Why do we disagree about climate change? It’s a strange question to ask- All of humanity is threatened by irreversible climate change which threatens to undermine the very institutions responsible for economic development. So why then is there so much disagreement? Keeping geopolitics aside, the discordant note in climate change politics has its roots in the uncertainty surrounding economic and scientific analyzes. Add to it the importance placed by policymakers on such analyzes and we have ourselves a cauldron with lots of smoke (read- debate). My contention is that such analyzes ignore the ethical underpinnings of climate change; their recognition is perhaps the only way out to achieve an equitable climate deal.
In this article, I will talk about the limitations of economic analysis when applied to climate change and the fallacious reasoning it leads to.
The Mandate of Economics
The central question which economics is charged with answering is the following:
” Should governments focus on implementing stringent measures (like carbon tax, deep emission cuts) in the short term or gradually in the medium- long term”
Or, to state it differently- “Instead of making investments today in mitigating future climate change, could a better use of that investment would be in reducing the vulnerability to climate risks of today’s generation of the poor ? “
When considering such questions it must be kept in mind that both the goals come associated with significant costs (close to 1% of GDP) and risks: If one adopts stringent measures in the short term there would be recessionary affects on economies- rising prices, lesser jobs which would rob the poor of this generation a chance to increase their incomes; on the other hand adopting a more lenient approach towards tackling climate change could aggravate the uncertainty of climate change where the world might be faced with a doomsday scenario- too late to do anything
The economics approach to this conundrum is the traditional method of using a cost-benefit analysis. Economists would calculate the damage cost/ton of co2 or as it is called, to the Social Cost of Carbon for different emission scenarios. This would then be compared with the costs to offset this damage. If favorable, the investment goes ahead as planned.
Where Economics goes Wrong
However, there are 2 sets of criticisms which can be aimed at such an approach. One set, questions the very veracity of using an economics approach to such an important question, I shall come back to this towards the end. The other question is within the realm of economics- How does one account for non-monetary goods/artifacts/beliefs/values/utilities? Accounting for the social cost of carbon is one of the most contentious issues giving rise to serious divisions within economists and policymakers alike.
Social Cost= function (Damage, equity weightage, discount rate)
Each of the three factors is difficult to monetize1. Damage – How does one calculate the damage for a whole generation of people who may not be able to say play in the snow because of adverse climate change? How does one calculate the damage from tourism migration? How does one account for damage to aesthetic values attached to natural ecosystem? 2. Equity Weightage- When accounting for disease and damage, should the cost of death for a US citizen be the same as those of an Indian Citizen; even though both have consumed vastly different amount of resources? 3. Discount Rate- One of the most contentious factors and with a significant bearing on the final result. The discount rate we use to cost the damages is the reflection of our concern and responsibility towards our future generations. A higher discount rate would transfer the majority of the damages to the future while a lower discount rate would significantly increase the cost of mitigating climate change. The Stern review (the most influential and wide ranging document of the kind) uses a very low discount rate, hence comes up with dire predictions and messages of urgent action and uniform. Other economists, Nordhaus in particular have used a high discount rate to arrive at moderate damages advocating the graduate ramp-up of stringent measures.
Behind this economic mirage and technical terms like discount rate, what is the real issue at the heart of this controversy? The issue is simply whether we want to add a second car to the house today or give up the only one e own for the future of our grandchildren. In using a low discount rate, we take up a significant amount of responsibility in ensuring that the future generation has a similar amount of opportunities to benefit from the planet as we did. In choosing, a high discount rate we value our consumption more than the good of the future generation. Thus, we see that the debate over Discount Rate is not an economic debate at all, but rather a debate about the endowment of values- something completely beyond the grasp of economics.
Before moving on to the other set of criticism, it would be instructive to note the assumption which forms the cornerstone of all such economic analyses- The Assumption of perpetual growth. The Stern review assumes annual growth rate of 1.3%, other analyses in the range of 1-2%. In the midst of upheavals and dire predictions, can such an assumption truly hold ground?
Does all this economic foolery really matter?
Science is uncertain about the pace of climate change. In a decade, we could be faced with irreversible climate change- beyond the scope of fruitful human mitigation. What then is the point of all this debate- what is needed is immediate human action. This then is the brief conclusion reached by the application of the precautionary principle- a stance preferred by most Europeans. The United States using its own economic considerations reached a diametrically opposite conclusions to the Europeans. Whether we like it or not, in the policy world economics does matter.
At a deeper level, this debate can be extrapolated and enjoined to the debate on free market capitalism. The Stern Review states- ‘Climate Change is a monumental failure of the market system’. What then is the point of continuing to use this system (imposing Caron taxes, creating a carbon trade market) for mitigation efforts? Most deep ecologists would subscribe to this view.