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Among the most significant economic issues facing the world today is the effect of human actions on the environment. There is scientific consensus that without a significant reduction in the production of greenhouse gases, which engulf the atmosphere and lead to global warming, irreversible damage to the climate, ecosystems, and coastlines will result. However, the course of action needed to address climate change deals with equity issues that are difficult to achieve consensus on.

Many individuals and corporations understand that natural resources are scarce and many do their parts by conserving water and energy resources, and recycling. Those who are more dedicated might choose public transportation over cars, install solar panels and other energy-saving technologies in homes and businesses, and plant trees or donate to one of many organizations that will do so on one’s behalf. The choice to engage in actions to minimize climate change by individuals, businesses, and governments is one that involves a cost-benefit analysis. A cost-benefit analysis provides a formal, rational model for policy decisions, by focusing on the choices that are available, the preferences of individuals, and the present value of benefits and costs that will be incurred by today’s and future generations.

The challenge with using cost-benefit analysis for environmental policies is that many of the benefits and costs are difficult to quantify. For example, what is the cost of living in a polluted city? What is the benefit of preventing a species from going extinct? The answers require a more thorough understanding of the causes and effects of climate change. Moreover, climate change has an intergenerational effect, as actions today will affect future generations. This has led many corporations and countries to adopt sustainable development goals, which refers to the ability to meet the needs of the present without compromising the ability of future generations to meet their own needs. Through greater knowledge of the issues at stake, individuals are more likely to make informed decisions about their impact on the environment.

Climate change refers to the gradual change in the Earth’s climate due to an increase in average temperatures resulting from both natural and human actions. It is largely irreversible, particularly in its effect on rising sea levels and on ecosystems. According to the Intergovernmental Panel on Climate Change (IPCC), the average temperature “from 1983 to 2012 was likely the warmest 30-year period of the last 1400 years in the Northern Hemisphere.”5 And the trend has not ebbed, as average temperatures in the year 2015 reached the highest ever recorded in modern times. Understanding the causes and effects of climate change is necessary to adopt appropriate actions to address the problem.

5 IPCC, 2014: Climate Change 2014: Synthesis Report. Contribution of Working Groups I, II and III to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change [Core Writing Team, R.K. Pachauri and L.A. Meyer (eds.)]. IPCC, Geneva, Switzerland, 151 pp.

The Causes of Climate Change The primary causes of climate change are related to actions that emit greenhouse gases. Greenhouse gases created largely by human activities include carbon dioxide (CO₂) from fossil fuel and industrial processes, carbon dioxide (CO₂) from forestry and other land use (FOLU), methane (CH₄), nitrous oxide (N₂O), and fluorinated gases (F). Figure 9 shows both the global nominal rise in each of these greenhouse gases from 1970 to 2010, along with the percentage of overall greenhouse gases that each source represents.

The largest portion of greenhouse gases is carbon dioxide, which is created by fossil fuel usage, industrial production, and deforestation. Fossil fuel usage includes the use of automobiles and airplanes, electricity and home heating fuels, and the production of products such as plastics and tires, and even everyday items such as ink pens, cosmetics, and toothpaste. Deforestation contributes to greenhouse gases because trees absorb carbon dioxide, and when they are cut down, the stored carbon dioxide is released into the atmosphere.

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Other forms of greenhouse gases include methane, nitrous oxide, and fluorinated gases. Methane is generated largely from livestock farming, landfills, and the production and use of fossil fuels. Nitrous oxide is produced on farms from the use of synthetic fertilizers along with fossil fuel usage. Finally, fluorinated gases are created in products such as modern refrigerators, air conditioners, and aerosol cans. Because fluorinated gases do not harm the ozone layer and are energy efficient, products that emit these gases have grown in popularity over the past decade, though they still contribute significantly to global warming.

The Consequences of Climate Change Today and in the Future A sense of urgency surrounds climate change because the state of climate change science has advanced to the point where scientists are able to put probability estimates on certain impacts of warming, some of which are catastrophic. The major impacts of climate change are in the areas of food security, water resources, ecosystems, extreme weather events, and rising sea levels. The IPCC summarizes the consequences of climate change by listing five key “reasons for concern,” as follows:

The difficulty with addressing these effects is that unlike air or water pollution that can be seen today, climate change has a cumulative effect. In other words, this year’s CO₂ adds to that from the past to raise concentrations in the future. Once CO₂ levels reach a certain level, it may lead to extreme consequences that cannot be reversed. The global environment is essentially a common resource with many public goods aspects, and climate change is a huge global negative externality that extends long into the future.

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Cleaning up pollution problems typically involves finding a level of abatement at which the marginal costs of abatement equal the marginal benefits. This can be achieved by taxing, assigning marketable permits, or using command and control policies to limit emissions. However, reducing global warming is not a short-term objective, but a cumulative process across many years. Yet, our short-run decisions will have immense impacts in the long run. Small changes in emissions today may have little effect on the current generation, but will have sizable effects many decades out. This aspect of the problem seriously complicates policymaking and economic analysis.

To further compound the problem, global climate change is a public good. Nobody can have less of it when someone has more (nonrivalry), and nobody can be excluded from its negative effects (nonexcludability). Technical innovations that help reduce CO₂ emissions are costly to develop and are difficult to profit from due to the free rider problem, which means that efforts to combat climate change need to involve governments or organizations wishing to fix the problem for the greater good.

Even so, issues of equity arise when combating global warming. Why would one country invest in expensive clean energy processes when its neighbor continues to spew out emissions unhindered? Currently, nearly half of the world’s greenhouse gases are produced by China and the United States, which are the world’s two largest countries economically. Does that mean the United States and China should spend at least a proportionate amount reducing emissions? How well will that appeal to the citizens in each country? Such issues of equity will continue to be raised as increased global cooperation to combat climate change takes on increased urgency in the near future. For some corporations and countries, waiting is not an option, and efforts to promote sustainable development have increasingly become part of corporate sustainability missions and political platforms, respectively.

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As the world’s population continues to grow and countries become wealthier, there is an enhanced effort to improve sustainable development to prevent future generations from suffering the consequences of actions taken today. Sustainable development involves a concerted effort by individuals, businesses, and governments to recognize the causes and impacts of climate change, and to take appropriate actions. Much of the technology needed to reduce greenhouse gas emissions is already available today, and corporations and individuals play as much of a role as governments to keep global warming from worsening.

Nearly every company’s primary responsibility to shareholders is to maximize profits. However, promoting the image of the company as socially responsible has also become common. Take a glance at most major corporations’ Web sites and one will see a link to the company’s page on corporate social responsibility, highlighting its efforts to improve sustainable development and to provide educational opportunities and other economic programs for local communities.

But much like equity issues faced by countries, corporations face equity issues, too. Those in competitive industries must balance what they spend on their social responsibilities with their ability to generate sufficient monetary returns. Some companies have used social responsibility as a marketing strategy to promote market share. For example, both PepsiCo and Coca-Cola have extensive corporate social responsibility teams that spend tens of millions of dollars each year to improve the efficiency of their operations and to operate programs helping the environment and local communities. Today, it has become a necessity for corporations to promote sustainability, though large differences in commitment still exist.

One of the most common methods of reducing greenhouse gases by individuals is through recycling, with some communities even requiring households and businesses to recycle or face fines. Yet, the process of recycling itself uses energy, in addition to labor and other resources. A more effective means of promoting sustainability is to conserve resources. Examples of ways to improve conservation include the following actions:

Clearly, undertaking efforts to reduce our carbon footprint as a nation represents an insurance policy on the future. As new climate change information and technology becomes available, policies can be adjusted to reduce the potential costs in the future.

To that end, carbon dioxide emissions are frequently placed on political agendas. However, a slow economic recovery makes it harder to focus people’s attention on this issue. Moreover, environmental policies such as cap-and-trade remain largely unfamiliar to everyday citizens, allowing politicians to portray policies in a manner that helps to promote their own goals rather than the goals of society. Political issues combined with economic issues will continue to make climate change a thorny problem for the future.

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Globally, there has been increased effort in recent years to combat climate change, especially in the United States and China, the two biggest emitters of greenhouse gases. In 2015 the United States implemented the Clean Power Plan, setting new standards for reducing carbon emissions in power plants. Then in late 2015 the United Nations Climate Change Conference held in Paris led to the most comprehensive global accord passed to date. Signed by nearly 200 countries including the United States and China, the accord requires every country to enact a plan to reduce emissions, without mandating a specific level of reductions, which could conceivably cause political opposition within some countries. However, the agreement requires signing nations to reconvene every five years to report their progress, essentially creating global peer pressure to achieve its goals.

As with climate change, each of the examples described in this chapter dealt with market failure in which externalities, public goods, or shared resources lead the market away from a socially desirable output. Resolving a market failure generally requires some policy tool, such as the assignment of property rights, regulation, or the creation of market incentives to achieve the ideal outcome. However, determining which policy tool to use often leads to intense debate, making issues of market failure a challenge that societies and their policymakers will continue to face.