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Stern und Drang: two different ways of using economics to deal with climate change

For some very good reasons, many people are wary of “economic” arguments as part of debating what should be done in the face of global warming. George Monbiot takes the wary approach in his latest column in The Guardian [1].

This is a column about how good intentions can run amok. It tells the story of how an honourable, intelligent man set out to avert environmental disaster and ended up accidentally promoting the economics of the slave trade. It shows how human lives can be priced and exchanged for goods and services…

When Sir Nicholas Stern published his study of the economics of climate change, environmentalists – myself included – lined up to applaud him: he had given us the answer we wanted. He showed that stopping runaway climate change would cost less than failing to prevent it. But because his report was so long, few people bothered to find out how he had achieved this result. It took me a while, but by the time I reached the end I was horrified.

…Stern’s unit (a reduction in consumption) incorporates everything from the price of baked beans to the pain of bereavement. He then translates it into a “social cost of carbon”, measured in dollars. He has, in other words, put a price on human life…

Stern’s methodology has a disastrous consequence, unintended but surely obvious. His report shows that the dollar losses of failing to prevent a high degree of global warming outweigh the dollar savings arising from not taking action. It therefore makes economic sense to try to stop runaway climate change. But what if the result had been different? What if he had discovered that the profits to be made from burning more fossil fuels exceeded the social cost of carbon? We would then find that it makes economic sense to kill people.

[cont’d [1]]

Therein lies a very sensitive rub. To do a cost-benefit type of analysis, you must convert your different variables so that they all share the same unit of measure. It doesn’t have to be dollars, but in practice that’s what happens. (Not that it would be any easier to convert to another unit of measure. How would you convert the dollar value of a television into years of healthy life?*)

Understandably, many of us react badly to this kind of reductive thinking. (To be sure, there are decent–though not necessarily completely persuasive–arguments in favor of this kind of reductive thinking.) And so, understandably, many of us are inclined to distrust almost any use of economic analysis in dealing with an environmental or social problem like global warming. If you are so inclined, please think twice.

Your second thought should be more favorable towards the economics that are used in Peter Barnes’ Climate Solutions. Though Barnes’ proposal to reduce greenhouse gas emissions relies on an economic approach that commodifies the atmosphere, in a certain way, his overarching structure avoids the pitfalls that Monbiot identifies in Sir Nicholas Stern’s approach. That’s because Barnes’ “cap-and-dividend” plan–unlike many proposals for a carbon tax–is built first and foremost on a defined level of emissions that are allowed, a level that is gradually reduced over time. The economic system of auctioning off permits within that level, and of allowing the buying, selling, and trading of permits, is embedded within a larger system that relies on scientific determination of what the emission levels must be changed to in order to reduce the harm of global warming. In that way, it is in the spirit of 20th century economist/anthropologist Karl Polanyi [2], who described the risks to society when the economic system is allowed to overtake the larger social and cultural (and environmental) systems within which it has traditionally been embedded. (See his classic book, The Great Transformation [3].) In other words, while so many economists (official and wannabe) use economic analysis to encompass their understanding of the entire world, Barnes uses economic thinking as one of several tools and keeps it contained within his larger view of the world as a whole.

* Keep this in mind should you ever be confronted by an economist who has conducted a cost-benefit analysis, for example at a town hall meeting to inform debate over some new regulation, like the expansion of an industrial park. In addition to asking them to explain how they converted non-monetary measures (like the value of open space, or estimates of years of life lost due to increases in pollution) into monetary numbers for their cost-benefit comparison, go on to ask them how they might do the reverse: convert monetary measures (for example estimates of increased payroll) to non-monetary units (like years of healthy life gained). My guess is that they’ll be unable to conceive of how to do the exercise in reverse, and if that is true, ask them why this “asymmetry” is acceptable? Why doesn’t it invalidate their initial attempt at conversions? Why they express any confidence that their conversion to monetary measures actually captures anything real about the situation? Or, of they do come up with a way to convert monetary measures into non-monetary measures, ask them why they didn’t do that in the first place. After all, at the heart of neoclassical economics is the idea that what we are trying to have the most of is “utility,” not money. Satisfaction, happiness, contentedness, those sorts of things–those are the things that are supposed to be at the heart of economic thinking. So why won’t the hired-gun economist do his or her measurements in terms of happiness? And if they say they can’t, ask why money is a trustworthy stand in for utility/satisfaction/happiness. The answer is: it rarely is.