The window of opportunity for containing risks of dangerous instability in the global climate system is closing rapidly. The response of the international community is embedded in the 2015 Paris Agreement, signed by 195 parties. Implementing the mitigation pledges parties submitted for the agreement is an important first step, although an additional mechanism to coordinate and scale up mitigation policy at the international level will likely be needed. Carbon taxation, or similar pricing, has a pivotal role, providing across-the-board incentives for reducing emissions and the critical price signal for redirecting investment, but pricing has proved difficult politically. Analytical literature on carbon taxation provides practical guidance on the role of taxation in implementing the Paris Agreement and enhancing its acceptability. Shifting taxes off labor and capital and onto carbon or fossil fuels can produce a “double dividend” by reducing environmental harm and lowering the burden broader taxes impose on the economy. Broader taxes both discourage work effort and investment and promote tax-sheltering behavior (e.g., activity in the informal sector). For various technical and practical reasons, however, it may not make sense to set the carbon tax rate above levels warranted on environmental grounds. The literature emphasizes the general importance of using carbon pricing revenues to benefit the economy, for example, lowering burdensome taxes or funding productive investments. These economic benefits are forgone if instead carbon pricing revenues are given to households in lump-sum dividends. Where higher energy prices are subject to public acceptability constraints, a package of regulations or their fiscal equivalents (known as “feebates”) have an important role in reinforcing carbon pricing. Carbon mitigation can also produce important domestic environmental co-benefits, such as reductions in local air pollution mortality. Unilateral action may be in many countries’ own interests before even counting the global climate benefits. Recent studies have quantified the carbon prices implicit in countries’ Paris mitigation pledges. These implicit prices differ widely across countries with the stringency of pledges and the responsiveness of emissions to pricing, underscoring the potential efficiency gains from some degree of price coordination at the international level. In fact, an international carbon price floor arrangement could be strikingly effective to the extent that it promotes more mitigation in key emerging market economies, such as China and India. The price floor need only cover a handful of large emitters, could be designed equitably with higher requirements for advanced countries, and could be designed flexibly to accommodate different policy approaches at the national level. Domestically, policymakers need to develop comprehensive mitigation strategies, ideally with carbon pricing as the key element. These strategies need to distribute burdens equitably, assist vulnerable groups, and include supporting measures for investment and pricing for broader sources of greenhouse gases.
Hao Liang and Luc Renneboog
Corporate social responsibility (CSR) refers to the incorporation of environmental, social, and governance (ESG) considerations into corporate management, financial decision-making, and investors’ portfolio decisions. Socially responsible firms are expected to internalize the externalities they create (e.g., pollution) and be accountable to shareholders and other stakeholders (employees, customers, suppliers, local communities, etc.). Rating agencies have developed firm-level measures of ESG performance that are widely used in the literature. However, these ratings show inconsistencies that result from the rating agencies’ preferences, weights of the constituting factors, and rating methodology. CSR also deals with sustainable, responsible, and impact investing. The return implications of investing in the stocks of socially responsible firms include the search for an EGS factor and the performance of SRI funds. SRI funds apply negative screening (exclusion of “sin” industries), positive screening, and activism through engagement or proxy voting. In this context, one wonders whether responsible investors are willing to trade off financial returns with a “moral” dividend (the return given up in exchange for an increase in utility driven by the knowledge that an investment is ethical). Related to the analysis of externalities and the ethical dimension of corporate decisions is the literature on green financing (the financing of environmentally friendly investment projects by means of green bonds) and on how to foster economic decarbonization as climate change affects financial markets and investor behavior.
Frederick van der Ploeg
The social rate of discount is a crucial driver of the social cost of carbon (SCC), that is, the expected present discounted value of marginal damages resulting from emitting one ton of carbon today. Policy makers should set carbon prices to the SCC using a carbon tax or a competitive permits market. The social discount rate is lower and the SCC higher if policy makers are more patient and if future generations are less affluent and policy makers care about intergenerational inequality. Uncertainty about the future rate of growth of the economy and emissions and the risk of macroeconomic disasters (tail risks) also depress the social discount rate and boost the SCC provided intergenerational inequality aversion is high. Various reasons (e.g., autocorrelation in the economic growth rate or the idea that a decreasing certainty-equivalent discount rate results from a discount rate with a distribution that is constant over time) are discussed for why the social discount rate is likely to decline over time. A declining social discount rate also emerges if account is taken from the relative price effects resulting from different growth rates for ecosystem services and of labor in efficiency units. The market-based asset pricing approach to carbon pricing is contrasted with a more ethical approach to policy making. Some suggestions for further research are offered.
The rise in obesity and other food-related chronic diseases has prompted public-health officials of local communities, national governments, and international institutions to pay attention to the regulation of food supply and consumer behavior. A wide range of policy interventions has been proposed and tested since the early 21st century in various countries. The most prominent are food taxation, health education, nutritional labeling, behavioral interventions at point-of-decision, advertising, and regulations of food quality and trade. While the standard neoclassical approach to consumer rationality provides limited arguments in favor of public regulations, the recent development of behavioral economics research extends the scope of regulation to many marketing practices of the food industry. In addition, behavioral economics provides arguments in favor of taxation, easy-to-use front-of-pack labels, and the use of nudges for altering consumer choices. A selective but careful review of the empirical literature on taxation, labeling, and nudges suggests that a policy mixing these tools may produce some health benefits. More specifically, soft-drink taxation, front-of-pack labeling policies, regulations of marketing practices, and eating nudges based on affect or behavior manipulations are often effective methods for reducing unhealthy eating. The economic research faces important challenges. First, the lack of a proper control group and exogenous sources of variations in policy variables make evaluation very difficult. Identification is challenging as well, with data covering short time periods over which markets are observed around slowly moving equilibria. In addition, truly exogenous supply or demand shocks are rare events. Second, structural models of consumer choices cannot provide accurate assessment of the welfare benefits of public policies because they consider perfectly rational agents and often ignore the dynamic aspects of food decisions, especially consumer concerns over health. Being able to obtain better welfare evaluation of policies is a priority. Third, there is a lack of research on the food industry response to public policies. Some studies implement empirical industrial organization models to infer the industry strategic reactions from market data. A fruitful avenue is to extend this approach to analyze other key dimensions of industrial strategies, especially decisions regarding the nutritional quality of food. Finally, the implementation of nutritional policies yields systemic consequences that may be underestimated. They give rise to conflicts between public health and trade objectives and alter the business models of the food sector. This may greatly limit the external validity of ex-ante empirical approaches. Future works may benefit from household-, firm-, and product-level data collected in rapidly developing economies where food markets are characterized by rapid transitions, the supply is often more volatile, and exogenous shocks occur more frequently.
Gerard J. van den Berg and Maarten Lindeboom
Modern-day famines are caused by unusual impediments or interventions in society, effectively imposing severe market restrictions and preventing the free movement of people and goods. Long-run health effects of exposure to famine are commonly studied to obtain insights into the long-run effects of malnutrition at early ages. This line of research has faced major methodological and data challenges. Recent research in various disciplines, such as economics, epidemiology, and demography, has made great progress in dealing with these issues. Malnutrition around birth affects a range of later-life individual outcomes, including health, educational, and economic outcomes.
To guide climate change policymaking, we need to understand how technologies and behaviors should be transformed to avoid dangerous levels of global warming and what the implications of failing to bring forward such transformation might be. Integrated assessment models (IAMs) are computational tools developed by engineers, earth and natural scientists, and economists to provide projections of interconnected human and natural systems under various conditions. These models help researchers to understand possible implications of climate inaction. They evaluate the effects of national and international policies on global emissions and devise optimal emissions trajectories in line with long-term temperature targets and their implications for infrastructure, investment, and behavior. This research highlights the deep interconnection between climate policies and other sustainable development objectives. Evolving and focusing on one or more of these key policy questions, the large family of IAMs includes a wide array of tools that incorporate multiple dimensions and advances from a range of scientific fields.
Integrated assessment models (IAMs) of the climate and economy aim to analyze the impact and efficacy of policies that aim to control climate change, such as carbon taxes and subsidies. A major characteristic of IAMs is that their geophysical sector determines the mean surface temperature increase over the preindustrial level, which in turn determines the damage function. Most of the existing IAMs assume that all of the future information is known. However, there are significant uncertainties in the climate and economic system, including parameter uncertainty, model uncertainty, climate tipping risks, and economic risks. For example, climate sensitivity, a well-known parameter that measures how much the equilibrium temperature will change if the atmospheric carbon concentration doubles, can range from below 1 to more than 10 in the literature. Climate damages are also uncertain. Some researchers assume that climate damages are proportional to instantaneous output, while others assume that climate damages have a more persistent impact on economic growth. The spatial distribution of climate damages is also uncertain. Climate tipping risks represent (nearly) irreversible climate events that may lead to significant changes in the climate system, such as the Greenland ice sheet collapse, while the conditions, probability of tipping, duration, and associated damage are also uncertain. Technological progress in carbon capture and storage, adaptation, renewable energy, and energy efficiency are uncertain as well. Future international cooperation and implementation of international agreements in controlling climate change may vary over time, possibly due to economic risks, natural disasters, or social conflict. In the face of these uncertainties, policy makers have to provide a decision that considers important factors such as risk aversion, inequality aversion, and sustainability of the economy and ecosystem. Solving this problem may require richer and more realistic models than standard IAMs and advanced computational methods. The recent literature has shown that these uncertainties can be incorporated into IAMs and may change optimal climate policies significantly.