An Economic Solution To Climate Change
Before any rash judgements are made, I am not a ‘climate change denier’. Instead, I am an economist.
It is evidence-based to say that temperatures have been on a clear upward trend since roughly the 1900s. The increase since then has been around 1 °C[i](Although this figure is often exaggerated). Predictions from models do suggest a rise in the rate of temperature increase, but these are just models. As we have seen from some of the modelling during the pandemic[ii], we shouldn’t be willing to bet our livelihoods on their validity.
Therefore, solutions to climate change should be proportionate and targeted. The apocryphal solutions suggested by the likes of Greta Thunberg or Extinction Rebellion are not that[iii]. The economic myopia in these solutions leaves me cringing in disbelief. Opportunity costs matter. Banning all fossil fuel production may stop CO2 emissions but would cause such economic upheaval and subsequent social agitation that I would rather be burned to death by climate change.
So, how do we address climate change and limit the economic stagnation that is often seen as the trade-off? Governments around the world are pledging to take action, so will a government spending spree on green projects, jobs and infrastructure help to achieve this? It is unlikely. The idea that it is the governments’ role to create green industries or create ‘a million secure government jobs in renewable energy’[iv] is problematic. Firstly, because they have a poor track record in picking winners. Secondly, because governments have never been able to ‘create’ jobs out of thin air. ‘One million climate jobs’ sounds brilliant, but unfortunately it's time to be an economist. They would simply be using other people’s money, in the form of tax revenue, to fund jobs that would otherwise not be feasible. If they do this, why don’t they also ‘pay people to dig holes and fill them in again’[v]?
Instead, my proposal is a market-based response to internalise the externalities by attempting to better align personal incentives with societal incentives.
This would be achieved through driving a change in consumer behaviour, possibly through nudges and other behavioural economic measures. Before Adam Smith wrote the Wealth of Nations, he wrote the Theory of Moral Sentiments. In this book, he spoke about a ‘moral spectator’ that observes and self-regulates our decisions to ensure they are for the societal good. I think this process is becoming more evident; people want to buy local, they care about how their products are made and this can often determine their consumption patterns. If we can harness this ‘moral spectator’ further and create ethical consumers, we can place ‘moral sentiments’ back at the heart of markets. This would mean that the price of a good reflects the full societal value of that good. By doing this, firms are incentivised through the price mechanism to produce goods that have societal value. We need to get away from the idea of ‘evil corporations’: they are simply catering for consumer demand. Thus, influencing individual choices to promote ‘moral sentiments’ could foster a market-based response to climate change that would allow for both prosperity and environmental protection.
If effectively implemented, this would be a market system that accommodates the pursuit of self-interest within a moral framework to create green growth opportunities and prevent any further environmental degradation. It almost always comes down to incentives. Incentives make the world spin, and a closer examination of them within the context of the environment could be the key to creating a sustainable solution to climate change.
[i] https://royalsociety.org/topics-policy/projects/climate-change-evidence-causes/question-1/ [ii] https://blogs.lse.ac.uk/covid19/2021/05/06/bad-data-and-flawed-models-fact-checking-a-case-against-lockdowns/ [iii] https://www.ctvnews.ca/sci-tech/greta-thunberg-s-four-simple-steps-to-combat-climate-change-1.4613253 [iv] https://www.campaigncc.org/climatejobs [v] https://www.washingtonexaminer.com/opinion/the-green-jobs-fallacy