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Posted on July 30th, 2012, by

Today, the problem of the climate change affects significantly the development of the world economy. In actuality, consistent environmental changes caused by the climate change provoked the change of traditional economic activities in many regions of the world. These changes are particularly obvious in the agricultural sector of the world economy, where farmers have to change their traditional methods of farming to adapt to new, changing climatic conditions to maximize crops and, therefore, maintain their revenues high. In addition, the climate change has provoked severe natural disasters, which have never been so widely-spread before. As a result, the world economy and business need addition protection from natural disasters that implies not only the wider introduction of technological innovations but also the development of insurance business, which though tends to become risky when climate change issues are involved. At the same time, the climate change has proved to be the market failure at the international level because the unexpected climatic changes revealed the unpreparedness of business and national economies to such changes. In such a situation, the assistance of national governments may help to tackle the problem of the climate change because governments can introduce environmental policies decreasing their pollution of the environment and negative impact of human activities on the environment. But the government should not intervene into the economic processes because it will waste its funds, whereas the strategic goal of the government is to stop the climate change. Therefore, policies started in terms of the Kyoto protocol should be developed and new international agreement should be more effective in regard to the solution of the problem of the climate change. The world community should unite its efforts in the struggle against the climate change to prevent ongoing economic crises and downturn of the world economy for years and decades ahead.

Climate change as an example of market failure

The climate change is an example of the market failure because it has a profound impact on the development of international markets and this is impact is definitely negative. To put it more precisely, the development of the world economy grows to be more and more dependent on the climate change (Fusaro and James, 2006). International markets have proved to be unprepared to the consistent climate change that determined the negative impact of the climate change on the development of the world economy and slowdown of the economic growth in many countries of the world, especially those countries that are dependent on the agricultural sector of economy.

At this point, it is important to lay emphasis on the fact that stability is an essential condition of the economic growth and normal market development. Any changes that affect the stability in the market may lead to the market failure.

This was the case of the climate change. In fact, the major problems the world economy and market have faced was the problem of irrevocable changes and the inability of specialists to forecast effects of the climate change on the development of business (Andreae, 1996). The climate change forces business to adapt to the new environment, where new business methods and approaches have to be applied. For instance, the climate change affected probably the most significantly agriculture. As a result, farmers do need to introduce new methods and techniques of farming, but the development of new methods and techniques need time and investments to introduce the methods and techniques successfully. However, farmers, especially in under-developed countries of the world, are unprepared to the introduction of new methods and techniques of farming that put them on the edge of bankruptcy. Potentially, agriculture can decrease its profitability consistently. Moreover, in many countries, especially in the EU, the US and Canada, farmers are dependent on the state subsidies, which allow them to maintain the competitive position in the market (Barnett, et al., 2005). However, many specialists (Grubb and Neuhoff, 2006) warn that such policies of the state support of farming will become an unbearable burden for state budgets and national economies at large. In such a context, it is obvious that the climate change has become the market failure for many countries, which were unprepared for the consistent climate change.

In addition, the climate change affects not only agriculture but also other branches of national economies. As a rule, this impact is negative because markets and different industries are unprepared and need substantial investment to adapt to work in the changed environment. One of the major problems of the climate change is the unpredictability of the change because it is difficult to foresee how the climate change will influence business even in a short-term perspective (Maxwell and Reuveny, 2005). In such a context, it is difficult to develop long-term strategic plans which may be ruined in the result of a natural disaster that may strike any moment because of the climate change.

The instability of climate and business has already become the characteristics of the contemporary business environment because of the climate change. Obviously, market cannot progress if there is any instability in the business environment. Therefore, the climate change implies the instability of the market and, thus, the market failure.

Circumstances preventing governments from intervening into the climate change market failure

At first glance, the interference of governments in the economy is essential to prevent the market failure and to help national economies to overcome negative effects of the climate change. Obviously, business is unprepared to the climate change, but the interference of the government into economy to prevent the market failure is not always the best solution. Moreover, the government intervening in the climate change market failure may have negative effects on the further economic development as well as it may provoke the ongoing deterioration of the environmental situation that may aggravate the problem of the climate change. To put it more precisely, the government should not intervene into economic processes which are irrevocable and if the interference of the government cannot be effective to help the national economy to recover.

In this respect, it is possible to refer to the Keynesian theory, which stands on the ground that the government should focus on the macroeconomic development of the national economy. In such a context, if the government intervenes in the economic development caused by the climate change it should rather deal with specific industries than with macroeconomic development of the national economy. In other words, to prevent the climate change market failure, the government should slip from macroeconomic to microeconomic policies. The latter will increase the impact of the government and its control over the national economy (HansjĆ¼rgens, 2006). Potentially, the increased level of the government control of economy may undermine the major principles of the open market economy. The crisis of the open market economy will lead to the decrease of the competition between businesses because the government interference and control may put different businesses in an unequal position. In addition, the government interference increases the risk of corruption that will slow down the economic development and recovery after the market failure caused by the climate change even more. As a result, the government should not intervene into the economic development but it should focus on macroeconomic development solely.

In addition, the government interference to prevent the climate change market failure may deteriorate the environmental situation and accelerate the climate change. In this respect, it is possible to refer to the example of the state subsidies for farmers in the EU and other developed countries. The state supports farmers, which are uncompetitive in the international market. If the government intervening increases the government support of other industries, the business will not be encouraged to introduce innovations which decrease the negative impact of business on environment. Instead, using state funds businesses will carry on pollute the environment accelerating the climate change. Consequently, the government should intervene into economic processes to maintain fair competition and open market economy. Liberalization of economy will stimulate competition and only environmentally friendly businesses will survive because they are the most effective in the contemporary business environment.

The Kyoto protocol and difficulties to achieve its goals

The Kyoto protocol was one of the first international agreements that aimed at the prevention of the climate change and minimization of the negative impact of modern economic activities on the environment. However, in spite of good intentions, the Kyoto protocol has failed to succeed because the international community is not as united as it needs to be to tackle the problem of the climate change effectively. In fact, some countries, including the US and China, refused to sign the Kyoto protocol. As a result, the overall effect of the Kyoto protocol could not be as significant as it was supposed to be because some countries, which have a particularly negative impact on the environment and which have a large share of greenhouse gas emissions in the world, ignored norms and principles defined by the Kyoto protocol.

In this respect, it is even possible to speak about the failure of the Kyoto protocol. The major reason of the failure of the Kyoto protocol is economic interests of countries, which prevented them from the effective coordination of their economic and environmental policies at the international level in terms of the Kyoto protocol. To put it more precisely, the Kyoto protocol affected the economic development of many countries because it implied the maintenance and steady decrease of greenhouse gas emissions. However, in the contemporary business environment, the economic growth is hardly possible without the increase of greenhouse gas emissions. The minimization of greenhouse gas emissions implies significant investments in green technologies, which can slow down the economic development of countries. For instance, the US had to restructure and change the car manufacturing industry to make American cars more fuel-efficient to minimize CO2 emissions. This step could become an unbearable burden for American car manufacturers. The situation in China is even more difficult to implement norms and principles of the Kyoto protocol because China carries on industrialization, which naturally increases greenhouse gas emissions. As a result, if China signed the Kyoto protocol, it would need to slow down its economic development because substantial funds would be directed into the development of new, environmentally friendly technologies. In such a way, national economic interests of countries come into conflict with norms and principles of the Kyoto protocol that prevents the effective implementation of the Kyoto protocol.

Conclusion: recommendations on further environmental policies

Obviously, the current environment policy has proved to be inefficient because the climate change carries on, whereas national governments are focused on the protection of national economic interests. In such a situation, the international community should focus on the development of the new international agreement, successor of the Kyoto protocol (Millard-Ball, 2008). In order to make the new agreement more effective compared to the Kyoto protocol, it is necessary to motivate countries economically to introduce environmentally friendly technologies and to minimize their effect on the environment preventing the climate change.

In this respect, it is possible to recommend the creation of the international fund which can support the development of new “green”¯ technologies. For instance, the international fund can provide grants to introduce environmentally friendly technologies en masse. Alternatively, the international fund can provide loans to businesses which attempt to introduce environmentally friendly technologies. In the time of economic recession, such loans can be very helpful to businesses because they will allow to introduce new, more effective technologies and to decrease costs of production.

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