TWN Info Service on Finance and Development (July08/01)
3 July 2008
Third World Network

Climate: Poor taking on more burden on climate actions, warns Stiglitz
Published in SUNS #6508 dated 2 July 2008

Istanbul, 30 Jun (Martin Khor) -- While global warming will disproportionately affect the poor in the world, the response to global warming has also in some ways placed the burden of adjustment disproportionately on the poor, warned the renowned economist Joseph Stiglitz in a keynote speech at the International Economics Association Congress in Istanbul on 29 June.

Stiglitz, a Nobel prize-winning economics professor at Columbia University (United States) and formerly Chief Economist at the World Bank, gave the example of subsidized bio-fuel production in the developed countries which had contributed to global food price increases, which has hit the poor harder as they spend more of their income on food.

This problem is worsened by "inflation targeting" policies by central banks, which adversely affected growth and jobs, thus hitting the poor even more.

In his speech on Climate Change and Global Justice: Lessons from the Theory of Public Finance, Stiglitz also advocated "equal emission rights per capita" as the only serious defensible principle in allocating emission rights.

Commenting on access to climate-friendly technology, Stiglitz said that it is an important factor determining efficiency and equity. The patent system restricts the use of knowledge, may lead to large transfers of wealth from developing to developed countries and is an impediment to reaching a global climate agreement.

He also advocated a system of taxes on carbon (that would operate like the value added tax), which he indicated would be a better approach than the "Cap and Trade" system of carbon trading.

Stiglitz said that global warming is a global problem, and needs to be addressed globally. Global warming is also a long-run problem, giving rise to the concern not so much with the level of emissions in any particular year, as with the long-run levels of atmospheric concentrations of greenhouse gases.

The costs of reducing the level of emissions (limiting the increases in atmospheric concentration of greenhouse gases) will be much lower if it is done efficiently. Efficiency implies comprehensiveness, covering all sources of emissions, countries and ways of reducing atmospheric carbon concentrations. To do this, two conditions should be met. First, said Stiglitz, we need a global agreement, and a global agreement will require equitable burden sharing. Second, the shadow price of carbon should be approximately the same in all uses, in all countries, and at all dates.

Stiglitz said that current policies deviate from this principle. The shadow price of carbon in those countries that have signed on to the Kyoto Protocol is higher than in other countries. The price of carbon associated with deforestation is lower than in other uses. And in many countries, the price of carbon associated with renewables, and especially ethanol, is higher than in other uses.

This can be viewed as a standard problem in public finance, said Stiglitz. There is a global public good (global warming), it has to be financed, and standard theories of public finance provide clear formulations concerning equitable and efficient taxation. There was importance of transactions costs or enforcement costs; of compliance; of second best considerations; and there were also complexities of incidence analysis.

These concerns affect the choice of instruments (for example, taxation or regulation) and design. Moreover, what is appropriate for one country or one situation may not be for others. For example, the value-added tax (VAT) is a distortionary tax in most developing countries, because enforcement is incomplete, and the VAT is also inequitable. But in developed countries, the VAT has some advantages in transactions costs and compliance.

Stiglitz said that one of the responses in many parts of the world to the threat of global warming is to increase the production of bio-fuels. In some parts of the world, bio-fuel production makes extensive use of already very limited supplies of water, which are unpriced, and thus this distortion is increased. He added that the United States has taken advantage of global warming concerns to provide subsidies for bio-fuel production and this has increased the magnitude of its agricultural subsidies.

The increase in bio-fuels has also contributed to the increase in the price of food, said Stiglitz. As a result, the incidence of the hidden and implicit tax on carbon is borne disproportionately by the poor in the world, since they spend a larger fraction of their income on food, while the rich bio-fuel producers and corn producers in the US are actually better off.

This problem is exacerbated by the "inflation targeting" policies of the central banks, which has adverse effects on the economy and induces job losses. "Global warming would have disproportionately affected the poor in the world, but this response puts the burden of adjustment disproportionately on the poor," he remarked. Stiglitz also said that in standard tax theory, in competitive models, it makes no difference whether one taxes the consumption of a good or the production of a good. He implied, however, that this can make a significant difference in the case of climate change.

The present carbon regime focuses on production, said Stiglitz, but he asked whether it makes sense to "credit" developing countries with the carbon content of goods that may be produced there but are exported to and consumed in developed countries. With incomplete enforcement, this leads to the shifting of production.

Stiglitz then discussed the alternative proposals of a carbon tax, and the "cap and trade" system. He said a "Carbon Added Tax" could be implemented in a way similar to a VAT, in which the tax would be imposed on each stage of production and distribution. There could be a "double check", at production and at final point of sale. It would also be a way of implementing cross-border adjustments, ensuring compliance. It would, however, have higher transactions costs than just imposing a tax on oil, gas, and coal.

On the "Cap and Trade" system, Stiglitz said it was easy to implement for major sources of emissions, but harder to implement for the multitude of small sources. It is also giving rise to distortions and transactions costs. Stiglitz said a key issue is how to allocate emission rights, which are a valuable asset, worth perhaps $2 trillion annually (or 5% of global GDP). This issue has become a major stumbling block in reaching a global agreement, and the attempt to avoid taking on full implications of this issue is one of the reasons for distortionary policies (or for carbon in different uses being priced differently).

So far, commented Stiglitz, the only serious defensible principle is equal emission rights per capita, adjusted for past emissions. However, this principle will face resistance because it may entail large redistributions, which are larger than what is politically acceptable. It is however not clear why this should be treated differently than other property rights. Stiglitz also said that the argument that the cap and trade system is better than the tax system because of uncertainty is flawed, in the context of global warming being a long-run problem.

If permits are auctioned, the auctioning system brings to the fore the distributional questions, especially how the proceeds are to be divided. Standard welfare theories provide clear guidance, that they should be distributed to poorest individuals in poorest countries, said Stiglitz. It could lead to a large pool of money to be used to finance global public goods, including financing research to reduce emissions and for carbon sequestration.

Stiglitz also stressed that access to technology is an important determinant both of efficiency and equity. In this context, the patent system restricts the use of knowledge and it could also lead to large transfers of wealth from developing to developed countries. This problem is also an impediment to reaching a global agreement on addressing the climate problem, remarked Stiglitz, adding that knowledge is a global public good and like other public goods, it should be financed equitably. The burden therefore lies on richer countries.

Stiglitz concluded that the world is engaged on a risky experiment. It is imperative that there be reductions in emission levels, but it is also imperative that it be done in ways where the burden of adjustment is equitably shared. This, he said, will require a new economic model, with changed patterns of consumption and innovation "We have treated two scarce goods - air and water - as if they were free. Charging for them will lead to large changes in prices.

"Only through changes in patterns of demand will adverse effects on developing countries be mitigated," he said, adding that increasing reliance on renewables threatens to increase the costs of energy and food, which would be particularly hard for the poor. +