.5°C above pre-industrial levels. The Pact states that:

limiting global warming to 1.5°C requires rapid, deep and sustained reductions in global greenhouse gas emissions, including reducing global carbon dioxide emissions by 45 per cent by 2030 relative to the 2010 level and to net zero around mid-century, as well as deep reductions in other greenhouse gases.

So how far would the commitments made in Glasgow restrict global warming and what actions need to be put in place to meet these commitments?

Short-term commitments and long-term goals

According to Climate Action Tracker, the short-term commitments to action that countries set out would cause global warming of 2.4°C by the end of the century, the effects of which would be calamitous in terms of rising sea levels and extreme weather.

However, long-term commitments to goals, as opposed to specific actions, if turned into specific actions to meet the goals would restrict warming to around 1.8°C by the end of the century. These long-term goals include reaching net zero emissions by certain dates. For the majority of the 136 countries agreeing to reach net zero, the date they set was 2050, but for some developing countries, it was later. China, Brazil, Indonesia, Russia, Nigeria, Sri Lanka and Saudi Arabia, for example, set a date of 2060 and India of 2070. Some countries set an earlier target and others, such as Benin, Bhutan, Cambodia, Guyana, Liberia and Madagascar, claimed they had already reached zero net emissions.

Despite these target dates, Climate Action Tracker argues that only 6 per cent of countries pledging net zero have robust policies in place to meet the targets. The problem is that actions are required by firms and individuals. They must cut their direct emissions and reduce the consumption of products whose production involved emissions.

Governments can incentivise individuals and firms through emissions and product taxes, through carbon pricing, through cap-and-trade schemes, through subsidies on green investment, production and consumption, through legal limits on emissions, through trying to change behaviour by education campaigns, and so on. In each case, the extent to which individuals and firms will respond is hard to predict. People may want to reduce global warming and yet be reluctant to change their own behaviour, seeing themselves as too insignificant to make any difference and blaming big business, governments or rich individuals. It is important, therefore, for governments to get incentive mechanisms right to achieve the stated targets.

Let us turn to some specific targets specified in the Climate Change Pact.

Phasing out fossil fuel subsidies

Paragraph 20 of the Climate Change Pact

Calls upon Parties to accelerate … efforts towards the … phase-out of inefficient fossil fuel subsidies, while providing targeted support to the poorest and most vulnerable in line with national circumstances and recognizing the need for support towards a just transition.

Production subsidies include tax breaks or direct payments that reduce the cost of producing coal, oil or gas. Consumption subsidies cut fuel prices for the end user, such as by fixing the price at the petrol pump below the market rate. They are often justified as a way of making energy cheaper for poorer people. In fact, they provide a bigger benefit to wealthier people, who are larger users of energy. A more efficient way of helping the poor would be through benefits or general tax relief. Removing consumption subsidies in 32 countries alone would, according to International Institute for Sustainable Development, cut greenhouse gas emission by an average of 6 per cent by 2025.

The chart shows the 15 countries providing the largest amount of support to fossil fuel industries in 2020 (in 2021 prices). The bars are in billions of dollars and the percentage of GDP is also given for each country. Subsidies include both production and consumption subsidies. (Click here for a PowerPoint of the chart.) In addition to the direct subsidies shown in the chart, there are the indirect costs of subsidies, including pollution, environmental destruction and the impact on the climate. According to the IMF, these amounted to $5.4 trillion in 2020.

But getting countries to agree on a path to cutting subsidies, when conditions vary enormously from one country to another, proved very difficult.

The first draft of the conference agreement called for countries to ‘to accelerate the phasing-out of coal and subsidies for fossil fuels’. But, after objections from major coal producing countries, such as China, India and Australia, this was weakened to calling on countries to accelerate the shift to clean energy systems ‘by scaling up the deployment of clean power generation and energy efficiency measures, including accelerating efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies’. (‘Unabated’ coal power refers to power generation with no carbon capture.) Changing ‘phasing-out’ to ‘the phasedown’ caused consternation among many delegates who saw this as a substantial weakening of the drive to end the use of coal.

Another problem is in defining ‘inefficient’ subsidies. Countries are likely to define them in a way that suits them.

The key question was the extent to which countries would actually adopt such measures and what the details would be. Would they be strong enough? This remained to be seen.

As an article in the journal, Nature, points out:

There are three main barriers to removing production subsidies … First, fossil-fuel companies are powerful political groups. Second, there are legitimate concerns about job losses in communities that have few alternative employment options. And third, people often worry that rising energy prices might depress economic growth or trigger inflation.

The other question with the phasing out of subsidies is how and how much would there be ‘targeted support to the poorest and most vulnerable in line with national circumstances’.

Financial support for developing countries

Transitioning to a low-carbon economy and investing in measures to protect people from rising sea levels, floods, droughts, fires, etc. costs money. With many developing countries facing serious financial problems, especially in the light of measures to support their economies and healthcare systems to mitigate the effects of COVID-19, support is needed from the developed world.

In the COP21 Paris Agreement in 2015, developed countries pledged $100 billion by 2020 to support mitigation of and adaptation to the effects of climate change by developing countries. But the target was not reached. The COP26 Pact urged ‘developed country Parties to fully deliver on the $100 billion goal urgently and through to 2025’. It also emphasised the importance of transparency in the implementation of their pledges. The proposal was also discussed to set up a trillion dollar per year fund from 2025, but no agreement was reached.

It remains to be seen just how much support will be given.

Then there was the question of compensating developing countries for the loss and damage which has already resulted from climate change. Large historical polluters, such as the USA, the UK and various EU countries, were unwilling to agree to a compensation mechanism, fearing that any recognition of culpability could make them open to lawsuits and demands for financial compensation.

Other decisions

  • More than 100 countries at the meeting agreed to cut global methane emissions by at least 30 per cent from 2020 levels by 2030. Methane is a more powerful but shorter-living greenhouse gas than carbon. It is responsible for about a third of all human-generated global warming. China, India and Russia, however, did not sign up.
  • Again, more than 100 countries agreed to stop deforestation by 2030. These countries include Indonesia and Brazil, which has been heavily criticised for allowing large parts of the Amazon rainforest to be cleared for farming, such that the Amazon region in recent years has been a net emitter of carbon from the felling and burning of trees. The pledge has been met with considerable cynicism, however, as it unclear how it will be policed. Much of the deforestation around the world is already illegal but goes ahead anyway.
  • A mechanism for trading carbon credits was agreed. This allows countries which plant forests or build wind farms to earn credits. However, it may simply provide a mechanism for rich countries and businesses to keep emitting as usual by buying credits.
  • Forty-five countries pledged to invest in green agricultural practices to make farming more sustainable.
  • Twenty-two countries signed a declaration to create zero-emission maritime shipping routes.
  • The USA and China signed a joint declaration promising to boost co-operation over the next decade on various climate actions, including reducing methane emissions, tackling deforestation and regulating decarbonisation.

Blah, blah, blah or real action?

Many of the decisions merely represent targets. What is essential is for countries clearly to spell out the mechanisms they will use for achieving them. So far there is too little detail. It was agreed, therefore, to reconvene in a year’s time at COP27 in Egypt. Countries will be expected to spell out in detail what actions they are taking to meet their emissions targets and other targets such as ending deforestation and reducing coal-fired generation.

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Questions

  1. What were the main achievements of COP26?
  2. What were the main failings of COP26?
  3. How can people be incentivised to reduce their direct and indirect greenhouse gas emissions?
  4. How is game theory relevant to understanding the difficulties in achieving global net zero emissions?
  5. Should developing countries be required to give up coal power?
  6. If the world is to achieve net zero greenhouse gas emissions, should all countries achieve net zero or should some countries achieve net negative emissions to allow others to continue with net positive emissions (albeit at a lower level)?