Climate versus growth
Climate versus growth
People frequently believe combatting climate change and economic development are incompatible. They're wrong
“There’s a hard trade-off between climate action and economic growth” is a common refrain in economics punditry. Is it true? I’m not going to be touching on degrowth (you can read about why it’s stupid here) or the “100 corporations” bit too extensively, mostly because they’re the sort of ideas that are observably stupid but way too hard to disprove.
The climate science of climate change
Climate change (formerly global warming) is a phenomenon by which the planet has been getting hotter and hotter (or colder, in some areas) due to human activity. It’s a fact. It’s also a fact that it’s caused by human action: a variety of activities produce what are known as greenhouse gases, which (simply speaking) make the atmosphere “thicker” and heat up some parts of the planet.
The most common greenhouse gases are carbon dioxide (CO2) and methane, and they’re almost uniquely produced by burning fossil fuels. Since the 1850s, global average temperatures have gotten 1.1 degrees Celsius hotter, with nearly two thirds of the warming happening since the 1960s. And the natural factors that should affect climate change, as seen in the chart above, should have decreased, not increased, global emissions; for example, large volcanic eruptions that block out parts of the atmosphere with smoke and materials. The lion’s share of emissions are carbon dioxide, with methane taking a back seat; in the past, greenhouse effects from the particles used in aerosols were a problem, but that’s mostly been dealt with.
Generally speaking, CO2 emissions can be broken down as follows: a country’s total emissions equal its population times its emissions per capita. For example, China has a lot of population, but the US has very high per capita emissions, so they’re roughly as big as each other. Per capita emissions are dictated by per capita consumption (represented by GDP per capita), and technology, so that each dollar spent has a certain amount of carbon attached. The technlogy is defined by two factors: energy intensity, i.e. how much energy each dollar of GDP needs, and carbon intensity, how much CO2 there is in each unit of energy. The increase in global carbon emissions has mostly been caused by the increases in GDP per capita offsetting the reductions in carbon and energy intensity.
What happens if we don’t deal with climate change? Given current policies, the planet would heat 2.7° to 3.1°C by the end of the century- which is really bad. If all countries do the things they promised to do to reduce climate change, it would be 2.4°C, so still bad. The upper bound for “tolerable yet negative” is 2°C, and the optimal is 1.5°C
If anything but the lowest bound is hit, a bunch of really, and I cannot emphasize this enough, really bad things will happen. Massive heatwaves affecting hundreds of millions every years, enormous droughts hitting the driest areas of the planet constantly, floods and extreme weather events becoming more usual, out of control wildfires, sea level rise that floods large portions of the planet. Plus, things like malaria and dengue will spread through the planet, and even some weird viruses encased in the global ice caps might be released. Additionally, the droughts and floods and heat waves would reduce water availability and create disruptions in nutrition. All of these would hit the poorest countries in the world much harder than the richest ones.
The economics of climate change
Basically, climate change is an externality, a cost (or benefit) imposed to someone who’s not participating in a given transaction. For example, if a factory pollutes a river, then the cost of pollution isn’t paid by the factory or by the people who buy from it, but by people who use the river. There’s a few very Econ 101 ways of solving them. For instance, Ronald Coase basically thought that private agents should be given property rights over everything and then they’d bargain for a right amount of compensation. Generally, though, the Economist’s Choice solution is subsidize good externalities (like pharmaceutical research in vaccines), tax bad externalities (like pollution), regulate around the other problems. This is called a Pigouvian tax (or pigouvian subsidy) in honor of the guy who proposed the basic gist of it, Arthur Pigou.
Based on the facts of global warming, we can generally pin down the policies that will reduce emissions the most: putting some manner of a price on carbon, promoting alternative energy sources (such as renewables like wind and solar, nuclear energy, etc), promote the adoption of emissions reductions across the economy, and cutting costs as much as possible. The sector with the largest carbon footprint is probably food production, which can be improved in a variety of ways: reducing meat and dairy consumption, improving crop yields, and reducing food waste. So that’s what each government should do, right?
Wrong. Governments have incentives to not do anything about climate change. Greenhouse gas emissions are a global public good (or, uh, public bad), which is something that you can’t be excluded from consuming if you don’t “pay” and also isn’t used by just one person at a time (externalities are a weird type of public good, in fact). The basic principle is simple: if people can’t be kicked out from using something, and you have to share it with them, then they won’t pull their weight in paying for it. So even if all governments agree that some set of policies is the best choice, then each country has incentives to not pay any costs and let all the others do the heavy lifting.
Since some countries are much bigger emitters than others, it adds another layer of complication. For example, the biggest single emitter is China, which has been aggressively expanding its coal capacity even while trying to tout its climate leadership. And some countries actually benefit from climate change getting bad: Russia and Canada, for isntance, will suddenly have their enormous, basically useless tundras into more temperate and productive land.
Plus, there’s another layer of complication here. There hasn’t been enough research into climate change in economics for a variety of reasons, but primarily that prestigious journals aren’t publishing much, and since academics want to be published, they don’t do as much work in those areas. Though, the main way to think about the economic costs of climate change is through the DICE model, which was a big enough deal that it netted a Nobel Prize to William Nordhaus. In general, it’s an economic growth model that incorporates carbon emissions and damages from climate change, but gets there by making a number of flawed assumptions.
The first one is really nerdy and it has to do with the discount rate. A discount rate is the way economists use to show how much someone values the future. Imagine someone offered you to either make 100 dollars right now, or get paid 1.01 dollars every day for 100 days. A really patient person has a very high valuation of the future, so they choose the latter; an impatient one chooses the former. Many economists consider that DICE models, which use discount rates based on market interest rates, simply value the future too little. This means that estimates of the social cost of carbon emissions are too low in the model, compared to what would be “acceptable”.
Plus, Nordhaus’s model focuses a lot on the likeliest scenario, and not so much on ones that are much worse than we might expect but are also far less likely, individually. For example, there’s huge deposits of methane (the other greenhouse gas) trapped below ice caps and permanently frozen ground in the Russian tundra. These are called tail risks, or in Ben Bernanke’s words “really really bad outcomes”. We don’t really know how hot it would have to get for all this methane to be released, so maybe it’s much hotter than we’re on track for, and maybe it’s around that temperature… or colder. Or a bunch of wildfires could wipe out most trees and make reducing emissions much harder. There’s a lot of unknown problems with unknown probabilites, but they’re serious enough that the main models simply break down when considering them formally.
As a result, the DICE model doesn’t really work; for example, it predicts that global warming of 6°C would reduce Earth’s GDP by 10%. If this sounds like a lot, you ought to realize that if the Earth got 10°C hotter instead, most of the planet would be literally unliveable, physical labor would be impossible, and people living in the habitable parts of the planet would literally die of heat exposure after just going outside for 6 hours. Call me innumerate, but I think “being more than half to the point that being outside kills you” will cost a lot more than a tenth.
Additionally, the DICE model is centered around exactly the kind of trade-off we want to explore, that climate change costs a lot of money to avoid very distant damages. This is, uh, controversial (why else would I argue about it?), and also leads to some insane conclusions. The parameters Nordhaus used, especially a 4% discount rate as implied by financial markets, imply that the uppermost acceptable amount of warming is 3.5°C, which is less than what we’re on track for, so we shouldn’t do anything else because it wouldn’t have additional benefits. For instance, if he instead used a more defensible discount rate (1.4%) proposed by other sources, the upper bound on warming would instead be a much more realistic 2.2°C.
His work was still very important, though, and a very good initial effort for climate economics: it involved climatologists at least to some extent, focused on a wide array of effects, and tried to answer the questions as realistically as was possible. However, the models weren’t just good enough, which is a very respectable error to make anyways.
The costs of inaction are too high…
It seems that reducing CO2 emissions to a low level will be pricey. But climate change is certain to be pricier: floods and droughts are by far the most dangerous natural disasters, followed by earthquakes, followed by extreme weather. Extreme temperatures and wildfires follow. Besides, climate change has large human costs already. India loses 8% of its GDP every year to air pollution, which causes about 350,00 fetal deaths worldwide every year as well. Just from the current benefits of curbing air pollution, decarbonizing the US would pay for itself. Coal power already kills about 1 person due to respiratory diseases for every thousand it creates power for.
There also seems to be evidence pointing to all of the existing climate-related phenomena getting more destructive. For example, the 2020 California wildfires are estimated to have cost the country’s economy 0.7% of GDP, or $148.5 billion - and one third, or $ 49 billionn, were outside of California. In fact, a very DICEy estimate is that climate change will reduce US GDP by 2.3% by the end of the century, without counting the expenses resulting from large-scale environmental disruptions such as wildfires or hurricanes. Natural disasters costing the US economy over a billion dollars are increasing in frequency, almost entirely because of climate related phenomena.
But the chance of such serious climate events isn’t going to be the same in the future -it’s going to be much higher, as mentioned above. How much higher? Due to the tail risks mentioned above, unpredictable catastrophes might be so bad they lead to other worse, even less predictable catastrophes. The situation could even get so bad that climate change becomes self-sustaining.
There’s an additional problem here, which follows from the free rider problem of climate action: even if China not doing anything about climate change means that most of the country will become an infernal hellscape in 100 years, the current Chinese authorities won’t do absolutely anything about climate change if it’s too economically costly. Policies that are based on imposing large up-front economic costs to fix some incredibly distant problem never work, no matter how many times bigger the problem is than the costs. The reasons for this are obvious: rich countries got rich burning as much carbon as they wanted to, and now countries that are much poorer than them will have to pay the price. So a decarbonization that is based around paying huge costs, in terms of cost of living, will never work because the kind of countries that actually have to do anything about climate change will never get on board with them.
… and the costs action are going down
Fortunately, they don’t have to. Remember how I mentioned climate change is a negative externality? Well, there’s another way to fight it off than by charging companies: superpowering a positive externality. As I said above, fighting climate change by costing the economy money won’t really work because developing countries, to which it would be unbelievably unfair, won’t go through. But what if you make them an offer that is so good they can’t refuse it?
Renewable energies are now the cheapest source of electricity on the planet, far below oil and gas, and especially below coal (the worst energy source). It’s hard to explain how much. In 2014, the International Energy Agency expected solar to become as cheap as it is by the 2050s at least. And its 2010 forecasts are putting us basically a century ahead of forecast, if not permanently better off than it. The problem with renewables isn’t how to get to zero carbon, but rather, how to get there quickly enough.
Solar and wind energy being the cheapest energy sources on the planet is a huge deal. It means that countries won’t face a choice between using less energy and being eco-friendly. To be adopted in a given place, renewables have to be cheaper than building non-renewable capacity, which they increasingly are. For instance, India may never decarbonize as it will perhaps never carbonize at all: the low price of solar energy has pushed the government away from investing in coal power like China has. Other South Asian nations, whose development lags further behind, could follow shortly. African industrialization, by the 2040s or 2050s, may happen fully with renewable energy and barely with any fossil fuels.
Why has solar power gotten so cheap? Between 1970 and 2012, most of the decline was caused by government (and, to a lesser extent, private) investment pushing costs down. But starting in 2001, and especially in the last decade, costs started decreasing for a different reason: solar plants started getting more efficient by practice. This is because, while running solar plants and building solar panels, companies started noticing ways to improve efficiency through hands-on experience and by improving the technology based on that first hand experience.
As a result, every time solar capacity doubles, prices go down by 20%, and from 1976 to 2019, solar prices went down by a whopping 99.6%. A similar thing happened with onshore wind, which decreases 23% every time capacity doubles (and 10% offshore). This doesn’t happen with coal or other fossil fuels, because of limits to how efficient they can get. Natural gas has been an exception, but it’s unlikely it ever gets as cheap as solar does.
Making energy very cheap isn’t just about making climate change politically feasible to solve. It’ll also transform the global economy. Starting in the 1970s, energy got very expensive, which had a significant effect on productivity. This is discussed by Nordhaus (2004):
The major result of this study is that the productivity slowdown of the 1970s has survived three decades of scrutiny, conceptual refinements, and data revisions. The slowdown was primarily centered in those sectors that were most energy-intensive, were hardest hit by the energy shocks of the 1970s, and therefore had large output declines. In a sense, the energy shocks were the earthquake, and the industries with the largest slowdown were near the epicenter of the tectonic shifts in the economy.
This means that energy getting more expensive hit a variety of industries that used a lot of energy hard. This had long-term ramifications that impacted productivity more than 30 years later. As companies reorganize and take advantage of newly cheap energy, we can expect a flurry of innovation, which would accelerate economic growth to levels not seen in nearly 50 years. It won’t be inmediate, though. Just like factory owners in the Industrial Revolution needed decades to adjust their steam-fueled business models to electric energy, modern day businesses will need time to adjust for how to take the most advantage of cheap, plentiful renewable energy. Efficiency and productivity will grow, but after a while.
It’s not just weird techno-optimists of the internet who think this. Utility companies are, in fact, predicting that adoption of renewable energy will run them out of business, since most of their generation infrastructure is fossil-fuel based, with massive upfront costs, and solar panels can be cheaply installed and will only get cheaper and cheaper. Solar and wind are also much more reliable power sources than fossil fuels, which would be good news to developing countries and their frequent power outages. Cleaning up electricity is a gigantic deal because it allows for cleaning up everything else; once you can get the most bang for your buck, carbon-wise, everything else becomes much easier.
The other big sources of emissions are transportation and industry. Transportation is a huge source of emissions (roughly 60% of them in the US, at least) and solving it is theoretically easiest, by replacing a large percentage of existing vehicles with electric ones. Of course, the intricacies of creating enough charging stations, making them affordable and competitive, and managing to improve battery technology are hard nuts to crack, but they’re mostly about improving on existing trends. Electric flight, and much more importantly electric ships, are much technically harder, but still plausible. Regarding industry, replacing as many sources of emissions as possible is a decent enough approach, considering that many of the processes that are most carbon-intensive, like manufacturing cement, are basically unfixable at the moment.
Conclusion
Climate change is not an easy problem to solve, and it won’t solve itself. The two main solutions right now are carbon pricing and green energy. Carbon pricing is a traditional, very econ-sounding, pigouvian tax: estimate how much harm each molecule of CO2 does, put a price tag on it, charge it to companies. It’s particularly unpopular, being soundly rejected by Swiss voters in a referendum fairly recently. Green energy doesn’t have that problem: offering people cheaper electricity, cheaper electric cars, good green jobs is a winning bargain.
Internationally, there is also another problem. Countries have to all adopt carbon prices and carbon tariffs, to punish each other into acting. This isn’t really sustainable and it’s quite unfair to developing countries, which are saddled with high costs and none of the benefits of decarbonization. Rich countries could “pay back” their carbon debt by paying for clean energy infrastructure abroad, plus their existing support which made the technologies so cost-effective in the first place.
There’s also pie-in-the-sky ideas like mass planting of trees, creating fake volcanic eruptions to put what’s basically artificial ash into the sky so it cools down the atmosphere, and even just pulling carbon dioxide out of the atmosphere. All of these would be expensive (actually, planting enough trees would take up like half of all global energy consumption), but it would mostly follow the solar cost decline pattern to some extent.
Climate change is already affecting the way we live, as seen in (for one example) the recent floods in Europe or the massive fires in SIberia, and it’s likely to get worse. We’re on track for emissions that make 1.5°C warming (the “safe” scenario) basically unachievable, though we could still reach the 2°C target comfortably. To get a grip on the severity of this outcome, a variety of climate-related health problems and catastrophes would kill as many people as COVID-19 did, globally, and primarily in very poor countries. This isn’t good, it’s bad - but bad enough that we can still live with it (or live on the planet at all).
Sources
Climate change 101
Hannah Ritchie and Max Roser (2020), "CO₂ and Greenhouse Gas Emissions", OurWorldInData
Hannah Ritchie and Max Roser (2020), "Emissions Drivers", OurWorldInData
Zeke Hausfather (2017), “Why scientists think 100% of global warming is due to humans”, Carbon Brief
Alan Buis, (2019), “A Degree of Concern: Why Global Temperatures Matter”
Climate economics 101
Stern (2008), “The Economics of Climate Change”
Noah Smith (2021), “Why has climate economics failed us?”
Consequences of climate change
Adam Smith (2019), “2018's Billion Dollar Disasters in Context”
Hannah Ritchie and Max Roser (2019), "Natural Disasters", OurWorldInData
Weitzman (2011). “Fat-Tailed Uncertainty in the Economics of Catastrophic Climate Change.”
Economic benefits of action
Noah Smith (2020), “Climate change isn't THAT hard”
Noah Smith (2020), “Why I'm so excited about solar and batteries”
Ramez Naan (2020), “Solar’s Future is Insanely Cheap ”
Tim Harford (2018), “Why didn't electricity immediately change manufacturing?”, BBC
Nordhaus (2004), “Retrospective on the 1970s Productivity Slowdown”
David Roberts (2018), “The key to tackling climate change: electrify everything”
Noah Smith (2021), “Decarbonization: Think globally, act locally”
Samuel Hammond (2021), “How Congress Ruined the Endless Frontier Act”
Ellie Nielsen (2021), “The fastest way to get more people to buy electric vehicles”, Vox