How much would you pay to ensure a stable climate in the future? Should we tax coal use to help renewables spread faster? And what is the cost of not acting today for the generations to come?
Questions like these are crucial to climate policies and economists who often guide government choices have all sorts of opinions on the issue. Those opinions are not pure science, however, but may be based on values people hold, the logic of markets and government priorities. Thus, if you are worried about the future of the climate, it is well worth understanding the connection between values, economics and climate actions.
The contemporary economics of climate action
Imagine that your phone will break in a year and repairing it will cost €100. How much would you pay if you could prevent the damage? From an economic standpoint, it is good to think of other ways you could use €100; for example by depositing them to your bank account under a 5% interest rate. In this case you’ll have €105 and it would only make sense to pay €95 or less now to prevent the damage.
The same approach is used for all types of investment decisions, not least climate action. For example, if climate change would lead to €100 billion in losses in 50 years, which is a period over which today’s emissions will start making most of their impact, at a regular discount rate of 3% you would invest no more than €22.8 billion. That’s still a lot of money, but is it enough?
Economists actively discuss effectiveness of different discount rates, usually arriving at some estimation that further informs real economic choices: for example the value of the carbon tax or the share of country’s GDP devoted to climate action. Orthodox economists usually suggest discount rates around 3-5%, while more ecologically inclined ones tend to go between 0% and 2.5%, arguing that the costs of inaction will be much worse than the cost of acting today.
And though discussions on the proper rate are quite fervent, the approach as such is considered a gold standard for investment decisions on protecting the climate while not wasting a penny. William Nordhaus even got a Nobel this year for work in this realm.
Meanwhile, this doesn’t tell the whole story.
Imagine a different situation. What if you were told that your dog, Buddy, might die in a year because of a spreading disease if you don’t vaccinate him now? It would cost €50 to buy the vaccine. But, no need to worry, a new dog of the same breed would cost you only €20. Which price would you choose to pay? Would you calculate if it’s economically viable to save your dog? Would you abandon the whole idea of having the dog because it leads to uncomfortable decisions? Or, maybe, would you be ready to pay even more, way more, if needed, for saving Buddy and even feel offended that I suggested to trade his life?
It actually works exactly the same way for the climate and our planet. However, this time it is the only planet we have and it is about the lives and homes of millions of people, hundreds of vanished species and destroyed ecosystems, which, of course, might feel much less personal than Buddy, whom you have known for years. For the cases like this, it is sustainability scientists and climate activists who feel unsettled due to irreversible damage and planetary threats of unstable climate. What price would you put on that?
Many still would put a price on it and do so on a regular basis. Sometimes it helps to get more money invested into solar energy or low-carbon transport. But sometimes it leads to the slowing down of climate action and luckily there are other ways to approach the issue.
Climate-friendly economics is possible
Among the most promising approaches are positive discounting rates, outcompeting the dirty economy with sustainable solutions and, finally, rethinking the economic benefits of growth as such.
The positive discounting rate basically means that we should now pay even more to avert the damage in the future. And while for many economists this might sound like nonsense, there are some good reasons to consider the idea. For example, in health economics it is well known that people would willingly pay more to ensure better health now and into the future rather than hoping that future medicines will help them get better at a lower price.
And how different is the health of our living environment compared to the health of our body, especially when they are tightly intertwined?
Meanwhile, future generations might happen to live in much worse climates and have less money because of increased droughts and extreme weather event, thereby valuing good climates much higher than we currently do. And as some of them will have more money, others will become even more vulnerable because of higher inequality, going hand-in-hand with unchecked economic growth.
You don’t need to go far to see the consequences of inaction, as a company called Aethaer is already successfully selling fresh air from England to polluted regions of China for $215 per liter. This is the price some people are ready to pay since previous generations had different priorities on their mind and polluted the country’s air without a thought for the future. And while consumption in many other countries is directly linked to air pollution in China, it may still sound surprising to us that air might even have a price.
The next argument comes from Gunter Pauli, founder of the blue economy concept. His idea is simple yet effective: don’t wait for the rules of the game to change, but use sustainable and competitive solutions to get the dirty industry out of the market. And this is not simply wishful thinking. Pauli himself presented over a hundred solutions from all over the world in his famous Blue Economy report for the Club of Rome.
A vivid example is the price of solar compared to fossil fuels, dropping down with the speed of a waterfall and exemplifying how human dedication to innovation influences the logic of markets. The idea has also become a cornerstone of the circular economy, which is increasingly regarded for its win-win impacts on both climate and society. For urban-areas effective climate action has also been linked to nature-based options like green roofs and expansion of green areas. From an economic standpoint these are considered no-regret solutions, since while positively impacting the climate they also provide immense social benefits.
Still, the question remains whether the adoption of renewables and other climate-friendly solutions will be fast enough to achieve the Paris goals of keeping global warming within manageable limits. Many of the future scenarios suggest that we might not succeed because of how our economy develops and this suggests digging deeper into the very idea of growth.
While discounting theory is based on the presumption that economic growth is always good, there is a growing tribe of economists stating that things like income or consumption provide very limited answers to human wellbeing. We can not value economic outcomes only for the numbers they hold and above certain thresholds GDP growth may lead to making much of Earth simply uninhabitable. This has profound implications for lowering the impacts of the economy on climate and you discover more on this from concepts like degrowth, which suggests that degrowing our economy in some areas might be good for nature and society alike.
While it is unlikely that the way economists make their estimates or the way system functions will change overnight, there are still things you can influence to change the course of action for better.
Key takeaways for a thriving climate
First, when it comes to the climate, ethics should go before money. We can’t value life the same way we value consumption. And the practical way to go about it is to commit to a livable climate prior to any economic considerations. Sometimes, it even makes sense to consider negative discount rates, at best combined with multiple criteria to guide decisions, and not only economic ones.
Second, learn about the worst possible local impacts of climate change in the next few decades and use them as a baseline for action. Check if your municipality has planned sufficient mitigation and adaptation measures and get them to consider the threats seriously and do as much as possible, prererably focusing on nature-based solutions.
Also, no matter how fast we transition towards renewables or how well we plan for climate change, it will also always depend on social norms and personal choices that comprise our daily lives. Get to know you family’s impact on climate and think of what you can do to achieve the best outcomes with the least effort. As you commit to sustainable choices and put your values first, standard market economics will have far less impacts on your life.
Finally, think how to spread the transition. Start talking with your community and acquire the knowledge and resources you can utilise togother to adapt locally. And as each of us takes personal and social responsibility of engaging into climate action, all of us together will have a much better chance of creating a sustainable and thriving Earth.
