Decarbonization of economy and economic policy

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Decarbonization of economy and economic policy

(Yelisieieva L., Institute for economics and forecasting National Academy of Sciences of Ukraine)

Introduction

Global climate changes have been worsening. They're causing an ecological disaster and the appearance of various socio-economic problems. A comprehensive solution to these issues is inextricably linked to decarbonization. In addition, in the context of the Russian-Ukrainian war and Ukraine's preparation for joining the EU, financing the low-carbon development of the national economy is one of the priorities of modern economic development, which confirms the relevance of such research. economic policy comprehensive solution

Results

Decarbonization is an important tool for ensuring sustainable development. According to the UN report, sustainable development is socio-economic development that meets the current needs of society and doesn't threaten future generations with the loss of the opportunity to realize their needs [1].

In the context of climate change the demand for decarbonization has been updated since 2015, when the Paris Climate Agreement was signed. According to the Intergovernmental Panel on Climate Change (IPCC) report, decarbonization is a set of measures aimed at adapting to climate change and mitigating its negative consequences, which primarily involves reducing greenhouse gas emissions [2]. Decarbonization contributes to the fulfillment of the 7th and 13 th points of the Sustainable Development Goals of the UNDP, but in practice it has a much wider positive effect. According to the Paris Agreement the goal of decarbonization is to slow the increase in the global average annual air temperature to 2°C while simultaneously limiting the increase to 1.5°C relative to the preindustrial level. According to the Paris Agreement decarbonization involves a set of measures in the financial, scientific and technical spheres, as well as "capacity building" [3].

In a narrow sense decarbonization of the economy is the process of states to low-carbon economic development. The goal of economic agents is to reduce the carbon intensity of the economy, that is, the marginal emissions of greenhouse gases into the atmosphere during production. In general the largest volumes of greenhouse gas emissions fall on six sectors of the economy: energy, industry, land transport, buildings, public and commercial construction, air transport - therefore, they require urgent decarbonization.

On the way to low-carbon development, decarbonization causes socio-economic and financial effects. According to microeconomic theory greenhouse gas emissions are an example of a negative externality. External effects (externalities) are public goods that are not regulated by the market mechanism and are the result of the activities of other business entities. In practice, negative externalities arise due to the appearance of improper sanitary and hygienic conditions, an increase in the morbidity of the population, the occurrence of an ecological disaster, etc. However, this has not only a social, but also an economic character.

The transition to low-carbon development is accompanied by the emergence of various financial effects, which generally include: an increase in the tax burden on households due to taxation of greenhouse gas emissions, replenishment of state and local budgets due to taxation of emissions, a change in the structure of state and local expenditures to ensure low-carbon development, an increase in public debt through borrowing funds to finance decarbonization, changing the investment structure, improving the state investment climate, increasing the investment attractiveness of enterprises, etc.

Accordingly the task of achieving the socially optimal volume of production of negative externalities arises. The optimal volume of a negative external effect is the one at which the social benefit from the production of a certain good is equal to its social costs. Optimization or internalization of externalities consists in forcing economic agents to take into account the aggregate costs of the entire society. Various methods are used for this purpose: administrative and private.

Decarbonization of the economy requires significant capital investments, therefore, there is a challenge to ensure the financing of low-carbon transitions with effective levers and sources.

The government, local authorities and territorial communities retain the right to independently establish decarbonization levers. In our opinion, the effective use of these tools should meet two conditions: the internalization of a negative externality and the stimulation of the optimal amount of production of positive externalities. Decarbonization will become a socially acceptable phenomenon only when all economic agents benefit from it. There are following sources of funding such as: state and local budgets, international loans, grants, private investments and household funds.

It is necessary for research to analyze the theoretical principles of the functioning of the tax on greenhouse gas emissions and the system of trading emission quotas. The introduction of these instruments is carried out taking into account the social cost of carbon. The social cost of carbon is the monetary equivalent of economic damage from the emission of an additional ton of greenhouse gas into the atmosphere [4]. The greenhouse gas emissions tax inherited the mechanism of action from the Pigou's environmental tax. The introduction of this lever is aimed at equating marginal social costs (the sum of marginal production costs and marginal losses of society from an external effect) with marginal social benefit, because then efficiency is achieved for society. Moreover, the tax rate should compensate for the social cost of carbon and create such a tax burden on

producers that will force them to reduce greenhouse gas emissions. There are two 2 methods for these: "cap-and-trade" and "baseline-and-credit". With the help of the first mechanism the government limits greenhouse gas emissions and issues the appropriate quotas for producers. Issuers are required to have a permit for each released ton of greenhouse gas. If entrepreneurs manage to reduce emissions, they can sell unnecessary permits to producers who do not have enough allowances to cover their emissions needs. When using the second form, a base level of greenhouse gas emissions is established for companies. If the company pollutes the air above the norm, it is obliged to hand over quotas to the government institution. Companies that have reduced their emissions below the baseline receive permits that are available for sale.

Decarbonization of the economy is accompanied by a number of prerequisites and factors that affect the willingness of subjects to invest in it. We conducted a PESTLE analysis of these factors, on the basis of which we identified the drivers and blockers of decarbonization at the global and national levels. The main drivers of decarbonization in the world economy are requests from the public sector, government environmental regulation, investor demands and the cheapening of low-carbon technologies. The public is increasingly concerned about the worsening of climate change. Thus, a record number of climate protests took place in 2019: thematic demonstrations were held in 185 countries [5]. More and more companies realize that decarbonization is carried out for the sake of preserving the ecological balance, winning the trust of customers and conducting long-term activities. According to Deloitte estimates, about three- quarters of the surveyed enterprises in the USA indicated that their customers expect them to use alternative energy, while 77% of firms report the origin of the consumed electricity [5]. Under pressure from the public sector, authorities are forced to take

preventive measures. More than 40 states have already implemented environmental taxation and/or ETS. As a result, investors also began to pay attention to the carbon footprint of companies in order to avoid financial risks. For example, in 2015 the ClimateAction 100+ initiative emerged, which informs investors about the contribution of companies to climate protection. The project has been involving 615 investors who control assets with a total value of 60 trillion dollars. USA and 167 enterprises have been generating more than 80% of greenhouse gas emissions in the world [6]. "Divestment" campaigns are spreading in the global economy. They carry out social, political and economic opposition to investment in fossil fuels. The value of assets and the number of companies involved in such liabilities are growing rapidly. The gradual decrease in the cost of energy-efficient and low-carbon technologies catalyzes the decarbonization of the world economy. According to a Bloomberg report, the average market price of a battery fell by 86% during 2010-2019. According to forecasts, the cost of the device will decrease by another 36% by 2023 [7]. Modern developments, namely: technologies for capturing and storing carbon dioxide, hydrogen energy, etc. will reduce the carbon intensity of the world economy and the cost of alternative electricity.

Blockers of decarbonization at the global level include financial support for fossil fuels, monopolization of the energy market, low level of social responsibility and opaque legislation. State subsidization of fossil fuels leads to an increase in its competitiveness on the market. However, countries are gradually abandoning financial incentives for carbon intensive production. In 2020 the COVID-19 pandemic caused a reduction in demand for fossil fuels and a decrease in their market price. As a result the cost of subsidies decreased by 40% compared to 2019 and was the lowest in the entire history of observations [8]. At the same time the weakening of government control over fossil fuel prices in

some countries narrowed the gap between regulated and market prices. However, in our opinion, the regeneration of the global economy will once again lead to a resumption of financial incentives for fossil fuels. Decarbonization is negatively affected by the monopolization of the energy market. First, monopolists regulate energy prices, focusing mainly on their costs, so they are not interested in reducing costs by modernizing production. Secondly, energy monopolies attract politicians who use them to act in the interests of personal enrichment. This usually manifests itself in the form of corruption, bureaucracy and inflated electricity tariffs [9]. Recently some countries have been liberalizing their national electricity markets. The change in the market situation causes companies to become more innovative, and thanks to the effect of scale, they reduce greenhouse gas emissions, supply electricity to more consumers and invest in production assets. According to the US Energy Information Administration, during 2008-2018 greenhouse gas emissions decreased by an average of 12.1% in states with free competition, and by 7.3% in states with monopolies [10]. We believe that the source of all decarbonization blockers is a low level of social responsibility. The modern culture of consumerism does not encourage subjects to change their behavior in accordance with the principles of sustainable development. Although government regulation limits greenhouse gas emissions, companies intentionally conceal and/or falsify data when assessing and determining compensation amounts. In this way, the company generates information asymmetry in the market. In foreign practice it was called "greenwashing". Greenwashing is creating a false impression or providing false information about the environmental friendliness of products in order to attract customers [11]. For example, in 2014, after a public scandal, the Volkswagen company admitted to installing special devices in 11 million cars to reduce greenhouse gas emissions, and allocated 20 billion dollars US compensation. According to Two Sides, "greenwashing" will cost Ј22.4 million annually to the paper, printing and postal industries in Great Britain, and Ђ337 million in Europe [12].

However the greatest harm is caused by the low level of social responsibility of state and local authorities. Nobel laureate V. Nordhaus considers this as a form of the "problem of the freerider". He thinks that governments that neglect their climate responsibilities are taking advantage of countries that take full responsibility for reducing emissions. According to the scientist, the "problem of the freerider" is caused by the declarative nature of international climate agreements and the ineffectiveness of government regulation.

Blockers of decarbonization prevailed in the national economy. The monopolization of the energy market, the subsidization of thermal energy by domestic and foreign private investors, and the introduction of the "Rotterdam+" coal pricing scheme have put national renewable energy in a disadvantageous position. This situation in the market is caused by the rent- oriented behavior of political figures. In addition, the decarbonization of the national economy was hampered by ineffective government regulation.

The public sector plays a leading role in financing decarbonisation. Recently the cost of public climate finance has been increasing. This trend is expected to continue in the future, especially in countries with a high share of the public sector in the economy. The most common levers of state financing are the emission tax. In 2020 the tax rate and the value of quotas did not meet the recommendations of the World Bank.

Also one of the instruments of state financing of decarbonization is green bonds, the market of which is developing rapidly. It is predicted that the annual issue of these securities in 2023 will reach 1 trillion dollars. USA. The share of private green bonds is also growing, with more and more companies starting to issue them, including Apple, Microsoft, and Google.

In the pre-war period, the value of private climate finance also increased. However, private investors were hindered by investment risks, small scale projects and insufficient incentives from the government. Blended financing and voluntary carbon markets contribute to solving these problems.

About 250 of the world's largest companies have introduced compensation for the social cost of carbon into their pricing policies or plan to do so in the near future. There are 3 types of this tool, but usually entrepreneurs use mixed models. For example, this is how Microsoft finances energy efficiency programs, while Shell, BHP and BP invest in low-carbon assets and eliminate carbon-intensive projects. However, the carbon price does not always comply with World Bank recommendations, and companies rarely report on the methodology and intended use of funds.

In recent decades the EU has successfully implemented the levers of financing decarbonization. The European Green Deal envisages achieving climate neutrality by 2050 thanks to expanding sectoral access to financing levers, countering carbon leakage and strengthening carbon protectionism. It is planned to issue pan-European green bonds worth 5 billion dollars USA in the next 5 years. Worthy of attention is the experience of China, which, despite being the leader in terms of emissions, is going to provide 80% of the demand for electricity with renewable energy by the middle of the 21st century.

Conclusions

To prevent growth air temperature by 1.5-2 °C, need to reduce carbon intensity production Greenhouse gas emissions form a negative externality in production, administrative the regulation of which generates financial effects. Decarbonization financing instruments differ in their influence on the motivation of subjects, and coercive levers are the most effective from the point of view of society. A number of negative and positive factors affect the decarbonization of national and global economies. The state plays the role of the helmsman of decarbonization, which must involve the rest of the subjects in its implementation. Decarbonization of the national economy should be financed taking into account the current state of the economy and focusing on democratic values and principles of sustainable development.

References:

1. Annexes II. Glossary / IPCC. URL: https://www.ipcc.ch/ site/assets/uploads/2018/02/AR5_SYR_FINAL_Annexes.pdf

2. Climate Change 2007 - Mitigation of Climate Change / IPCC. Cambridge University Press, 2007. P. 1-24.

3. Dejuan O., Lenzen M., Cadarso M.. Environmental and Economic Impacts of Decarbonization. Input-Output Studies on the Consequences of the 2015 Paris Agreements. London, Routledge, 2019. 402 p.

4. Social cost of carbon. Resources for the future. URL: https://media.rff.org/documents/SCC_Explainer.pdf

5. The 2030 decarbonization challenge. The path to the future of energy / Deloitte. URL: https://www2.deloitte.com/global/ en/pages/energy-and-resources/articles/the-2030-decarbonization- challenge.html

6. Global investors driving business transition / Climate Action 100+. URL: https://www.climateaction100.org/

7. Battery prices fall nearly 50% in 3 years, spurring more electrification: BNEF. URL: https://www.utilitydive.com/news/ battery-prices-fall-nearly-50-in-3-years-spurring-more- electrification-b/568363/

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9. Competitive Energy Markets, Not Monopoly, Delivers Affordable, Reliable, And Low-Emission Energy. URL: https://www.forbes.com/sites/waynewinegarden/2021/06/07/comp etitive-energy-markets-not-monopoly-delivers-affordable-reliable- and-low-emission-energy/? sh=7a 1bab2dcd9a

10. Expand competitive power markets, not regulations and subsidies, to address global climate change. URL: https://www.utilitydive.com/news/expand-competitive-power- markets-not-regulations-and-subsidies-to-address/609523/

11. Greenwashing. Investopedia. URL:

https://www.investopedia.com/terms/g/greenwashing.asp

12. The Volkswagen Emissions Scandal Could Shorten Thousands of Lives, Study Says. URL: https://time.com/4689276/volkswagen-emissions-scandal-lives/

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