I’ve been itching to take a more theoretical turn on the blog, and I get the opportunity to do just that here. To start, we need to tread some well-worn ground that has been covered by both environmental and ecological economists. The latter group, led by pioneers like Herman Daly and Robert Costanza, were among the first economists to think of the economy as embedded within the natural ecosystem.
Simply put, the planet is a thermodynamically closed system aside from solar energy, and this, of course, is where economic activity takes place. In order to provide the things that we need and want, the economic system coordinates the extraction of natural resources and their transformation into capital and consumer goods. This coordination can be done through markets, with the state, or, as Elinor Ostrom detailed, through local communities developing systems of rules and norms – the optimum system of coordination varies. Additionally, the environment is a provider of ecosystem services, such as wetlands that help with flood control or trees that prevent erosion on a slope, and, crucially here, it is a sink for wastes. All of those resources that are extracted from the environment and transformed through the economic system are deposited back into the environment in some form. For example, coal can be extracted, burned to generate electricity, and enter the atmosphere in the form of various gases. Other materials are used and then deposited in landfills or (unfortunately) the oceans. The material flow through the economy is known as throughput, and, as ecological economists have long pointed out, it is not the same thing as economic growth. While early economists that payed attention to the environment in the 1960s and 1970s worried about humanity simply running out of resources to extract (most famously, in the Limits to Growth), we have since learned that filling up sinks is by far the more immediate problem. This is where climate change comes in. Through burning fossil fuels and other sources, humanity is overwhelming the ability of the environment to absorb greenhouse gas emissions, which is typically done by plants and the oceans. If sinks become too full, as they are already, and result in a changing climate, our ability to extract further resources becomes compromised. In the case of renewable resources, like agricultural products or fish, the changing climate can cause those resource stocks to collapse, spreading the problem from one of sinks to one of direct extraction. In the case of nonrenewable sources like valuable minerals and ores, climate change can make both extraction and transportation much more difficult. That is, climate change can undermine the foundations of the flow of resources through the economic system. Additionally, most modern economies are service-based, and climate change can impact the ability of those services to operate, imposing penalties on economic growth and development. The problem, as environmental economists have long pointed out, is that greenhouse gas emissions have historically been and still largely are, free to emit. That is, the privilege of taking up space in the giant, global sink for GHG emissions is free, and, because that privilege is valuable, people have taken advantage of it (though to be fair to our ancestors, before about the 1960s, there was little understanding that this could possibly be a problem). But the result is that, if we are to avoid catastrophic warming, we need to make big cuts, fast (Note: I loosely define catastrophic warming as that which triggers feedback loops, though I understand even warming of that level will be very damaging). If we are looking at historical emission of GHGs, the rich countries are very close to maxing out their shares if we are to make any room for developing countries to increase emissions. Even if you don’t like the idea of poor countries being able to emit more, which I find to be morally questionable, there is little that could be done to stop it. Let’s think of our rich country obligations as falling along two lines: we have an obligation to people in poor countries who simply happened to industrialize later but get stuck doing so in the context of a filling sink for carbon AND we have an obligation to future generations who will need to make some use of the GHG sink for their own development and live on a planet not irreparably damaged by climate change. I’m going to leave that statement for now in order to move things along, but a future post will look to develop the philosophy on it more clearly. Assuming that we agree we have these obligations, the question of exactly how much we need to curtail emissions comes to the fore, but it quickly becomes complicated. First, for simplicity’s sake, let’s keep our stark division between rich and poor countries -- though, realistically, I’d argue that the world should be divided now into rich, middle-income, and poor countries since the prescriptions for China would probably be different than, say, Chad. So now we are faced with several issues:
Economists are at odds over how to address these issues. Environmental economists largely argue for calculating social welfare functions for society that attempt to estimate the well-being generated from consumption and balance that against an estimate of damages from climate change. Crucially, the social welfare function for the future contains a discount rate that functions as a rate of time preference for society. That is, how much do we care about giving things up now to realize benefits in the future, sometimes past our lifetimes? Unfortunately, picking a discount rate becomes a purely philosophical question: if one doesn’t think we owe much to future generations, pick a high rate that will show we should prioritize development now. Luckily, model results driven largely by discount rate choices have started to fall out of fashion in recent years (since one can make the model show almost any conclusion simply by choosing a different rate, and a wide range of rates can be justified). Other economists argue that the discount rate approach is flawed given how little we understand about the consequences of climate change and especially where those feedback loops lie. Instead of carefully trying to balance costs and benefits – a useless exercise given the number of unknown factors – we should instead treat the problem like one of insurance. To borrow an analogy from Frank Ackerman, if you own a house, you probably have fire insurance on that house. But, unless you live near me right now, the average house will have a fire once every 250 years, meaning you will probably not use your insurance in your lifetime. But the consequences of your house burning down and not having insurance are so great that most people have the insurance for peace of mind. Similarly, because we don’t know how bad warming can get before it becomes civilization-ending, we should be willing to pay to be on the safe side of things. For instance, we are relatively confident that 2-3 degrees of warming will not be absolutely disastrous, even if it will impose costs. But the small risk of disaster starts to go up as warming continues. Even if it stays small, we should use the logic of the black swan. Fortunately, if managed correctly, the transition to a low-carbon economy could deliver lots of benefits. By shifting away from fossil fuels, other air pollutants like nitrous oxides and ground-level ozone (smog) will be greatly reduced. Green technologies tend to be relatively labor-intensive compared to fossil fuels, meaning that they offer economic opportunities to people in rural communities. The massive investments needed to meet appropriate goals would mean that economies would be closer to full employment. And, as I will argue in the future, a sustainable society is necessarily a more equitable one. Yes, there will be losers in this economic transition, like the fossil fuel industry (or, more importantly, its workers). But the potential gains from this transition are great indeed.
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At first glance, you may have thought that title addresses the obvious: of course climate change matters. We hear about the science and consequences quite often, unless you rely on right-wing sources for your news. Scientists overwhelmingly agree that climate change is happening, that it is caused by human activities, and that it is having and will have increasingly large impacts on society and our planet in the future. But allow me to take the opportunity to put these big ideas into a more digestible form and link the natural science more explicitly to economics in two parts. I’ll do this with the caveat that I am an economist and not a climate scientist, so my science explanations in this part will not be quite as detailed. The next post will focus more on economic theory and its links to what I describe here. First, I have watched presentations of climate research that have been utterly derailed by an audience member asking how we can be sure that anthropogenic (that is, human-caused) global warming is happening. Simply put, we have several sources of evidence that gives the scientific community its high level of confidence. Let’s start with some theories and pieces of information that we know. Scientists have long understood that different combinations of gases, such as the mix that is found in our atmosphere, absorbs and emits radiation from the sun at different rates. At the atomic level, greenhouse gases like carbon dioxide are more likely to absorb and then re-emit infrared radiation from the sun. Nitrogen and oxygen, the other big atmospheric components, do not absorb infrared radiation. To think about how this affects things on a planetary scale, imagine that the earth is a big pot of water that is being heated on a stovetop (the sun) and has achieved an equilibrium temperature. Uncovered, a lot of the heat from the pot just escapes into the room (space), but covering the pot with a lid keeps more of the heat trapped and makes the water even hotter than it would be otherwise. When more greenhouse gases are emitted, it is as though we are putting an ever-thicker lid on our metaphorical pot. All of this theory seems to make intuitive sense, but is it backed up empirically? YES! These observations come from a number of sources on the land, in the water, and from satellites collecting data from space. NASA has a great summary of such observations. The conclusion is that the world is warming consistently and the concentrations of greenhouse gases are rising. We know from industrial records and other sources what humans are emitting, so we can match that with atmospheric observations to precisely understand how the atmosphere is changing. Additionally, scientists have painstakingly researched historical climate conditions in a variety of ways to assemble a long record of climate and atmospheric conditions on the earth. For example, samples of bubbles from extracted ice cores preserve the atmosphere at that period in history, allowing them to see the composition of the atmosphere millions of years ago. If that weren’t enough, we also have another planet to observe. Venus is the hottest planet in the solar system because of a runaway greenhouse gas effect. What becomes disturbingly clear from the look at the historical record is that we are entering a climatic period warmer than any experienced by human civilization. Note from the chart below, taken from Vox, that agriculture developed only after the climate had been unusually stable for a long time – this is the conclusion reached by researchers at CalTech from whose data this comes. We also know from our observations that concentrations of carbon dioxide (the most prevalent greenhouse gas) in the atmosphere have increased from about 280 parts per million (ppm) before the industrial revolution to just over 400 ppm now. As a result, the world is about 1 degree Celsius warmer than before the industrial revolution, and, because it takes a while for greenhouse gases to get high enough in the atmosphere to cause warming, the world is certainly locked in for warming close to 2 degrees. The impacts from this you have probably heard of: more floods, more droughts, sea level rise, etc. There are two final things to keep in mind when thinking about all of this. The first is that the damage from global warming maybe exponential and not linear and, for the most part attempts to estimate damage functions are educated guesses. If the “true” damage function is actually exponential, that means that if warming doubles from 1 to 2 degrees, it increases by something like 4 fold rather than doubling. Depending on policy, the world will likely warm by anywhere from 3 to 10 degrees by the end of the century. On the upper end of that scale, the damage becomes truly civilization-threatening – and I do not intend that to be a hyperbolic statement. Even 4 degrees of warming would be incredibly disruptive. The other danger is that things could very well spiral out of control because of feedback loops in the climate system. For example, the permafrost that rings the arctic, mostly in Russia and Canada, contains huge amounts of frozen organic matter. If this thaws on a large scale, that matter will decompose and emit methane. If this happens on a large enough scale, those methane emissions could be enough to trigger more warming and more thawing and more emissions. One feedback loop could then trigger others, such as the collapse of ice sheets that would trigger a cycle as the albedo of the earth would be reduced. Because of the complexity of the global climate system and its inherently chaotic nature, it is very difficult to know just how much warming the world can take before it gets out of control. Recent evidence suggests we are closer to at least the methane feedback loop than we had previously thought. Future posts will discuss the many implications of all of this, but I will say that instead of simply sounding apocalyptic, it should be read as a call for a conservative approach to emissions control – and here I use conservative to mean that we should err on the side of caution because the risks on either side of a climate goal are asymmetric. The issue of climate change shouldn’t be thought of as win-or-lose, that we either escape it or we don’t. There will certainly be some damaging warming. Our goal should be to limit that, and especially to avoid any dangerous feedback loops that could send things spiraling terribly out of control. In the wake of Brexit and Donald Trump’s place at the top of the GOP ticket, along with the continuing threat of far-right parties across the rich world, the internet these days abounds with explanations of this phenomenon. Last week’s post here reflected on this. But I will add one more that is relatively US-focused, as I have not seen these particular ideas fleshed out yet. Motivating this are two charts that have been making rounds through various blogs in the past few months. The first, originally published in the Washington Post from Branko Milanovic’s data, shows that, relatively speaking, the working class in rich countries have seen far fewer income gains between 1988 and 2008 (keep in mind that this series ends before the Great Recession). The world’s wealthiest people and the emerging global middle class saw tremendous gains in their income during this time. Even the world’s poorest workers did well, with hundreds of millions of people leaving absolute poverty. I should note that the Post is quick to associate the entire pattern with globalization, and, while that may be true for some groups (like the global middle class), I think there’s more going on for the so-called “losers” in this chart. There has been a complex interaction of offshoring, automation, and public policies that have consistently disadvantaged workers over the past several decades. Let’s look further. Using data from the Economic Innovation Group, we can see the number of business establishments added in counties by population level during the past 3 economic recoveries, demonstrating a clear trend. The major headline here is that in the latest recovery, small counties actually lost businesses, where in the recovery of 1992-1996, they added relatively more businesses than larger counties. Digging a little deeper reveals that only 20 counties in the US added half of the new establishments from 2010 to 2014. And thus a picture begins to emerge, especially when paired with what we know about social indicators from rural America. These economies are simply not what they once were. A combination of automation, outsourcing, and lack of investment in infrastructure and education have left them with little to offer and few opportunities for their citizens. Wage growth has been poor, even in the face of rising costs of healthcare and education (and, in some areas, housing). In the 1950s, an unskilled worker earning a typical salary could generally afford a house (though keep in mind that mortgages were typically just given to white borrowers then). Years of anti-union propaganda have poisoned efforts to organize workers and left them struggling as industries that have remained in some areas, such as coal, begin to die.
One can, of course, argue that support for figures like Trump is not entirely founded on economic angst; after all, likely Trump voters have higher average incomes than likely Clinton voters. However, in recent polling, Trump leads Clinton among whites without a college degree by a margin of 30 to 58%. This is the group that has not only (and deservedly) lost some of the privilege they once had, but they have been buffeted by economic forces for which they are inadequately prepared. Call me a materialist, but perhaps they would be coping with the loss of privilege in society better if they were not anyway facing terrible economic prospects. Unfortunately for them, the economic policies that Donald Trump advocates, such as massive (I mean, massive) tax cuts for the wealthy paired with huge spending cuts, dismantling environmental regulations, and throwing up trade barriers, would do little to improve this outlook. Jobs that have moved overseas tend to be low-paying and low-quality jobs in industries such as textiles; few workers could earn a decent living doing that even if they did come back. And this assumes that the returning jobs would be as labor-intensive as before, which is unlikely. US manufacturing output is at an all-time high, meaning that firms just need fewer workers than before to make more things. Instead, changes in government policies can help, though it will take time and massive action to improve a situation that has been worsening for years. Government can promote investment in infrastructure, which is clearly needed, along with renewable energy to help meet climate policy goals. It can get more serious about employment and job retraining program, which have largely been laughably inadequate so far. These are just three examples of initiatives that could start to make a difference. Until things like this are tried or technological changes begin to once again call for greater use of unskilled labor (which is unlikely), these more rural areas of the country will continue to have a bleak outlook, and the voters living in them will continue to look for answers. I should note, too, that all of this has real implications for climate and energy policy, as we’ve seen with the closing of the UK’s Department of Energy and Climate Change when Theresa May took office recently. The department is being folded in to the Department of Business, Energy, and Industrial Strategy. Democracies that contain large numbers of workers under economic strain will be hard-pressed to pursue aggressive and long-term climate commitments, which makes the stakes of these contemporary political battles even higher. This week’s cover story in The Economist argues that traditional left vs. right political divides in advanced capitalist countries are beginning to give way to a new fault line, with those who advocate for open economic policies on one side against those who favor a more closed approach. The policies of those in the closed camp will be familiar to anyone following the news: this is the stuff of Trump in the United States, the (successful) Brexit campaign in Britain, or the National Front in France, and there are analogues with various levels of success in practically every country in Europe. They advocate a kind of nativist nationalism, hostile to any group not perceived as pure enough, and so they oppose more open immigration policies, along with free trade deals. They are not skeptical of state intervention in the economy in general, but the state should be discriminating in who it supports. Therefore, millions of voters in the recent Republican primary supported a very un-conservative in Donald Trump, who promised to maintain benefits from Medicare and Social Security while engaging the government in the deportation of more than 11 million undocumented immigrants in what would be a massive use of state power. These newly prominent philosophies all argue that the path to prosperity for natives is to minimize foreign involvement, discriminate against those not deemed appropriately native who are already in the country, and to build walls (sometimes literally) to protect "true" natives from an uncertain and frightening world.
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AuthorEconomist. Professor. Environmentalist. Archives
July 2017
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