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  Global Views
Economics of Climate Change; a Global Deal
By Ram Kumar Phuyal
Special Contributor
Climate change can cause serious natural disasters.

Climate change is the most severe problem that we are facing today—more serious even than the threat of some terrible unidentified diseases. It is a global problem and requires a global solution. In recent years, addressing climate change has been high on the international policy agenda.

There is now a consensus that to prevent global warming from reaching dangerous levels, action is needed to control and mitigate green house gas emissions and stabilize their atmospheric concentration within a range of 450–550 parts per million. On this regards, reducing green house gases to reduce the threat of climate change is a primary need and the secondly securing economic growth and prosperity in the future. The dominant concern here is to trace the outlines of economic thinking on climate change, but clearly, any investigation on this area must begin with the underlying economic linkages with science. The major competing paradigms concerned on this issue are; modeling of greenhouse gases mitigation as a dynamic optimal control problem, and the willingness to pay of the present generation to ensure future generations against the potential adverse impacts of climate change.

The Climate—Health linkages

The damages generated by climate change will affect the developing countries welfare like Nepal much more than industrialized and developed countries because of four factors: their geographic location; their strong dependence on agriculture; their higher vulnerability to lack of resources; their low rate of insurance. For a 2-3°C increase in temperature, the extra number of people exposed to famine could be as high as 30 to 200 million. As a result, since developing countries will be those experiencing the greatest difficulties in adapting, large transfers from industrialized countries will be required to achieve the same development goals as in a no-climate change scenario.

Similarly, it tends to amplify disparities between rich and poor regions as regards health. Since 1970, according to the World Health Organization (WHO), due to increased mean temperature and more frequent and severe heat waves, climate change is already responsible for over 150,000 deaths each year through increasing incidence of diarrhoea, malaria and malnutrition, predominantly in Africa and other developing regions. Just a 1°C increase in global temperature above pre-industrial could double annual deaths from climate change to at least 300,000 and this to happen by 2030. By 2050, there could be as many as 200 million additional permanently displaced persons due to climate upheavals in 2000, climate refugees were as numerous as those fleeing political and religious persecution or ethnic conflicts. The combination of these physical and economic changes will probably lead to tourist flows being modified, with as a result, significant loss of income for some regions and gains in others. This will in turn lead to new investment flows in tourist industry infrastructures.

The Climate—Economics linkages

While closely observing the matters on the short-run, climate change phenomenon is not just a threat – there are also some countless opportunities as well. Opportunities for those countries in particular, those businesses and entrepreneurs who see that a high growth and low carbon economy are not incompatible. And there are opportunities too for those who move first, to deliver new technologies, create new jobs and drive economic growth. Now of course some companies are looking to exploit new markets and technologies. Others are looking to become more energy efficient. Others are acting to enhance their corporate image and reputation, something which is increasingly central to the value of any brand or product.

On the other hand, many of us are still ignorant on key issues highlighted by an economic perspective—for example: the close linkages between world economic performance, the man-made forces influencing climate change, and the considerable time lags between taking action and the effects of those actions; the costs that must be borne now for benefits that will not accrue to this generation; and the cost in terms of opportunities forgone by spending resources on climate change control rather than on, for example, addressing issues of global poverty now. On this aspect, the challenge of climate change is especially difficult because it covers so much of the economy, is so long term, is so full of risk and uncertainty, is so demanding internationally, and is so urgent because of the problem itself and the pace of public discussion and decision making. It is also a long-term problem for analysis. We will be learning all the time and policy will be made and reformed over coming decades.

Economics— Adaptation linkages

The attention to focus on adaptation capacity will be favored because it yields national benefits. The greatest challenge posed by adaptation is getting the rich countries to help finance adaptation by poor countries. Another approach that may be favored is “air capture”—that is, technologies that take CO2 directly out of the atmosphere. These technologies do not yet exist even as pilot projects, and they will be expensive to develop and use, but they have two advantages. The first is that they can be decoupled from energy systems. The second is that they can be undertaken as a single, large project. These technologies, however, raise a new problem for the world. Since air capture can reduce atmospheric concentrations and not only limit their rise, they create a challenge for governance: which countries should be able to decide the level of atmospheric concentrations that is “best”?

One more approach that will appear increasingly tempting is “geo-engineering.” This approach can offset the warming associated with rising concentrations by reducing the amount of solar radiation that strikes the Earth. Like industrial “air capture” it can be undertaken as a single project. Unlike “air capture,” however, some geo-engineering technologies are inexpensive. They can also have a near-immediate effect on the climate. Geo-engineering is therefore more likely to be used. But geo-engineering also poses a number of challenges. It would address the symptoms of climate change, not its causes. It would not address the related problem of ocean acidification. It would entail undertaking a new global experiment to offset another one such as rising atmospheric concentrations of greenhouse gases.

Technology — Economics linkages

In addressing economics of climate change fundamentally it requires a technological revolution—that is, it requires basic research, development, and diffusion. Kyoto creates very modest “pull” incentives for innovation. Even if these incentives were stronger, however, pull incentives alone will not be able to stimulate a technological revolution. To do that will require basic knowledge—the kind that cannot be patented. Supplying basic knowledge will likely require government funded Research & Development—a “push” incentive. The returns to investing in basic knowledge, however, will depend in turn on the prospects of technologies embodying this new knowledge being diffused. This is why new and innovative technology R&D efforts need to be strategic.

Meeting the technology policy goal requires immediate action on a coordinated global basis. In addition to progressively tougher targets and a global cap-and-trade regime, any global deal should also set the framework for: Globally coordinated standards, coordinated public funding, and Targeted concessional finance. Further work required—designing the national and international institutional arrangements to support the large scale increases in technology research and investment required; developing a more detailed understanding of requirements for successful technology diffusion and adoption in developing countries.

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Mr. Ram Kumar Phuyal, who is currently a Ph.D. scholar in Econometrics at Chonnam National University in South Korea, serves as volunteer contributor for The Seoul Times. The Nepalese scholar-journalist would like to focus on economic issues of South Korea and Asian countries.






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