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Agenda For a “New” Economics of Climate Change

by Serban Scrieciu • July 13, 2010 @ 2:17 pm

Throughout the world, societies are reaching across frontiers, and having an impact beyond their borders. As well, modern life is increasingly complex, with challenges that affect us all; finding solutions will require cooperation across research communities. Man-made climate change is one such challenge that has been confronting us for the past two or three decades. During the early phases of the climate change debate, there was virtually no communication between climate scientists, economists, those working on development issues and other “soft “or “hard” scientists. This was understandable as the climate scientists focused on exploring the physical processes associated with man-made climate change, as well as the risks that our planet might be facing with an increasingly unstable climate.

After many years of hard work gathering and understanding the evidence, the scientific community has reached a consensus. This was expressed in the IPCC 2007 fourth assessment report stating that proof of climate change is “unequivocal” and that human activities have caused most of the observed changes in the past 50 years. In order to benefit in the longer term from a safe and stable climate, physical scientists generally point towards a necessary stabilization range of 350-450 parts per million CO2 by the end of this century. Evidence of a faster-than-expected changing climate is cropping up. As a result, it is the lower end of the range corresponding to sharp emission reductions and almost complete decarbonization by 2050 that is recently receiving increasing attention from policy circles and communities. Meanwhile, traditional orthodox economists have been recommending little climate action or even inaction. Their evaluations are based less on the physical scientific evidence and more on the economic school of thought dominating contemporary market-liberal societies, i.e. neoclassical supply-side economics. The latter typically assumes that we are in a first-best world, where societies are composed of economic agents able to optimize based on perfect access to information and fully rational behaviour. Economies, in their perspective, function in a certain environment so that firms and households act ideally and exploit perfectly efficient their profit and income opportunities. From their point of view, any departure of economic systems from this stable, ideal equilibrium point (such as government and mitigation action) would automatically involve costs. Traditional economists generally calculate their own climate stabilization targets according to an “optimal” economic path. This weighs the costs of climate policy action and the benefits in terms of avoided damages and additional benefits. All impacts are monetized, even though some are extremely difficult or simply should not be valued solely in monetary terms (e.g. controversial issues, such as pricing human lives and calculating “statistical lives”, or placing a financial value on ecosystem services). Their highly prescriptive findings point towards considerably less stringent emissions reduction efforts and higher global warming levels than what the physical evidence and science has been arguing for.

Clearly there is a dilemma here for the concerned citizen. Should she trust the physical scientific basis for informing the set-up of climate stabilization targets and arguing for strong climate action or should she confide in the orthodox economist advocating less stringent cuts and smaller departures from the business-as-usual fossil fuel-based economic pathways? From my point of view this is a no-brainer. Climate change is first and foremost a physical science problem and climate scientists are best suited to understand this. Climate science provides the physical evidence for formulating the problem and the basis for action; it informs the political process deciding on what we ought to do given underlying uncertainties and risks. Economics then steps in to provide cost-effective but also equitable solutions in order to achieve the politically agreed objectives. In other words, there is a clear distinction here between the role of physical science that is concerned about supporting the decision process on “what we ought to do” and the role of economics that responds to questions related to “how we should do it”.

Neoclassical economists have often ventured well beyond their mandate and have attempted to provide “socially optimal” prescriptions to problems that are ultimately of a non-economic nature. It has been occurring not only for the climate change problem but also in other areas of environmental protection, health issues, education, and even conflict and war. Traditional neoclassical economic thinking has gradually developed a highly mathematized and sophisticated apparatus. Often economists tend to resemble applied mathematicians. They are less keen to be seen as social scientists concerned about the realities of social behaviour, of which economic behaviour is fully part of. This path has been strongly pursued in order to both fortify its own prestige status within mainstream economics and extend more or less forcefully into other disciplines. It goes without saying that disciplines venturing in the realms of other disciplines would contribute to the progress of knowledge. But this needs to be done through active dialogue and effective team-work and cooperation. Real collaboration with other disciplines does not appear to figure high on the traditional economists’ list of priorities. Finding effective ways to communicate across and within disciplines will be crucial if we are to choose the right actions and formulate sound climate policies. Decisions we make on climate change adaptation and mitigation cannot be based solely on economic efficiency criteria; we will need to consider equity, environmental and other developmental issues too.  We will have to work across different approaches if our work is to bear fruit.

A possible agenda for a “new” economics of climate change could follow a twin track. First, one needs to accept and interact more with different perspectives within economics itself. There is a wide and rich diversity of schools of economic thinking relevant to climate change already out there that requires more tapping into. Evolutionary economics, ecological economics, complexity economics, post-Keynesian economics, behavioural economics, experimental economics, institutional economics, feminist economics cross my mind. Heterodox views on the economics of climate change should be given the floor more often to make their approaches and tools voiced. Several concepts and perspectives from such alternative economic thinking are already increasingly part of the mainstream (e.g. demand-led growth, policy induced technological change, bounded rationality, uncertainty and risk, systems analysis). The more diverse the economic views are, the healthier the economics discipline is, and the more fertile the breeding ground for innovative and groundbreaking ideas could be. Non-economists need to be made more aware of such diversity within economics. They need to depart from the mis-understanding that equates the entire economics discipline with particular neoclassical orthodox tools such as cost and benefit analysis or optimization models. Alternative economic views on the climate change problem need to be better incorporated into the mainstream and more positive commonalities could be identified across economic sub-disciplines. This may prove vital for economics to regain its popularity and robustness, and depart from its contemporary “dismal science” status. Second, one needs to foster more real cooperation between economics and other disciplines. This would involve researchers from various backgrounds effectively collaborating, finding a common language, and integrating their work without necessary losing their technical jargon and specific tools (though trans-disciplinary concepts could emerge). In the area of climate change, there is great potential for collaboration between, for instance: economists, climate scientists, sociologists, engineers, moral philosophers, ecologists, historians, and political scientists.

Any “new” economics of climate change must find solutions to this dual challenge. It is essential that one sees the forest from the trees, particularly when aiming to tackle the system-complex and highly dynamic problem of climate change. It is about time for economists to more actively cooperate and engage in dialogues both amongst themselves and with other disciplines. The Economists for Equity and Environment Network represents a call in this sense.

By Serban Scrieciu, United Nations Environment Programme, Division of Technology, Industry and Economics

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