30 years: Macroeconomist
In this video, Amit Kara talks about the need for government intervention to tackle the climate change crisis. He explains about market failure, externalities and the case for governments to intervene through Pigouvian taxes such as carbon tax and new regulation.
In this video, Amit Kara talks about the need for government intervention to tackle the climate change crisis. He explains about market failure, externalities and the case for governments to intervene through Pigouvian taxes such as carbon tax and new regulation.
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11 mins 57 secs
Climate change is an example of market failure, and policy intervention is evident in order to achieve socially optimal levels. This can be achieved through a variety of methods such as a carbon tax, new standards and regulations, or the increased role of financial markets.
Key learning objectives:
Understand what is market failure
Understand what are the two important market failures related to greenhouse gas emissions
Understand how policy intervention can support transition to low carbon economy
Outline how can the financial market play a role in intervention
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A market failure is when the free market outcome is not socially optimal. The free market outcome is the outcome of actions taken by households and businesses in the absence of any policy intervention. In other words, an action undertaken in self-interest can have spillover effects onto others that are often negative. In circumstances such as this there is a strong case for policy to intervene to encourage a socially optimal outcome.
Central banks are spearheading efforts to encourage financial institutions to evaluate climate risk and appropriately price that risk in its business decisions. One important step in that direction is a climate stress test for banks. Both, Bank of England and the Banque de France will be conducting climate stress tests for banks.
Financial institutions will begin to price in the risks of climate change which, for example means that the borrowing cost for companies that generate power from fossil fuels could rise and at the same time the borrowing cost for the renewable energy producer could fall. In this way, the financial sector can help facilitate the transition to a low or zero carbon economy.
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