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Identification of External Impacts of GHG Emission Reduction Policies

Externalities of Greenhouse Gas Emission Policies

In the context of climate change impacts, the debate about the achievements and negative impacts of policies to reduce GHGs is becoming more and more popular. Recently, this problem has attracted a more extensive and more detailed focus on the benefits and costs of the externalities of the policy options and mitigation plans. Basically, these externalities can be understood as policies and plans to reduce greenhouse gases that could, in some way, cause a positive or negative impact on the economy, public health, ecosystems, etc. And, in this case, the effects can be monetized; they should be subtracted or added to the social cost of emission reduction policies. The positive externalities can be created through minimizing damage to the environment and the health of the pollutants. Conversely, these policies can also create negative externalities for public health and the environment, for example, in the field of energy, the increased use of diesel fuel can reduce GHG emissions, but will increase the risks to environmental and human health. Generally, these externalities have not so far been studied and evaluated fully, and so rarely have been quantified in a systematic way and integrated into the emission reduction policies. Failure of consideration and evaluation of the impacts of externalities may affect the choice of policies to reduce emissions. The externality, accordingly, should be considered as one of the indicators to identify the priorities for policies to reduce GHG.

The Impact of Macroeconomics

Policy impacts on the energy sector such as fossil fuel price rises, or policies imposed on the industrial sector such as rising commodity prices related to GHG emissions, can help reduce emissions as well as the risks of climate change in the long term; conversely, however, they also reduce economic activity in many forms.

Although these effects on the economy's growth may not be large in the long term, they need to be considered. The policies on reducing GHG emissions that impact on economic activities can be generalized as follows:

– The shift in production, investment and labor from industries related to energy production based on carbon, or products and services that use a lot of energy, to industries using alternative energy sources and consuming less energy;

– Reduced productivity of capital and labor in accordance with the cheap energy available;

– Reduced household incomes, with a reduction in domestic reserves;

– Lack of encouragement for investment due to increasing capital costs of production processes using a lot of energy;

– Reduced amount of net income from abroad (decreased productivity and increased cost of production capital), making the domestic market become less attractive to foreign investors;

– Deterioration of total labor supplies due to increases in the cost of consumer goods and reductions in the real wages of workers.

The GHG emission reduction policies may affect GDP growth through investment mechanisms. For example, high taxes on production that has a high level of GHG emissions will cause increases in production costs, thereby reducing investment and leading to a decline in product supplies and real wages. Accordingly, the consumption by people will fall and, as a result, reduce GDP. At the same time, lower wages can reduce workers' choices for employment that is unpaid or is not reflected in GDP, such as parenting, employment at home or entertaining.

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