Economics for the future

The great American mechanical engineer Frederick W. Taylor once said “It’s easier to make a reporter into an economist than an economist into a reporter.” I must confess I’ve often sympathised with this view; I’ve often found it rather hard on the grey matter to follow the reasoning of some economists. I can see they have a series of logical arguments but getting my head round all of it in one go is often a challenge. On the 12 March I was fortunate to find a seat in a packed lecture at the University of Exeter where economist Professor Lord Stern of Brentford spoke on getting a global deal on climate change. This was not a dry, hard-to-follow monologue on the minutiae of economic theory. Instead, Lord Stern gave a lucid and convincing talk on the challenges we face in minimising the the risks of significant climate change. The economics were there but it was refreshingly understandable.

Lord Stern is arguably best known for heading up what is known as the Stern Review; published by the UK Government in 2006, this 700 page landmark piece of work made the economic case that it was cheaper to tackle climate change now rather than do nothing. Now the IG Patel Professor of Economics at the London School of Economics, Stern addressed the wider issue of how to deal with climate change. He stressed that the problems we face with climate change are a result of the greatest market failure of all: the environmental damage associated with using fossil fuels is not included in the price we pay. The problem is now how to address this. Although any country could instigate a policy that would fully cost the damage, it won’t have bite unless the majority are onboard. Ultimately, the atmosphere doesn’t care where the gases come from; extra gases being dumped in the atmosphere by free-riders means more warming for everyone regardless of who put it there. There needs to be a global agreement to significantly reduce greenhouse gas emissions. Unfortunately, polarised views are threatening to stymie progress.

For a global deal to stick, Stern identified three criteria that have to be met:

    * the deal has to be effective, meaning a cut of at least 50% in greenhouse gas emissions by 2050 (although science has moved forward since Stern’s review was released — with many scientists stating we need to reduce emissions by at least 80% by 2050, or even zero)
    * the deal has to keep the costs of emission cuts low; and
    * the deal also has to be equable, which in practice means rich countries have to take the lead.

Solar panels in Algeria
The shenanigans at Bali showed just how much work still needs to be done. Yet rich countries have to lead and there’s enough of a groundswell in public support for action that our governments are starting to feel impelled to act, albeit slowly. Contrast the massive proposed cuts of greenhouse gases by all Democratic and Republican candidates for US President with the current incumbent in the White House; this is for a nation that currently produces around a quarter of all greenhouse gas emissions. Although it would be fantastic if the USA and other developed nations were to commit to a rapid decarbonisation of its economy, the technology has to be deployed. The time element has often been used as an excuse for delaying action but the beautiful thing is a lot of the technology has been developed and the time it takes isn’t as long as you might think; some parts of Germany are using wind to generate half their electricity from nothing in just 5 years — the result of sensible policy mechanisms that incentivise the uptake of renewables. If the political will becomes a reality, opportunities abound to make a serious dent in atmospheric greenhouse gas levels. As Stern has shown, for just a one-off investment of 1-2% Gross Domestic Product (often abbreviated to GDP), a large enough investment can be made to reduce our dependence on carbon and significantly reduce the risk of catastrophic climate change.

We’ve got the technology and can afford it. Climate has changed. Let’s get on with the job and fix it.

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