CLIMATE change is both causing, and expected to continue to cause in the future, significant economic damage to almost every nation on Earth. The emission of greenhouse gases (GHGs) is not a costless action.

Without a tax on carbon, emitters are not forced to consider the impact of releasing GHGs into the atmosphere, and contributing to the issue of climate change. This gives polluters no tangible incentive to mitigate emissions, and is a major factor behind the rapid increase in GHG emissions since the Industrial Revolution.

Compounding this issue is the fact that our planet’s atmosphere is a shared global resource – it is the largest “public good” on Earth. Public goods are considered “non-rivalrous”, meaning one individual’s access to a resource does not infringe upon another’s access to the same resource, and “non-excludable”, meaning no one individual can be prevented from accessing said resource.

In the absence of regulatory action or policy, public goods are theorised to be overexploited. This is because the conservation of public goods is in no one individual’s rational self-interest – if I can use something for free, and I derive a benefit from it, why should I curb my consumption? As such, it is unsurprising that there are uncontrolled increases in carbon emissions, since individual actors do not face the true costs of their contribution to the mix of pollutants in the atmosphere.

The standard policy prescription to alleviate these issues of oversupply (of GHGs) and over-exploitation (of the atmosphere) is to put a price on carbon emissions.

If GHG emissions were priced to reflect their full cost to the environment, emitters and consumers alike would be forced to re-optimise their profit and utility-maximising behaviour to account for the cost of their emissions. This “internalisation” of the cost of the externality would force firms, consumers, and even nations as a whole to settle on lower levels of emissions, as in some cases, the tax would be significant enough for them to switch to less carbon-intensive activities instead.

In fact, the pricing and taxing of carbon emissions is akin to the removal of a large, inherent subsidy that presently exists for fossil fuels, relative to renewable energy alternatives.

Without a price on carbon, not only are we saying that the damage caused by the burning of fossil fuels is costless (which it isn’t), but we are essentially completely disregarding the environmental benefits of utilising renewable energy technologies over more polluting alternatives. We are not putting a tangible value on the fact that clean energy is capable of mitigating some of the future costs of climate change. This is a poor approach, especially for a country which purports to place much emphasis on sustainability. This enormous inherent subsidy afforded to fossil fuels must be reversed for Malaysia to truly embark on the process of decarbonising the national economy.

The pricing and taxing of carbon emissions thus represents a critical first step towards optimising between carbon-driven economic productivity and carbon-driven environmental degradation.

But what should the price of carbon be? This price is typically referred to as the social cost of carbon (SCC), and reflects to the best of scientific and economic knowledge the cost of the damage caused by an incremental tonne of CO2e (carbon dioxide equivalent) emitted into the atmosphere in a particular year.

Given the generally high level of uncertainty around aspects of climate change and its effects, calculating the SCC involves several extremely complex steps.

The first of these requires modelling trajectories of numerous socioeconomic factors, including but not limited to population, GDP, and energy use, in order to estimate GHG emissions over a particular time horizon.

These emissions, and consequent changes in the atmospheric concentration of GHGs, are used to predict changes in temperature. Temperature changes are translated into estimates of economic damage over the selected period of time. Finally, future damage is discounted to reflect their present value in any given year.

It is clear that the process of deriving as accurate an SCC as possible is no simple feat. In the context of Malaysia, a tremendous amount of research is still required in order for us to understand just how damaging our decisions and actions are likely to be for current and future life in the country.

We need a better understanding of the localised effects of temperature increases on the different components of the economy, and to be able to predict with some confidence the quantitative extent of the damage over time.

Once research gaps in the study of the impact of climate change on the Malaysian economy are filled, our ability to derive an ever more accurate price of carbon for Malaysia will grow. Such a price will allow policymakers to impose, eventually, the ideal climate policy: a one-time fee on carbon emissions that forces a re-optimisation between carbon-driven economic growth, and carbon-driven environmental degradation, based on the expected damage of climate change to Malaysia.

While it will take time and considerable effort to derive this most perfect of prices, there is no reason to put off the implementation of a policy measure which utilises a carbon price. It is, and has been for a long time, undeniable that carbon emissions are causing climate change, and just as undeniable that climate change will be economically damaging.

Carbon emissions are not costless; the price of carbon is therefore strictly greater than zero. If we want to create, and live in, a sustainable world, we need to start taking concrete account of the economic elephant in the room – the carbon externality. – October 23, 2018.

* Darshan Joshi is an Analyst at Penang Institute in Kuala Lumpur. He holds a Bachelor’s degree in Economics from the University of New South Wales, and a Master’s degree in Public Policy from the University of Chicago. His true passions lie in the analyses of global energy- and environmental-related issues. He views climate change as the most significant issue to face contemporary society.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.