Pay the Global South for climate damage, but only if it prices carbon, says economist Greenstone

Rich countries should pay people in developing countries for the climate damage their emissions cause, on condition that those countries put a price on carbon. That is the central proposal of a forthcoming book, Just Economics, by University of Chicago economist Michael Greenstone, with Nobel-Prize winning economists Abhijit Banerjee and Esther Duflo.

“We’re proposing Indians receive money unencumbered,” Mr. Greenstone, who is Director, Energy Policy Institute, University of Chicago, said in an interview. “Spend it on whatever you want. That is based on the amount of damage the OECD countries’ emissions are doing.” The payment, he said, “would go directly to the people, not to the government.”

The Organisation for Economic Co-operation and Development (OECD), is a grouping of mostly wealthy, industrialised countries that has contributed to most of the accumulated carbon in the atmosphere driving global warming. This contrasts with the “Global South”, meaning low- and middle-income countries but whose emissions are fast rising.

“82% of the emissions going forward are projected to be outside the OECD and moral appeals have failed,” he reckoned, “the better angels-argument ain’t working.” However the transfer would be “contingent on the Global South adopting carbon pricing. It’s not for free. It’s a deal. You have to give something to get something.”

Mr. Greenstone said it was possible to calculate the damage (per tonne of carbon whetting warming) to India. “However the exact parameters of that will have to be negotiated. Such a deal did not require the whole world and could be struck between, say, the European Union and India, he argued.

He pointed to “the more or less complete failure of climate finance to the Global South” and said “it’s time to think about a new approach.” Next month countries are expected to convene in Turkey for the annual climate meet.

Market-based solutions

Much of Mr. Greenstone’s work is around designing market-based solutions to address pollution. Most prominent is the Surat Emissions Trading Scheme for controlling particulate matter, first mooted with the Gujarat Pollution Control Board in 2010. In a randomised trial, 150 textile plants were assigned to a market and 150 stayed under conventional regulation. Compliance in the market was “99%”, against about a third of industries out of compliance at any time under the status quo. This happened because researchers could see what firms bid to buy and sell pollution permits: “The price I want for that has got to be at least what it cost me to do it. From those bids, we were able to infer how expensive it was to achieve different levels of total emissions. Cutting emissions proved cheap, because the guys had all the equipment and just had to start operating it or maintaining it,” he explained. Enforcement mattered. When firms fell short of permits, the regulator levied a fine of ten times the permit value. “Once the industry saw that the rules were going to be enforced then everything changed,” he said.

While the Surat system was designed to reduce particulate matter from textile mills, the next stop is Maharashtra, where the market will cover sulphur dioxide — a gaseous pollutant — and include large power plants. He said that a “mock trading period involving an actual market, without real money, was under way to get firms used to trading permits before the real market opened.

Similar conversations are on with Rajasthan, Uttar Pradesh, Madhya Pradesh, Bihar and Haryana. Gujarat’s Pollution Control Board has itself asked for help designing a water market and a Statewide sulphur dioxide market. If States get their own markets working, he said, “one could imagine linking those markets”.

The challenge that enforcement agencies faced is the inability to track a plant’s emissions second by second. Industries, for competitive advantage, frequently resorted to turning off pollution monitoring equipment. “ This is the Achilles heel of environmental regulation around the world.” Finding the upper limit to the pollutants that industries could be permitted to emit is the other big challenge. “It is a judgement about the right trade-off between economic costs and environmental quality.”