Climate Change Policy and Economic Recession

By Butcher, Ben Spies; Stilwell, Frank | Journal of Australian Political Economy, Winter 2009 | Go to article overview

Climate Change Policy and Economic Recession


Butcher, Ben Spies, Stilwell, Frank, Journal of Australian Political Economy


The economic difficulties following from the global financial crisis raise important and challenging questions about the strategies necessary to deal with the problem of climate change. Does the recession undermine the case for an emissions trading system? If so, what could be done instead to reduce environmentally hazardous emissions? Can the problems of recession and climate change be simultaneously redressed?

First, it is pertinent to point to a paradox--that the recession is good for the environment. Indeed, over the past year the failures of global capitalism have achieved goals that even optimistic environmentalists previously thought unreachable. The close correlation between economic growth and carbon emissions has meant that, as production has fallen, so too have emissions. However, the short term gains have come at significant cost, and there is little reason to expect that these gains are sustainable.

The Stern Report in the UK acknowledged a strong correlation between economic growth and increased carbon emissions (Stern 2007, xi). There is approximately a 0.9 per cent increase in emissions for every 1 per cent increase in growth (Adam 2009). The recession reverses this logic. Indeed, economic contraction has been particularly pronounced in emissions intensive industries, with industrial production in the United States down by almost 13 percent in the year to March 2009, and with declines concentrated in manufacturing and construction (US Federal Reserve 2009). In Japan exports fell over 40 per cent in the year to April 2009 (Ministry of Finance 2009). Globally, 2009 may be the first year in which global carbon emissions actually decline. However, the decline in emissions has been accompanied by growing unemployment, poverty and homelessness. What is more, the expenditure stimulus policies that many governments have introduced in the attempt to offset recession threaten to undermine the fall in emissions.

Recession is clearly not the answer to the challenges posed by climate change, yet its impacts suggest that economic and political strategies may need to be adjusted to a new context. The currently dominant policy approach seeks to increase the costs of carbon emissions, and thus use the price mechanism to reduce carbon intensive production. It is an approach that was set out by the Garnaut report in Australia (2008, esp. Chapter 11) as well as by the Stern report in the U.K. (2007, esp. chapters 9 and 10) and is reflected in government policy around the developed world. There are a number of different policy instruments consistent with this approach, ranging from taxes on carbon emissions through to systems of tradable emissions permits. In each case the logic of the policy is to increase the cost of production processes that create emissions, leading eventually to a shift in economic structure toward more sustainable forms of production and consumption. Depending on the magnitude of the changes in costs and prices, a significant shakeout of resources from carbon-intensive industries may occur. However, the recession highlights some old dynamics of capitalist economies--such economies require constant economic growth to avoid crisis, and when capitalism is in recession there is no automatic mechanism to redeploy unused resources from industries that have started to decline.

This article considers how to mitigate against environmental damage while also trying to avoid deepening economic crisis. It focuses on the case for an emissions trading scheme (ETS), as this type of pricing policy has been most actively advocated and embraced both in Australia and overseas. We argue that, while there may have been strategic reasons for supporting an ETS in the context of the long boom, such an approach is likely to be of little economic value now, while its political cost has increased sharply. This is a common feature of market-based schemes per se, not dependent on the detail of any one scheme, and therefore the discussion is not focused on the particular model proposed by the current Australian Government (Commonwealth 2009). …

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