Interrelated markets and climate change

An article in The Times recently explored the economic implications of reducing demand for oil and energy in the West.

Gary Duncan refers to a study by Professor Hans-Werner Sinn for a European think-tank; he argues that the policies used in countries such as the UK to reduce demand for fossil fuels could have the unintended consequence of reducing the price of oil and other fuels in world markets. And unless the extraction and production of these goods are reduced, this could increase quantity demanded in other, less eco-conscious countries.

Professor Sinn argues persuasively that this “green paradox” may help to explain why, despite the Kyoto climate-change treaty and the environmental efforts of many countries, fossil fuel use and CO2 emissions have continued to climb unchecked. He makes the case that, unless energy-consuming nations can form a largely loophole-free united front – which seems improbable – this paradox will make a nonsense of policies such as emissions trading.

Is this another persuasive case for the need for international cooperation on climate change?

This is a question worth considering by students preparing for exam modules on market failure and/or the environment this summer. There is plenty of excellent economics throughout the piece, including a nice illustration of short-termism/public choice theory at the end:

’...the report highlights how the unstable politics of oil-producing states in the Middle East and South America reinforces their rationale to keep pumping oil for whatever price the market sets. Since these nations’ rulers cannot be sure of staying in power indefinitely, they face an extra incentive to cash in while they can.’