Name: the manufacturing of yarn- assuming company is

Name: Maisam Ali Shams

Climate Change Economics

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Mid Term Exam


1. Neoclassical
approach to modelling climate change asserts that environment can be treated as
a commodity and hence markets can take into account the costs of environment.
For instance, markets can ascertain the optimal level of “environmental
protection” through demand and supply. Here, demand is what people want to
consume whereas supply incorporates not only the costs associated with making a
commodity, for example a textile product, but it also incorporates the damage
attributed to the environment due to the production of textile. Hence, in this
way, market forces will determine the optimal level of environmental

For example, the government of Pakistan may levy tax on
the textile company for polluting the environment, which will be an added cost
in the manufacturing of yarn- assuming company is in spinning sector of textile
value chain. Now, if the textile company increases its production of yarn, it
has to pay more costs of polluting environment and hence market forces will
determine a price which encompasses the damaged caused to the environment.
Similarly, a manufacturer of yarn, which uses a technology that is greener and
environmental friendly, can be subsidized by the government thereby reducing
the costs of manufacturing. It is pertinent to mention that this neoclassical
approach to modelling climate change has led to the idea of “carbon pricing” as
a way to reduce carbon emissions (Heesterman, n.d) ((“1. Carbon Pricing
(Cap and Trade/Carbon Tax) is Just One Piece of the Puzzle: Two Economic
Worldviews”, n.d)

Laissez-faire approach presented by neoclassical
economists; however, provide a very superficial approach to modeling climate
change. Moreover, recent changing climates across the world, floods, hurricanes
and other natural calamities prove that conventional approach to reducing
carbon emissions is not working. Nicolas Stern, chair of Grantham institute of
research at London school of economics, asserts that traditional climate model
are misleading and there is a need for a deeper understanding of problems in
order to devise an effective approach to addressing the issue of Climate

Firstly, Nicolas points out that climate models used in
the past overlook the scale of climate calamities that will result from global
warming. Basically, these models cannot predict or incorporate the risks
associated to increase in sea levels due to rise in temperatures from 1.5 C to
2 C. For example, small Island states and coastal belt communities face
increased danger due to increase in sea levels however estimates of economic
losses do not account for them.

Secondly, Stern believes that sole focus on economic
growth due to increase or decrease in emissions is itself flawed. For example,
Intergovernmental Panel on Climate Change (IPCC), pointed out that global GDP
growth will get negatively get affected by 
0.2% – 2% due to increase in mean global temperatures by 2 C. This,
Stern believes does not address the full scope of danger faced by the world due
to global climate change. For example, loss of life, welfare, peace of mind,
healthier environment, and etc are all factors that should be considered while
measuring the losses due to climate change.

Lastly, Stern explains that due to incorporating higher
discount rates, traditional models prove that environmental costs of the future
are low in present terms and therefore policy makers do not understand the
gravity of global warming and climate change. For instance, if we estimate
future costs of climate change to be PKR 1,000 (F.V) and use discount rates (i)
of 10% and 20% respectively, P.V or present value of PKR 623 and PKR 402 is
achieved. In other words, using 20% discount rate led to a value of PKR 402
which is less than PKR 623 which is the PV of future climate change costs
(Stern, 2016).

2. Although current CO2 emissions are being made by
developing countries mostly, CO2 emissions made by the developed world in the
past are actually resulting in global climate change. For example, China is the
top CO2 emitter in the world with 10,151 MTCOs whereas US is second biggest
emitter with 5312 MTCO (“CO2 Emissions.”, n.d.).

As a result, there is a serious debate going on a global
climate change conferences every year regarding who should cut more of their
CO2 emissions; developed countries or developing countries. In this regard,
developing countries argue that global warming that we see today is the result
of past emissions made by developed countries and hence developed countries
should cut more of their emissions to make room for developing countries. This
would allow developing countries to continue to grow while overall CO2
emissions do not increase at a higher rate. On the contrary, developed
countries assert that just because the developed world has unknowingly polluted
the environment in the past which is leading to global warming today does not
mean that developing countries should be allowed to pollute the environment in
order to achieve economic GDP growth. Hence, this leads to deadlock in the
international community as to who should limit their emissions more (Saran,

Moreover, if we force developing countries to utilize
green technology made by developed countries, they will not be able to grow at
a faster rate as the new technology is expensive and this would prevent
economic growth. For example, wind power is expensive as compared to coal
energy and that is why developing countries use coal as a fossil fuel for their
energy requirements.

To address this deadlock, we need to devise a fair
response to global climate changes. In this regard, I believe that equity
principal should be used whereby countries should be given policy goals with
respect to their capabilities. UN Framework Convention on Climate Change
(UNFCCC) describes equity as “common but differentiated responsibilities and respective

I believe that in order to achieve a world that has zero
CO2 emissions, countries should be divided into two groups i.e responsibility
and capability. Hence, developed countries which have caused today’s global
climate changes should cut their emissions greatly as compared to developing
countries however developing countries should work on their capabilities to
reduce carbon emissions by using greener technologies. Moreover, all the
countries should be given goals with respect to their stage of economic
development, historical responsibility, vulnerabilities and needs. In this way,
an equitable solution will be developed which would lead to a better world  (Cameron, 2012).

3. One of the two core strategies pertaining to global
climate change are adaptation and mitigation. While adaptation can lead to
countries benefiting from their increase capacity to deal with climate change
in the short term, mitigation will benefit future generations.

Since the current CO2 emissions in the environment will
still lead to global warming for a considerable time period even if mitigation
is done, countries face a challenge as to which of the two policies should be
given more importance; adaption or mitigation. In my opinion, the world needs
two pronged strategy to address global climate change and therefore countries
should not only think about adapting to the environmental challenges posed
today, but they should also think about future costs associated with climate
change if mitigation is not considered. For instance, if countries only follow
adaptation to cope up with environmental challenges, the costs of adaptation
for future generations would be so high that they will not be able to cope up
with environmental challenges. Hence mitigation is required today so that
future generations are able to adapt. Hence, all countries should put same
weight to adaptation and mitigation (Lee, 2017).

4.  Discounting
primarily involves finding the present value of future environmental costs
based upon a certain discount rate. The issue pointed out by Stern is that
while calculating the value of future environmental costs, using a high
discount rate leads to putting a low value of future costs. Hence, this value
is used by policy makers to develop present strategy and therefore it leads to
ineffective policies; the one that does not force a strong action for
addressing climate issues. The issue is can also be explained by simple
financial equation given below:

Present Value = Future Value / (1 + p)^n


Discount rate

N= no
of years.


For instance if FV of environmental costs after 25 years
(n) is fixed at $ 1,000,000/- and a discount rates of 10% and 20% is used, we
end up with present values of $ 402,000/- and $ 621,000/- respectively. This
shows that using a high discount rate undermines the value of life of future
generations by undervaluing the costs of future environmental damages.  Stern, therefore, argued that a low discount
rate should be used for discounting future environmental costs.

5. Through 18th amendment in the constitution,
provinces were given autonomy by the federal government. In this regard,
ministry of environment was also transferred to all the 4 provinces of Pakistan
and now environment is a provincial subject.

One of the key advantages of provincial autonomy with
respect to environment is that now provinces can voluntarily allocate budget,
plan policy, and take necessary action without the approval of federal
government. For example, Pakistan Tehreek Insaf Govt launched “billion tree Tsunami”
campaign by allocating a budget from provincial revenue and hence huge numbers
of trees were planted. On the contrary, pre 18th amendment, it would
have had taken much more time for any provincial government to plant billion

On the contrary, if a provincial government fails to take
necessary actions required to deal with climate change due to capability
issues, the same 18th amendment will prevent federal government in
intervening in provincial matters. Hence, for instance, if PPP government fails
to help citizens of coastal belt from flooding due to rising sea levels,
federal government cannot intervene.

Therefore, in my opinion, provincial autonomy is a double
edged sword and federation should be allowed to intervene in a provincial
matter without approval of provincial government.

6. Pakistan relies heavily on fossil fuels for its energy
requirements whereas renewable sources also contribute in the overall energy
mix. As per Planning Commission of Pakistan’s annual report of 2017-18, 64% of
the total megawatts (MW) produced in the country is through oil and gas whereas
31% of the energy is made from hydel power plants. The remaining is generated
through wind, nuclear and solar power plants (Aadil Nakhoda, 2017).

However, Pakistan’s energy mix is shifting from oil, gas,
and hydro towards wind, coal and solar energy. For example, in 2017, 6% of the
total power produced shifted from oil, gas and hydro towards solar, wind and
coal.  It is important to highlight that
coal took the largest share from this shift.

In my opinion, Pakistan’s energy scenario depends highly
on China Pakistan Economic Corridor (CPEC) and hence we should analyze the
energy projects in CPEC to examine and predict the energy mix of Pakistan after
10 years. Table below shows the “energy priority projects” under CPEC:



MW Electricity


2×660MW Coal-fired Power Plants at Port
Qasim Karachi



Suki Kinari Hydropower Station,
Naran,Khyber Pukhtunkhwa



Sahiwal 2x660MW Coal-fired Power Plant,



Engro Thar Block II 2×330MW Coal fired
Power Plant 
TEL 1×330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh,
ThalNova 1×330MW Mine Mouth Lignite Fired Power Project at Thar Block-II, Sindh



Hydro China Dawood 50MW Wind Farm(Gharo, Thatta)



300MW Imported Coal Based Power Project at Gwadar,



Quaid-e-Azam 1000MW Solar Park (Bahawalpur)



UEP 100MW Wind Farm (Jhimpir, Thatta)



Sachal 50MW Wind Farm (Jhimpir, Thatta)



SSRL Thar Coal Block-I 6.8 mtpa &SEC Mine Mouth
Power Plant(2×660MW)



Karot Hydropower Station



Three Gorges Second Wind Power Project 
Three Gorges Third Wind Power Projec



CPHGC 1,320MW Coal-fired Power Plant, Hub,Balochistan





(Ministry of Planning, 2017)

Looking at the energy priority projects under CPEC, we
can ascertain that Pakistan will be producing a total of 9,490MW of electricity
out of which 70% of the energy will be produced by coal, 17% hydel, 11% Solar,
and 3% wind. This shows that coal will be Pakistan’s future with regards to

In line with this, I believe that Pakistan’s energy
scenario in the next 10 years would be relying on coal and we will continue to
use fossil fuels to meet our energy needs thereby polluting our cities.

7. One of the major impasse of any climate change dialogue is
that developed countries influence developing countries to incorporate climate
change in their policy making whereas developing countries argue that developed
world, in the past, has exploited the environment due to which the world is
facing climate change issues. As a result, developing countries keep on
following their macro-economic growth goals without taking into account the
global climate change implications of their actions. Consequently, as they
focus solely on macro-economic goals, developing countries do not have funding
for mitigation and adaptation strategies and they face increasing threat from
climate change.

In order to address this issue, I believe that similar to
funds such as InsuReliance, Adaptation Fund, and fund for vulnerable communities,
the developed countries should launch a fund that subsidizes the green
technology for developing countries. Like adaptation fund where countries apply
for receiving financial aid, this fund should also allow developing countries
to apply for green machinery or capital goods.

Since not all the developing countries can be financed or
subsidized, there should be key yardsticks upon which the finances can be
provided. For instance, China, which is world second biggest economy, and huge
cash stocks should not be given subsidy for buying capital goods that are
environmental friendly. In fact China should be forced to reduce carbon
emissions. However, countries such as India, Indonesia and Brazil that face
several economic challenges such as poverty and high population growth and also
have a big environmental footprint should be allowed to procure greener
technology at subsidized rates. This strategy of making an international
mitigation fund will help reducing carbon emissions.

Secondly, with regards to adaptation, developing
countries should be given special trade access if they are taking steps to
manage climate change internally. For instance, if Pakistan builds an
infrastructure to respond to climate catastrophes that occur frequently to a
vulnerable community, it should get preferential trade access to United States
(US) for its textile products.

By developing an international fund for green technology
and providing preferential trade access to markets, developed world can
influence developing countries to increase their adaptation and mitigation
efforts while reducing carbon footprint and that too without the cost of slow
economic growth.

8. The UN Climate Change Conference of Parties (COP23) was
held in the third week of November 2017 where more than 20,000 people,
including world leaders, from 193 countries participated in an effort to devise
an implementation strategy of Paris Agreement. Although, the United States (US)
withdrawal from Paris Agreement was a setback, overall I believe that COP23 was
a success as notable implementation strategies were developed.

Firstly, as part of adaptation goals, InsuReliance Global
Partnership was launched. The federal government of Germany provided 110
Million euros to launch affordable insurance and other financial support to
localities and island-states and areas that are vulnerable to climate change.
Simultaneously, Fiji Clearance House was launched which provides tools to
people across the world to find best affordable insurance which are tailored to
their specific needs.

Secondly, Gender Action Plan (GAP), was finalized whereby
it was agreed to increase participation of in all UNFCCC processes. This would
allow an effective gender-responsive climate change policy at all governmental

Thirdly, in COP23, local communities and indigenous
peoples platform was finalized allowing a comprehensive voice to address
climate change by including the voice of indigenous people in climate
negotiations regarding conventional methods to deal with climate change issues.

Fourthly, a historic agreement was reached on
agriculture. Countries across the globe agreed to develop and implement
mitigation and adaptation strategies in agricultural sector. Countries agreed
to reduce carbon emissions while enhancing their capabilities to solve the
negative effects of climate change.

Moreover, adaptation fund of $ 93.3 Million was
replenished which provides finances to developing countries to undertake
projects to enhance their capabilities to manage climate change issues. It is
important to highlight that it was agreed in COP23 to channelize the adaptation
fund under the umbrella of Paris Agreement.

Lastly, World Health Organization (WHO), in collaboration
with the UNFCCC, launched a health initiative for the vulnerable island communities.
It was agreed to triple the international finance support by the end of 2030
(“COP23: Key outcomes agreed at the UN climate talks in Bonn | Carbon
Brief”, 2017).

To conclude, I believe that COP23 was a success but it
lacked leadership which was provided by the US in the past. One of the
drawbacks of bipolar world is that there is no single power which can dictate
international implementation through its own moral and ethical power  (“Key
Achievements from COP23 – Cop23”, 2017) (Islam, 2017) (“COP23 climate talks end in
Bonn”, 2017)

9. In my opinion, the proposed public policy should be
perused as it is generating an expected present value of $ 3,000,000/- (4000000
x 0.85 + 1000000 x 0.1 – 10000000 x 0.05). I am analyzing this proposed policy
from a financial analyst lens and therefore I am using underlying concepts of
present value to assess this.

Since the expected present value of policy is $
3,000,000/- it means that the policy will add value to the society and hence it
should be followed. In my opinion, any public policy that generates a positive
expect net present value should be followed as it will add value to the society
whereas any policy that results in negative net present value should be

10. The article by Arif Rahman and Anil Salman “district level climate change vulnerability
index of Pakistan” provides an overview of vulnerability of 22 districts of
Pakistan across all four provinces. The key conclusions of the research study
are that 1) rural vulnerability is 72% higher than urban vulnerability due to
high socio economic vulnerability and low adaptive capacity 2) Baluchistan
showed minimal disparity between rural and urban due to low differences in
terms of social economic vulnerability and adaptive capacity between rural and
urban districts and 3) adaptive capacity increases the vulnerability of a
district much more greatly than any other factor.

Although the research article provides a decent analysis
of vulnerability, there are some aspects that the article can be criticized
upon. Firstly, as the pointed out by Carr and Kettle (2009), the article relies
on the already available data to conduct research. For example, socio economic
data was retrieved from Pakistan Social and Living Standards Measurement (PSLM)
which provided the factors (S1 to S6) of socio economic vulnerability and
factors (A1 to A4) for adaptive capacities. In my opinion, these factors were
employed in the research study because that was the only data which was available.
For example, “dual income household” is a key factor, especially in the urban
districts, that can enhance the adaptive capacities of households as well as it
can decrease socio economic vulnerability of a district. Hence by not taking
into account a factor as important as “dual income household”, research
article’s findings are not comprehensive.

Secondly, one of key determinants of adaptive capacity is
the “presence of armed forces of FC” in the district. If there is a high
presence of FC/Pak Army, for example in swat region, it enhances the adaptive
capacity of that district.

Thirdly, one of the most important factors during relief
efforts is “road network and connectivity”. For example, it is difficult for
people living in Karachi to reach out to a district in Balochistan which does
not have road connectivity. Hence it might be easier for people in Karachi to
help people in Swat as compared to people in Pasni Balochistan due to road

Basically, as suggested by the article itself, the research
study uses the data available in Pakistan to develop factors that increase or
decrease vulnerability when infact it should have had been the other way round. 


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