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Economic cause of climate change

Climate change is caused by a market failure!

The term "market failure" may sound harsh, but it is used in economics in reference to, among other things, the increasing greenhouse gases (GHG) in the atmosphere. This is because the current market economy is incapable of automatically regulating GHG emissions in any form.


So what exactly is the market failure? We will discuss this and the associated external costs in this paper. Further, we discuss the solution to the economic cause of climate change: internalization.

 

A current entrepreneur has no incentive to reduce GHG emissions in the production of his goods without external intervention. This is despite the fact that greenhouse gas (GHG) has enormous costs. We have already written about the consequences and costs, such as building new dams against floods, fighting drought/hunger crises, or protecting against debris flows in another blog post. In any case, the costs are not borne by the polluter - the entrepreneur - but later by the general public.

This is where we talk about market failure. Because we are dealing here with external (environmental) costs. As can be seen in the economic price-quantity diagram on the right, there is a real price (social costs) and the price or production costs on the current market (private costs). External costs are the costs from the production of a product or a service, which are not borne by the polluters, but are imposed on society or third parties. For all those who have not fully understood this economic excursus, here are a few examples:


Coal & gas-fired power plants

When coal or gas is burned to generate electricity, many greenhouse gases are released. The consequences and costs of these gases in the atmosphere are not included in the production costs as well as in the market price of electricity and are therefore not paid by the polluters.


Slash-and-burn for food

The costs of CO₂ from slash-and-burn agriculture and the missing forest are not included in the prices of products such as meat, soy, bananas or coffee.





Air traffic

The burning of kerosene promotes the greenhouse effect and thus the rise in temperature. The airlines take no responsibility and the cost of the greenhouse gases of a flight is not included in the ticket or anywhere else. There are no incentives to avoid these costs.

 

Accordingly, newspapers and the literature speak of the true costs or the polluter-pays principle. This refers to the true costs including external costs of a product or service. An investigation by Swiss television SRF showed that the production of food in Switzerland cost a total of CHF 13.7 billion in 2018. Consumers paid CHF 7.4 billion when buying the products, taxpayers subsidized farmers to the tune of CHF 2.8 billion, and another CHF 3.6 billion was incurred for the damage done to the environment.


Parts of the private sector have also already acknowledged the issues described above. In one example, the German retailer Penny transformed one of their stores into a "Sustainability Experience Market" in a limited time promotion. In doing so, they obviously included the true cost on all products in addition to the retail price. However, customers still only had to pay the usual retail price at the checkout. This is because consumers today are usually not prepared to pay such price premiums. At the airline Swiss, only one percent of customers compensated for the CO₂ emissions of their flight before the Corona crisis. A representative survey conducted by the market research institute GFK in German-speaking and French-speaking Switzerland shows that 27 percent of all respondents do not want to pay anything at all for compensation. A further 15 percent said they would pay less than 1 percent of the purchase price. A further 35 percent said they would pay between 1 and 5 percent. Only 8 percent are even more generous.

 

In order to prevent large quantities of greenhouse gases from continuing to be released into the atmosphere, the emitter itself must now be asked to pay for the costs of the emissions in accordance with the consumer principle. We are talking here about the internalization of external costs in the form of carbon taxation. This is the only way to create incentives to save the costs for this and thus the greenhouse gas emissions themselves.


PayGreen follows exactly this approach. When paying with PayGreen, fees are charged according to the GHG footprint. Accordingly, companies have the incentive to save emissions in order to avoid fees. In addition, consumers do not have to pay more because PayGreen is free for them and the fees for companies are already in line with the market, with those of competitors. Therefore, on the whole, there is no increase in the cost of the shopping basket.


Pay accordingly with PayGreen to take a step towards cost truth and fight the market failure.

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