The Economics of Climate Change

Climate change is back on the front pages of the world’s press – belatedly. Its return is thanks to the landmark IPCC report, published in October 2018, which has served as a brutal reminder of the dystopian future that awaits humankind if radical policy change is not enacted immediately.

Compiled by over 80 of the world’s leading climate scientists - in an amazing feat of international cooperation - the report lays out the devastating consequences of allowing global warming to reach 2C above pre-industrial levels – the world’s survival, in any recognisable state, resting on a few fractions of a degree. In particular, the study emphasises the importance of keeping global temperatures below 1.5C, rather than 2C, listing the many frightening scenarios this would help stave off. Of the most dangerous, it's expected to: halve the number exposed to water scarcity; help prevent sea level rise that would otherwise obliterate low-coastal regions; and significantly reduce the risk of extreme weather events. Time, the report reinforces throughout, is now scarce, and terrifyingly, the point of no return is drawing close. To limit warming to just 1.5C, the transformation of economies, worldwide, must begin now.

How do we get there?

Regrettably, moral arguments – ‘we must preserve the world for future generations, etc.’ - have often failed to engage the masses; even when some of the world’s most precious places are imperilled. This general inertia has various sources, from the almost incomprehensible scale of the impending crisis, and its amorphous nature, to, from a business perspective, the perceived costliness of taking action. Often, unless one is on the absolute front line of climate deterioration, the typical response is a simple shrug of the shoulders, followed by a murmuring about enjoying the warmer weather. To be clear, this is not to say that moral arguments should be abandoned, they shouldn’t. Indeed, they should constantly be reinforced, repeated, and reiterated. It is rather that additional, equally strident means of persuasion also be adopted. Increasingly, given the rapid technological advancement in renewables, the economic argument is now looking a particularly sound one.

The economic argument

As put by Adnan Amin, the Director General of the International Renewable Energy Agency (IRENA), turning to renewables for new power generation 'is not simply an environmentally conscious decision, it is now – overwhelmingly – a smart economic one'. The cost of renewable energy, already competitive in many regions and industries, is expected to outcompete fossil fuels as a source of electricity in almost all markets by 2020 - a prediction based on the current trajectory of investment and, thus, easily improved upon.

Earlier this year, British economists published a paper in the journal Annual Review of Environment and Resources that examined, in detail, the funding of renewables. It concluded that over the course of this century investment would only need to be 50% higher that it is currently to limit warming to 1.5C instead of 2C. Nowhere near the increase often presumed.

And yet, many governments are still to make the required stand. Because of its marginal and normally short-term cost benefits, countries like Pakistan, Egypt, Indonesia, Philippines, and Vietnam continue to invest, sometimes heavily, in coal-fired plants. Even Germany, once heralded as a leading force in the fight against climate change, has invested in new coal-fired plants over the last decade, and is now preparing the clearing of the ancient Hambacher forest to allow for coal surface mining. Japan, too, is high-profile offender, having made huge commitments to coal since the disaster at Fukushima and the turn away from nuclear. In total, it is estimated that the coal-fired plants across the world, both existing and planned, will emit 330 gigatonnes of CO2 over their collective economic lifetime. Alone, this would exhaust almost the whole available carbon budget for the 1.5C scenario, begging the question: how then do we veer away from fossil fuel usage?

A carbon tax

Well, first of all, global leaders must take responsibility and start listening to the experts, whose voices are increasingly unanimous. The works of economist and recent Nobel Laureate, William Nordhaus, would be a good start. For many years, he has been a very public advocate of a global carbon tax. The policy, however, requires popularity and legitimacy to be implemented, which is, as of yet, still lacking. For politicians, therefore, the policy proposal's 'packaging' is of vital importance. This needn't be too difficult and could be presented like the following. The introduction of a carbon tax, it should be emphasised, would create a feedback loop - a snowball effect of falling energy prices. The revenue the tax generates could be funnelled towards the research and development of zero-carbon alternatives, which would see their already competitive costs reduce and their efficiency increase. This, in turn, would further de-incentivise the use of coal-derived energy, and as a corollary, encourage greater investment in renewables - in effect, closing the circle. Additionally, increased revenue could allow for the reduction of unpopular taxes, or be injected into public services - historically, two effective vote winners.

Acknowledging this need for new global policies, the directors of the Potsdam Institute for Climate Impact Research have looked into carbon taxation in more detail, suggesting it be set at €30 per tonne of C02 (currently, 75% of carbon emissions are priced at just €10). This is believed to be the threshold that would render investment in coal-fired plants unprofitable. The spike in the price of carbon would proliferate the use of electric cars - boosting jobs in an already expanding sector - and accelerate the phasing out of the internal combustion engine.

Going forward

Support for a global carbon tax is widespread, even reaching global financial institutions. Only recently, the World Bank released a statement declaring: ‘carbon pricing represents a simple, fair and efficient policy option to address climate change’. Its clarity, it concluded, enables businesses to ‘manage risks, plan their low-carbon investments, and drive innovation’. In December, world leaders will descend on Katowice, Poland, in a follow-up to the Paris agreement in 2015. There, guidelines will be drawn up as to how the targets set in Paris will be met. Any chance of success - and they currently look slim - will necessitate the rolling out of extensive and aggressive carbon taxes. For such an initiative to gain legitimacy, people have to become familiarised with the idea - the conversation discussing its merits, therefore, needs to start now.