No Con Economics

For the most part, this blog posting is devoted to summarizing a recent paper by Nicholas Stern and Joseph Stiglitz entitled Climate Change and Growth.  The primary conclusion from this essay is that “…tackling climate change can unleash higher growth for at least the next two decades…”

In this extensive essay, Stern and Stiglitz reach a number of conclusions including:

• “Clearly, there are substantial risks that unmanaged and weakly managed climate change could destroy growth and reverse development.  This conclusion emerges clearly from the science.”
• A tradeoff between economic growth and responses to reduce climate change does not have to exist if constructive policies are enacted and implemented.
• Strong climate action reduces risk overall which induces private sector investment.
• Strong climate action reduces the unproductive expenditures required to protect against climate destruction and to clean up from such destruction.
• The policies enacted to generate a sustainable economy and encourage green innovation can reduce a variety of market failures that inhibit economic growth such as the limited or non-existent markets for the medium and distant future.
• Policy to address climate change can stimulate aggregate demand and thus address concerns regarding economic stagnation.
• Reduced climate change and pollution can increase health as well as labor productivity.
• Appropriate policy can lead to the replacement of dirty capital (equipment and structures) with clean capital.
• Carbon pricing can yield revenue to aid the transition away from some industries to others, to reduce public debt, and to narrow the distribution of income (since the costs of climate change fall to a significant degree on those who can’t afford it.)

Much of the paper is devoted to why neither complete dependence on markets nor on a “no growth” policy strategy can meet the goal of keeping average temperatures below the 1.5 degrees Celsius goal and yield increased economic growth as well as narrow the distribution of income. The paper spends more space on its criticisms of markets than of no growth.  In this posting, I briefly address each argument.

For the former, the authors argue that a dependence on markets to yield the necessary adaptation to reduce climate change fails to address market failures including:

• The risk assessment of complex and unknown factors such as financial crises, pandemics, floods and fires, and climate change in general.
• Prices to reflect the social cost of negative externalities such as those induced by the production and consumption of greenhouse gases.
• Subsidies or regulations to reflect the social benefits of positive externalities such as those induced by less polluting technologies and consumption patterns.
• Social discount rates (or time preference rates) that differ from the rates existent in capital markets because private markets tend to excessively discount the distant future.  Private markets, thus, over-emphasize near term costs and under-emphasize long term benefits, such as the effects of reducing the large rise in the expected average global temperature on the existent population in 2050 or 2100.
• The distribution of costs and benefits upon different groups within the global population.

The authors reject no-growth strategies because “the no growth argument diverts attention from the key issue of breaking the relationship between consumption and production on the one hand and destruction of the environment on the other.”  Supporting arguments include:

• Without strong climate actions such as noted above, no growth may be neither necessary nor sufficient to achieve net zero carbon emissions and may just freeze emissions at increasingly high levels.
• The political feasibility of implementation of strong climate action may be inhibited by the lack of economic growth since funding would not be available unless those well-off or politically well-connected would be willing to be taxed to pay for it.

The authors’ discussion of market failure deserves much more attention than I can provide in this posting. I intend to address this topic in a future posting.

Nicholas Stern is the primary author of the frequently cited “Stern Review on the Economics of Climate Change, a 700-page report released for the Government of the United Kingdom on 30 October 2006. The report discusses the effect of global warming on the world economy. Although not the first economic report on climate change, it is significant as the largest and most widely known and discussed report of its kind.”

On a personal note, Nick Stern was a participant in one of my courses at the London School of Economics (LSE).  I was pursuing an M.Sc. in Mathematical Economics and Econometrics; Stern had just completed his Ph.D. under Professor James Mirrlees at Oxford University.  Future Nobel Prize winner Mirrlees delivered five lectures on optimal income taxation at LSE.  While at Lawrence, I developed a computer program for my course on public economics; students used the program to determine the optimal income tax system related to the social choice function they chose to investigate. A central mechanism in the program came from a paper Stern wrote.