Categories: Economic News

Solutions to climate change possible with the economy

Assistant Professor of Economics Darshana Udayanganie is one of the faculty members examining whether national attempts to combine trade and environmental policies can provide a key strategy for fighting climate change.
Edward and Virginia Van Dalson Professor of Economics Patrik Hultberg is one of the professors examining whether national attempts to combine trade and environmental policies can provide a key strategy for fighting climate change.

With much of the world debating how to reverse climate change during a sweltering summer, two Kalamazoo College professors are examining whether national attempts to combine trade and environmental policies can provide a key strategy.

The analysis by Patrik Hultberg, K’s Edward and Virginia Van Dalson Professor of Economics; and Darshana Udayanganie, K assistant professor of economics, will soon be published in the Journal of Environmental Economics and Policy. Among his findings, he will highlight that Europe and the United States are talking about adopting border adjustment taxes by 2026, aimed at influencing foreign countries’ carbon emissions.

Hultberg and Udayanganie suggest that such taxes could be options because the world’s environmental policy agreements, such as the Paris Agreement, the Kyoto Protocol and the Montreal Protocol, appear to have deficiencies.

“The best thing would be for countries to work together and reach these international agreements,” Hultberg said. “But countries have an incentive to violate these agreements. You might think that if other countries change their behavior, maybe I don’t have to change mine. Also, environmental policy authority doesn’t extend to foreign countries.”

As a result, Udayanganie said that an alternative to environmental policies would be to calculate the amount of carbon content that the production of a good creates to add a tax, imposed on the producing nation, that increases the overall price of the product, incentivizing actions that benefit the environment. This is the idea behind Europe and the United States exploring border adjustment taxes.

“When we just use stricter environmental policies, some of these companies might just go to another country,” he said. “This means that the pollution that is being created will not be reduced; it will just happen somewhere else. Such border adjustment taxes could encourage nations to adjust their environmental policies to avoid our environmental taxes.”

However, one consequence of this plan could be that richer nations take advantage of developing nations by placing most of the political hardship on developing nations.

“Europe and the United States are trying to tell a story that we’re trying to do this, not because it’s good for us, but because we want to save the global climate, while telling other countries, ‘You have to change your behavior to help- us to do it,” Hultberg said. “A developing country could look at this tax adjustment at the border and say, ‘You’re doing something to make us worse off while benefiting your own consumers and producers.’ It is true that by changing the international price, we are improving at the expense of producers who could be in developing countries.”

Therefore, a strategy that combines environmental and economic action could provide the best option for fighting climate change. That combination, Udayanganie said, could force companies to clean up the environment in one country or stop relocating and producing where they are. The thought leadership behind these ideas could go a long way toward stopping concepts such as carbon leakage, which is the relocation of emissions from regulatory countries to countries with weaker or no environmental regulation.

The model as a didactic tool

Hultberg and Udayanganie’s work may prove beneficial to students completing senior integrated projects at K and in university environmental economics and international trade courses, not to mention other institutions. “One of the comments we got from the reviewers mentioned that you could use models like these to teach students how to combine these policies and implement their own,” Udayanganie said. “That way we could convince environmental policy agencies, or the people who work in them, to educate themselves on how to use these policies.”

“The problem we have in most of the economics literature is that the models used are so abstract and so mathematically difficult that we can’t really use them at the undergraduate level, both in economics and in mathematics,” Hultberg added. “One of the goals we had with this paper was to use the model that we teach in intermediate microeconomics, for example, a core course for our majors. That’s why Darshana and I can use these ideas in our courses.”

The publication date of his article has not yet been determined. However, this wasn’t the first project where Hultberg and Udayanganie have combined their efforts, and don’t expect it to be the last.

“I am motivated to work with Patrik,” said Udayanganie. “We both like microeconomics and mathematical models, so it helped us to work together.”

“It’s more fun to work together,” added Hultberg. “The rest of the people I work with are all over the world, and we often work on things like education policy, and when COVID hit, it took me away from what I really want to work on, which is international trade. This was an opportunity real for me to do the economy that I like to do.”

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