Climate Policies Not Based on Market Principles Will Fail

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Financial flows and trading markets were high on the agenda at COP27, the United Nations‘ latest climate conference. Unfortunately, economic rationality was not, as the attendees embraced heavy-handed government interference with the world economy. The net result was a major setback to vital U.S. interests that will leave poor countries even worse off.

That is a shame, because the UN climate change convention’s initial forays into climate finance had plenty of promise. The Kyoto Protocol of 1997 established a “clean development mechanism” by which rich countries could offset increased carbon emissions by financing emissions reductions in poor countries. But at COP27 that approach was effectively shelved in favor of an impossibly complex framework for emissions credits trading that will leave government officials in an optimal position to move the goalposts, as with other failed emissions trading schemes.

Similarly, in 1991 the UN launched the Global Environment Facility, followed in 2001 by the Adaptation Fund. Like the World Bank, these initiatives provide modest financing for badly needed infrastructure projects in poor countries, often with little interference from local governments. In 2010, however, those efforts were eclipsed by the Green Climate Fund which, like the International Monetary Fund, provides money directly to governments on a vastly greater scale, aiming at $100 billion per year. Now COP27 has put that figure to shame, agreeing to a new “loss and damage” mechanism whereby rich countries would compensate poor ones for losses supposedly resulting from manmade climate change, past and future, to the tune of perhaps $1.3 trillion.

Along with the realignment of World Bank and IMF programs toward the UN’s climate goals, the main result has been a major shift in rich countries’ development assistance programs—away from their strategic interests and the practical needs of poor countries, and towards state-heavy policies more reminiscent of postcolonial states during the Cold War. That is no accident. It is precisely those states, many of them socialist dictatorships with appalling human rights records, that now dominate the United Nations, and, inevitably, COP27. Their influence reached a whole new level with COP27’s “loss and damage” mechanism.

Rich countries have long resisted the idea of such a mechanism, but this year, led by the European Union, resistance collapsed. What was agreed upon at the summit fell far short of the most outlandish proposals, which included a global 10 percent tax on oil firms to channel trillions directly to developing-world governments, and will focus on just the most vulnerable countries. But rich countries gave up on requiring emissions reductions from the target countries.

Instead of funneling modest funding to valuable infrastructure projects, rich countries will now be sending vastly larger sums directly to other countries’ corrupt elites. This is welfare on a global scale, and like domestic welfare, it will only drive the world’s poor further away from opportunities to develop resilient and flourishing societies.

Ironically, COP27’s decision is also likely to leave the world more vulnerable to climate change. Consider the problems of the National Flood Insurance Program in the U.S. Meant to protect those most vulnerable to flood loss, the program has massively subsidized development in flood-prone areas, which is the main reason the dollar amount of hurricane damage keeps increasing.

Left to its own devices, an actuarial insurance market would charge an appropriate premium for flood risk, and the premium would increase as the risk increases. That would create the right economic incentives, reducing the availability of financing for coastal development and eventually the stock of available housing in flood-prone areas.

Read the full article at News Week.