An economist’s post COP26 thoughts 

By Dr Laura Marsiliani, August 2022

Dr Laura Marsiliani, Associate Professor of Economics shares her thoughts on COP26 in Glasgow and what lessons we can bring to COP27. 

COP26 negotiations closed on 13 November 2021 yet pledges remained unfulfilled, with the removal of fossil fuel subsidies and finance for loss and damage still hotly debated. They’re also where the ‘Global North-South divide’ has been most acute.  

Typically, least developed countries (LDCs) fear that development and poverty alleviation would be hindered if fossil fuels were excluded from the energy generation mix. The last-minute intervention at COP26 of some LDCs negotiators, led by India and China, demonstrated this concern. The phrase ‘coal phase-out’ was ultimately changed into ‘coal phase-down’, leading to COP26 President Alok Sharma’s apologetic, emotional speech at the conclusive plenary session. As an economist I appreciate these issues, but I also wonder at the persistence and impact of economic systems riddled with fundamental inefficiencies that delay progress and prosperity. Energy markets often suffer from heavy subsidisation of fossil fuels and government regulated electricity prices. These market distortions prevent the optimisation of the fuel mix in electricity production, promote overconsumption of fossil fuels and ultimately delay transition towards sustainable development.  

Take the case of Bangladesh. At COP26, Bangladesh led the negotiations for the Climate Vulnerable Forum (CVF), a group of 48 countries facing high disaster risk from climate change. The CVF strongly advocate actions to limit the rise in global average temperatures to 1.5°C degrees above pre-industrial times, in line with the 2015 Paris Agreement. Bangladesh has pledged to reduce greenhouse gas (GHG) emissions by 15% (of which 5% is unconditional to any transfers from the global community) with respect to Business as Usual by 2030 and renewed this commitment at COP26. However, its overall CO2 emissions have risen dramatically in the last ten years, mainly due to an increasing reliance on oil (currently accounting for more than 30% of Bangladesh’s electricity generation). In addition, plans to step up the use of domestically sourced coal and waste-to-energy are under discussion. Given its dependence on fossil fuels and carbon-intensive technology, will Bangladesh succeed in fulfilling its Paris Agreement pledge?  

Recent research by economists at Durham University Business School, Durham Energy Institute, North-South University Bangladesh, and Copenhagen Business School has evaluated the effects of several decarbonisation policies in Bangladesh, namely the removal of intra-sectoral electricity price distortions (including implicit fossil fuels subsidies) and the implementation of carbon taxes. We’ve seen that a move towards liberalised energy markets can create a win-win situation by improving economic performance and reducing CO2 emissions by 4.6%, helping Bangladesh achieve its target. Interestingly, eliminating energy price distortions trumps carbon taxes, although a policy package that includes all decarbonisation methods can deliver even higher reductions in CO2. These lessons hold for any country with a fixed price system for energy in place. It’s hoped that COP27 will give more attention to energy price distortions for an effective decarbonisation agenda in LDCs.  

Another contentious issue that emerged was liability and compensation for loss and damage caused by historical greenhouse gas emissions from developed countries. In the policy debate, the word ‘compensation’ has often been substituted with the term ‘solidarity’, as legal liability is hard to determine when it comes to climate change. From an economist’s point of view, the debate is further complicated by the implications of the work of Economics Nobel Laureate Ronald Coase which argues that compensating victims of environmental damage may create the perverse incentive to not protect oneself from further damages for the sake of compensation. Would loss and damage finance translate into more misery for vulnerable communities? It’s a tough road ahead to COP27.   

More information on Dr Marsiliani's research interests.