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.
1 Comment
Brad Williams
8/24/2016 07:44:19 pm
Great article. I particularly like the bit about fire insurance.
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AuthorEconomist. Professor. Environmentalist. Archives
July 2017
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