Event report on "Climate Change: What can Economics do to help?"

Staff

On Thursday, 13th February 2020, an important debate was held about the role of economics in the face of climate change. This is a transcript of the many crucial topics that were discussed for those who were unable to attend:

Speakers:

• Dr Lory Barlie, henceforth LB, gender competition, intersection between environmental and behavioural economics.

• Dr Elke Pirgmaier, from Austria, henceforth EP, Living well within limits, biophysical resources, energy, focuses on the links of capitalist dynamics and global environmental challenges.

• Ipek Gencsu, henceforth, IG, focusing on the new climate economy project, overseas development institute since 2014. Energy and fossil fuels subsidies.

• Professor Elizabeth Robinson, henceforth, ER, school of agriculture and development. Experience in Tanzania, Ghana and China.

Moderator: How does economics incorporate finite resources and climate change into its models? Do we need models at all?

IG: Economic models are tools, ways of explaining the world. The current models policymakers use don’t adequately take into account the finite element of finite resources. They seem to assume that we will keep getting things out of the ground. Other ways of understanding economics and models should be possible. How can we differently maximise our utility?

LB: We must think about this idea of dynamic efficiency. Maximise the net marginal benefits over time, taking into account the “ethical” aspect of exploiting a finite resource over time. We have to leave resources to future generations. Are we able to allocate resources efficiently, that is another question. How can we maximise the net benefit of consuming resources over time, rather then the more static concept of efficiency. This should be the emphasis.

ER: Economists have problems because we struggle to know how to discount. We need to separate the idea of social discount rate to the economic discount rate. For instance, a discount rate of 3-5% isn’t sufficient. We might be very close to tipping points now, and it has affected us sooner. Also, we completely ignore the situation of our kids due to these discount rates, whilst the situation for them might be disastrous. Even the insurance markets are struggling with this. Economics is about extracting resources, this means economic models can struggle with sustainability.

EP: I really like the introductory question, do we need models at all? The expert on climate change are climate scientists who have very good models. There is a consensus now that the challenge ahead is to reduce 50% in the next ten years, and cut down to 0 in the next 20 years. Criticism of the 2018 economics nobel prize: Nordhaus’ model actually tells us is the optimal scenario to maximise welfare based on the marginal utility framework of neoclassical economics, suggests that we can keep increasing emissions until 2045. This is dangerous. This is not a joke. The advice from economists undermines THE SCIENTIFIC CONSENSUS OF THE WHOLE CLIMATE SCIENCE COMMUNITY! Are we realistic about the challenge ahead? Economics is failing!

Moderator: Is economic growth necessary?

EP: This is a myth, utility doesn’t mean the more the better. Economic growth does not deliver wellbeing and prosperity, if we are talking about transforming society and having to come up with a completely different way of living. There is a tight relation between economic growth and all types of resource use. There is no evidence for this magic idea that we can keep growing the economy without an environmental impact. Evidence of recoupling, every year of growth is increasingly resource intensive.

IG: We need to move away from this idea of the rational decision maker maximising the utility through consumption. What life does the truly contented thriving individual live? This is the generation that is starting to ask these questions. We need a faster pace of change, the youth movements are encouraging, a rethinking in terms of transition. We need understanding of the wellbeing and happiness and contented life.

ER: We have been trained to want more “stuff”. When we look at utility, we think that more “stuff” is better. What do we really want? What would make us happier? Safety, for instance, or arts, culture, music. We can still put that in a utility concept. We need to be careful to enable the aspiring countries, whilst reducing the emissions, it is a balancing act. We have to transform society. Reduction of inequality may naturally move us to a state where to reduce emissions. Politicians only talk about targets, we need to act! Societal transformation above all else.

Moderator: Even if we do not grow, we are still going to consume the resources of our planet. Do we have to grow?

ER: We misunderstand the concept of growth. There’s nothing wrong with aspiring to being a better world. We need to get rid of the essential consumerist element of buying and then throwing stuff away.

LB: Resources are limited. But that doesn’t mean we should stop economic growth.

EP: We need to think about how economic growth comes about. What are the drives that lead an economy to grow? The rate of profitability is what drives economic growth. So, how is it possible for capitalist economies to create surplus and profit. Apparently, you buy cheap and you sell dear, using labour and natural resources at a low price and you churn it through the productive economy to produce profit, which gives you growth. Growth is the result of exploitation. Social justice and ecological sustainability have the same route cause.

ER: Why do we measure growth? We could just not fixate on growth and fixation on the GDP. Many students want to measure happiness, life expectancy, basic freedom and rights, the right to safety, equality, etc. You could start to transform society like that.

Eric: Was this route of economic growth inevitable. Could we have grown without this sort of consumption of fossil fuels? Does economics encourage an unsustainable mode of production?

EP: Yes. Economics encourages unsustainability. Mainstream economics protects the mainstream economy. There is a close link between ideas and how capitalism functions in. The basic narrative is that markets are good for society, which legitimizes what happens in the real economy. Is it a choice humanity has taken, what about the widespread use of fossil fuels. Recommended book: Fossil capital. Why is capitalism not based on renewable energy? A hundred years ago, the cotton industry was water powered. There were sophisticated engineering plans to power the big cities on water. The reasons coal became the dominant source were actually related to the fact that coal enabled centralized production. Coal was a means of social control, making it possible to discipline workers, with industrializing units remaining independent.

Eric: Shouldn’t you work with the mainstream? Not go from the outside in, but work for compromise?

EP: I think this answers the question, why is heterodox a minority. Economics is very close to power, the more critical you become of the mainstream environment, the more you alienate and disenfranchise yourself.

IG: Many assumptions to the basic economic model, which happens about 5% of the time. Now, all we are doing is abusing economics. Looking at the externalities, for instance, coal is under-priced. There is a health externality we are accepting. We have global externalities of the emissions. Neoclassical economics should be able to talk to that. Why do we tax labour, and subsidise fossils? We have completely perverted neoclassical economics. We ought not to tax things that we think are good. The price of the good has to reflect the bad it does to other people.

LB: We are unable to process the question of risk, reference to Kahneman: Thinking Fast and Slow. We are not really thinking about the long run effect. Our emotional system doesn’t process the risk of activities, the risks, the things we are doing for the environment. Damaging the environment is a reflective action. We need to understand how our brain processes such activities.

IG: It is the responsibility of politicians to look at science, and scenarios, the reason they don’t do it is that there are many stakeholders, which prevent them from acting.

LB: Relating to why we do not tax, people are reluctant to accept taxes, politicians want to maintain their political power and prefer to subsidise when the alternative is the loss of power. Sin taxes, for instances, can be very hard to impose.

ER: This is a good issue on inequality. For taxes on junk food, with a really inelastic demand curve, you can just end up impoverishing the poor and having a really regressive effect.

Moderator: How can developing countries be incentivized to develop sustainably, in order to not follow the path of industrialization of now developed countries?

ER: We have no right to tell low and middle income countries how to increase their development. We should be incentivising them, rather than acting in a paternalistic fashion, we need to enable the low and income countries to develop in a low carbon way. We have a moral obligation to help these countries. We have to keep the coal in the ground in these countries.

EP: It’s always easy to point fingers, we are responsible for the problem, we have benefited most in terms of acquiring comfortable lives. We need to have honest global cooperation, there is a lot of cheating, misuse, mistrust, going on. We are not having an honest cooperation with “so called poor countries”. This idea of “poor” countries having to get richer in the way we perceive it is incorrect. We ought to measure direct social outcomes in terms of health, education and mobility and planetary boundaries on the other. We need to provide both sides directly. Chuck out the conventional economic indicators, technological dynamism, productivity, these are all intermediaries that have destructive side effects. We have to directly deliver what makes people lives better.

Eric: Would a system change/production change take a long time?

EP: We can militarize within months, if we want to, in cases of war and transforming to war economy. There are a lot of alternatives possible. Business models that are not based on accumulation, exploitation and extraction.

LB: The government should focus more on educating people. We should explain what the damages that we are creating to the environment are. We must persuade people to change our behaviour, stop thinking that nothing is going to happen even in the short run, not just the long run. Most people don’t even know what the problem is and what the consequences are. They don’t really think about it, and this we should do something about. How can we do this?

IG: If developing countries had the facts and long term scenarios available to them they would make the right decisions. People need to stop putting finances in the wrong place, there is too much funding on oil and gas. One thing we can do, is to stop making it easy to get financing to build fossil fuel based energy systems. We need to understand what realisticscenarios mean. We have the perverse incentive of the possibility of carbon capture technologies, which we cannot count on. We cannot have these technologies being an integral part of our future planning.

Questions from the audience:

What is the most effective market mechanism for incentivising renewable energy?

ER: Carbon tax. In theory, it perfectly aligns. We have to combine it with things to make sure we need to increase inequalities. It is a Pigouvian tax that reduces inequality by adjusting the market failure. Caps are good.

EP: We need to shut down the fossil fuel industry, no new infrastructure that is based on fossil fuels. Keep everything in the ground. This is the way to be serious about the problem we have to face. There’s no role for market based systems for that. The solution is to just do it. Increase pressure on governments, extinction rebellion must rise.

IG: If we want to push a whole lot of industries out of work, we need to have a good plan for that. We need to be able to train people in new technologies, and governments need to develop structural transformations, dealing with early retirement, retraining, etc. We can’t just remove energy subsidies, but, start fielding the upfront costs. The middle class and rich need to lose out. People need incentives.

What about the countries that depend on extraction?

IG: Resource rich countries rarely distribute resources.

Audience member: In Chile, 60% of the Copper is state income. How do we square this circle, should we just completely eliminate the copper industry?

ER: We need a rapid transition process, not just cancellation.

Eric: How do we coordinate, when coordination can be such a major problem?

IG: The Paris agreement is a monumental agreement. 10 years ago, this would’ve been unimaginable. We have to do everything, but cooperation is increasing. The top down approach, can’t that just lead to a rise in state totalitarianism?

EP: I am not advocating a strong state reforming everything top down. There is a strong role for clear regulation for shutting down fossil fuel industries. There needs to be government planning, global regulation and a serious public debate. I am sceptical towards top down solutions, and marketplace instruments, so, there. The level of carbon tax required to fix the debate is equivalent to shutting down fossil fuel industries. Neoclassical economics does not look at power!

Question: How do we deal with the political obstacle?

IG: Spread information. Your right to healthy air is taken away from you, you just don’t see it. People are not educated on this problem, and their political views reflect that. Donald Trump, for instance, is a manifestation of that, and the fossil fuel industry has spread this false view that the anti fossil fuel measures have short term costs. This is not true. Most people want better public transport.

EP: There is a systemic machinery of manipulation and misinformation that is very successful in making people vote for parties that are against their own interests.

ER: The trouble with economics, too many people sit in economics departments and just do maths.

EP: A lot of problems with capitalist institutions arise out of ways of being and interacting with each other. A system built out of competition, individualism, working a lot. People are forced to perform a lot of pressure, to function, exposed to bad health effects. We need to become human and foster a culture of values. We need to promote a culture of solidarity, love, and compassion.