Climate change is the long-term shifts in the weather patterns and temperatures that can be either natural or human imposed. Over the last century, humans have accelerated the climate changes by burning fossils fuels, including gas, oil and coal, to produce the greenhouse gas emissions that trap the sun’s heat on earth, thus accounting for a significant rise in temperatures around the globe. The greenhouse emissions causing the climatic change include methane and carbon dioxide. These emissions have been produced in different ways, including the burning of gasoline to drive cars, deforestation, and the use of coal in industries, leading to increased carbon dioxide and garbage emissions. On the other hand, it accelerates the emission of methane gas. In the contemporary world, among the most significant emitters of toxic greenhouse gases are in different sectors, including energy, transport, industry, buildings, agriculture and land use. Increased temperature is one among many consequences of climate change. Some of these consequences include drought, rising sea levels, severe fires, declining biodiversity, melting of the polar ice, storms and hurricanes.
Climate change is turning out to be the single greatest challenge on earth. To mitigate this challenge, the governments and society must transition into a low carbon economy. This article provides a d overview of how the macroeconomic and financial policies tools enable the transition to a low carbon economy, hence ensuring the climatic change mitigation. Microeconomic policies are policies concerned with the operations of an economy as a whole. The goals of the microeconomic policy are to provide a stable economic environment conducive for a steady and robust economic growth on which there is an incredible creation of wealth jobs and improve the living standards of people by providing ways to achieve that. The microeconomic policy has different features that help promote sustainable and stable economic growth. These pillars include fiscal policies, monetary policy and the exchange rate policy.
On the other hand, fiscal and financial policies operate in the level and composition of government spending. This alone makes it the only microeconomic policy that the government directly controls. Hence, the fiscal policy uses taxes and government spending to influence the economy. When policymakers want to impact the economy, they use two main tools monetary and fiscal policy. Central banks in different governments control the flow of money in the economy by changing the levels and the types of taxes; hence can directly or indirectly influence the utilization of resources in an economy.
Macroeconomic / Financial Policies
Putting a price on carbon pollution has become popular among countries and businesses worldwide. This will play a significant role in reducing carbon emissions, driving investments into cleaner options. The price of carbons shifts the entire burden for the damage brought by the use of the carbon to those that use the carbon and those that can reduce its usage. The introduction of carbon pricing gives the businesses and individuals responsible for its use different choices whether to discontinue their polluting activities, reduce emissions of the toxic gas, or continue its use and pay for its use. The use of carbon pricing has created a more advanced development of market innovation which use clean technology and significant market innovations, thus fueling low carbon drivers of economic growth.
Some of the macroeconomic, financial policy tools include carbon taxes. The carbon tax is a tax imposed and levied on the carbon emissions by the government to different industries to produce goods and services. Assessing the carbon taxes is designed to reduce the carbon emissions achieved through increasing the fossil fuels that emit carbon when burned. Previous studies show that the carbon tax mitigates the emissions of the carbon gases by reducing demands of the goods and services produced in industries where they emit carbon gas, among other greenhouses gas. Analysts and various professionals believe that imposing carbon taxes is the most efficient and low-cost way to achieve the climate goals and tackle climate change (Haites, 2018).
There are several ways that governments can use to implement carbon taxes and pricing. The choice of the instruments to use when imposing carbon depends on the economic and national circumstances. Indirect ways and methods to charge the carbon taxes include fuel taxes, removal of the fossil fuel subsidies and regulations, payments for emissions reductions. In the economic theory, carbon pollution negatively affects the third party and those not involved in a transaction, hence considered a negative externality. As a result, the economist Arthur Pigou proposed the taxation on the goods and services that are the source of the negative externalities to reflect on the costs and the effects on society ( Metcalf, 2020). This kind of tax on the negative externalities is called the Pigovian tax thus should be equal to cost.
Different countries have introduced policies to push for the imposition and introduction of the carbon tax on countries that have not started. Trade tariffs, border tax adjustments and trade bans on countries that have not introduced the carbon tax encourage them to do so. Among other related taxes include the energy taxes, where the greenhouse tax emissions require emitters to pay a charge for every tonne of greenhouse gas produced; this will reduce carbon emissions and other greenhouse emissions, including methane gas.
Over seventy countries and over 100 cities worldwide have put measures to achieve zero carbon emissions by the year 2050. Carbon taxes have been implemented in over 25 countries by 2019, while more than 45 countries and 20 cities have put various forms of price on carbon and emission trading schemes and have developed new mechanisms and more planning to be implemented in future (Metcalf 2020).
Green subsidies allocate public resources across the world, thus helping improve clean energy sustainability. Green subsidies are rising globally, aiming to develop clean energy industries and sectors, thus phasing out the fossil fuels era. This, in turn, will play a significant role in arresting climate change and promoting sustainable production and consumption. Green subsidies are the financial policies currently used for different purposes to enhance public goods and redistribute the resources and income to compensate for the market and government failures. Green subsidies are put in place to reduce the carbon footprints in different countries, hence designed to discourage companies from using carbon-based energy sources to renewable sources (Xie et al., 2019).
There are different types of green subsidies, including the use of the subsidy to reduce negative externalities like pollution, a subsidy that promotes an external benefit from a firm that includes forestations. Another type of subsidiary consists of a subsidy that can defray the cost of compliance with the environmental regulation. The grants help the organizations to move away from sources of energy like fossil fuels to renewable energies like solar, wind, hydro, tidal, geothermal energy and wave for power generation. The data obtained by the international energy agency subsidiaries are given to the non-renewable industries to those given to the renewable energy market by a significant margin of 6:1(Xie et al., 2019). The increase in deployment of renewable subsidies have reduced the reliance on fossil fuels hence have reduced the emissions of greenhouse gases and restricted the global temperature rise.
International renewable energy agency analysis in 2017 showed that the world would achieve almost 90% of the Paris agreement’s energy-related goals, thus ensuring more technological advancements and new business breakthroughs and models. According to the International Energy Agency (IEA) analysis, subsidies aiding in developing renewable energy technologies amounted to over 140 billion dollars in 2016 alone; however, fossil fuels received a more significant amount of 260 billion dollars of subsidies in the same year.
Both carbon pricing and subsidies have played a significant role in reducing carbon emissions. The European Union analysis has suggested that countries should focus more on the use of carbon pricing to the use of subsidies as a more cost-effective and efficient method. It is the preferred policy instrument that encourages the demand for renewable energy to mitigate climate change. In contrast, the use of subsidies alone successfully promotes further development of clean energy technologies, hence increasing the deployment of renewables.
Haites, E. (2018). Carbon taxes and greenhouse gas emissions trading systems: what have we learned?. Climate Policy, 18(8), 955-966.
Metcalf, G. E. (2020). Designing a carbon tax to reduce US greenhouse gas emissions. Review of Environmental Economics and Policy.
Xie, X., Zhu, Q., & Wang, R. (2019). Turning green subsidies into sustainability: How green process innovation improves firms’ green image. Business Strategy and the Environment, 28(7), 1416-1433.