Dealing with climate change has become an international priority. Its adverse effects are likely to change world ecosystems and produce a set of relevant and differentiated impacts, which depend on the characteristics, vulnerability, and adaptation capabilities of countries. The difficult task of designing and implementing an effective global climate policy requires efforts that may compromise future growth, particularly in developing countries. A global climate policy may eventually lead to strong reductions of greenhouse gases, but it may also entail large costs. In particular, policy debates are usually focused on economic costs in terms of GDP, trade, or output losses. Other costs such as lower investments in education, health, or research and development are usually overlooked. This note goes beyond economic costs by focusing on the effects of climate policy on an aggregate measure of economic, social, and environmental sustainability. Our final aim is to address the question of whether the achievement of ambitious climate targets, such as the ones proposed at the G8 meeting in l’Aquila and discussed at COP XV in Copenhagen, will make the world more sustainable.

Evaluating sustainability in a general equilibrium framework

The discussion on climate policy costs usually focuses on GDP losses or other monetary measures  of the effort of reducing GHG emissions. Let us introduce a new element in this discussion by considering the implications of achieving an ambitious climate target on sustainability rather than on GDP. We do this by combining economic, social, and environmental indicators onto a unique measure of sustainability, the FEEM Sustainability Index – FEEM SI¹ . The main novelty of the FEEM SI is that it is built within a dynamic Computable General Equilibrium (CGE) model, which allows projecting sustainability indicators in the future. Thanks to this framework, the FEEM SI is able to summarize current and future sustainability performances for 40 countries up to the year 2020. It is also possible to obtain projections for the FEEM SI relative to the different policy choices that countries may undertake. These can then be compared in order to study the consequences of climate policies in terms of sustainability.

The effect of a stringent climate policy on sustainability is not straightforward. Although environmental sustainability is bound to increase, a climate policy will also request resources that will negatively impact economic sustainability. Furthermore, it is likely that investment will be taken away from socially relevant sectors such as education and health, thereby having a negative impact on social sustainability. The FEEM SI, as a unique measure of sustainability, contributes to understanding the trade-off between these different aspects, and to finding the final effect of climate policy on sustainability.

With the scope of assessing the effects of efforts to curb GHG emissions within a sustainability framework, we consider two scenarios:

Global Commitment: all countries in the world participate to a global emission trading scheme and agree to limit growth of global GHG emissions to 19% with respect to 1990. Individual targets for leading countries are set to respect the proposals included in the Copenhagen Accord. The rest of the world instead, reduces emissions by 30% with respect to the baseline scenario at 2020;

Global Sustainability: A revenue recycling process is added to the climate policy described in the Global Commitment scenario. The revenues obtained from the sales of emissions quota are reinvested partly domestically, and partly as a transfer from industrialised countries to the rest of the world. These resources are invested to increase research and development, education and health expenditures.

Improving sustainability while reducing GHG emissions

Figure 1. World sustainability (%change wrt baseline in 2020) click to enlarge

The expected effect of climate policy in the Global Commitment scenario is to induce a strong increase in environmental sustainability, but a decrease in economic and social sustainability. If we consider the aggregate effect of the policy on the world, this is exactly the outcome we obtain. However, the negative effects are mostly in the social sphere rather than in the economic one. The negative effects on social and economic sustainability also induce a small decrease in overall sustainability. Figure 1 illustrates these results, showing that the consistent increase in the environmental pillar does not offset the decrease in the social one, leading to an overall decrease in sustainability. The main reason is that the necessary efforts to curb GHG emissions (for instance through investments in energy efficiency, or in renewable energy) also reduce investments in other sectors, including education and healthcare.

Figure 2. Percentage changes in the FEEM SI with respect to baseline in 2020 click to enlarge

However, when social policies are implemented simultaneously to the climate ones, such as in the Global Sustainability scenario, results improve consistently. When a policy is undertaken in order to limit the impact on social sustainability, the negative effects are limited and overall sustainability is almost unchanged with respect to the baseline case.

The effects for the single countries are also crucial. Figure 2 illustrates the regional changes in the FEEM SI under the two scenarios considered. In the Global Sustainability scenario, the FEEM SI improves for almost all regions and to a greater extent than in the Global Commitment scenario. The effects are positive in most countries in both scenarios.

Improving sustainability while reducing GHG emissions

Figure 3. Percentage changes in the Social Pillar of the FEEM SI with respect to baseline in 2020 click to enlarge

As the main cocern is that social sustainability should not be reduced, particularly in developing countries, we analyse the effect of climate policy on the social component of our sustainability index. Results are illustrated in Figure 3. Comparing the results relative to the two scenarios, it is clear that the social sustainability is greatly improved in the Global Sustainability scenario. When additional financial resources generated from the revenue recycling are invested in education and health social sustainability improves, and only a few regions are left with a consistent decrease in social sustainability.

Looking for the right balance

Whereas environmental sustainability is greatly improved at regional and world level thanks to the GHG emission reductions achieved by implementing a global emissions trading scheme, economic and social sustainability may be negatively affected by climate policy. The implementation of climate policy may indeed take resources away from sectors that increase social and economic wealth, such as education, healthcare, and R&D. In the policy debate, the concern is usually with the negative effects of climate policy on economic growth and competitiveness. Here, we demonstrate that the social component of sustainability is likely to be most negatively affected.

This means that a global climate policy will more likely lead to an overall improvement in sustainability if it is implemented together with policies aimed at improving social and economic wealth. Furthermore, if revenues related to emission abatement are invested in sectors related to the achievement of the Millennium Development Goals, strong improvements in social sustainability can be obtained. To conclude, we find that GHG emission reductions are not sufficient to improve world sustainability, unless an adequate balance between economic, social, and environmental outcomes is maintained. Ideas and strategies for the achievement of these objectives are at hand, but the right incentive scheme still needs to be designed and implemented.

1. A detailed description of FEEM SI is available at www.feemsi.org [↩]