Economic policy

Mainstream economic policy must take climate change into account in its calculation of growth

The scientific community is at the forefront of sounding the alarm on climate change and providing indisputable information proof on the link with human activity. Yet economic policies aimed at decarbonizing economies still lag behind the urgency of the warnings. Indeed, the lukewarm response from the economic policy community is part of the disconnect between knowledge and action to address the climate crisis. Some excellent to research Nevertheless economy did not take climate change into account in its calculation of growth. Part of the reason is fears that strong climate action will undermine short-term economic growth.

Climate action is not free. According to one estimate, investments of an additional amount $3.5 trillion will be needed to achieve net zero carbon emissions by 2050 by limiting global warming to 1.5 degrees VSElsius to reduce the risk of catastrophic weather events. The message of the economics of externalities or adverse spillovers is that the cost of stock is far below carbon and climate Cost in the case of inaction.

To advance climate action, mainstream economics must align with climate science.

To find solutions to daunting problems, whether it is HIV-AIDS or terrorism, it is essential to establish a causal link. Scientists have been clear in link points in the ecosystem of climate change – greenhouse gas emissions, rising temperatures, rising sea levels making floods and storms worse, and heat waves making fires worse (see face 1) – but cautious in attributing individual events to global warming. But new studies are doing just that – concluding that extreme heat waves in Siberia and the Pacific Northwest in 2021 would not have happened without climate change. Or that climate change has made the extreme rains and floods of 2021 in Belgium and Germany more probable and more intense.

Figure 1. Connecting the dots in the climate change ecosystem

Source: author’s illustration.

The economics of negative externalities calls for taxing carbon emissions. While some forty countries have launched carbon pricing, powerful lobbies continue to block climate action. Big oil has been misleading the public on the damage caused by greenhouse gases since the 1970s. Fossil fuels benefit from significant subsidies which, given their estimated damage to health, amount to 5 trillion dollars one year. China, Japan and the United States are the main financiers of new fossil fuel power plants. Multilateral Development Banks (BMD) have also invested in fossil fuel projects.

There are also downward spirals, rather than self-correcting forces, inherent in the climate crisis. For example, energy shortages linked to global warming can ironically lead to greater dependence on fossil fuels. Texas’ the blackout in 2021 was partly caused by gas pipelines freezing in unseasonably cold weather. Oarti-triggered oil price hikes are heightening energy concerns and driving policy reversals.

The relative absence of economics from the policy table is a missed opportunity. At last count, the best economics journals are still struggling to publish articles on climate change. The much quoted Economics Quarterly Review had not published any and the quantitative Econometrics—only two. A Nobel Prize in Economics was awarded to Nordhouse for “integrating climate change into long-term macroeconomic analysis”, but the cited work and its follow-up failed to recognize exponential damage, tipping points and irreversibility.

This error of omission is based on an evaluation focused on GDPa crude measure of production that does not compensate for the environment and biodiversity damage. Ignoring carbon intensity is a signal to maximize GDP growth regardless of the damage. The “East Asian Miracle implicitly celebrated rapid GDP growth at the expense of ecological destruction. Rapid growth in China and India, as in advanced economies before, has worsen the environment. South East Asia has the highest rate of increase in emissions, despite being the most vulnerable to climate change.

Once conventional economic growth is adjusted for CO2 emissions per capita, a truer picture emerges that can help guide policy. One such measure is the Global Pressures-Adjusted Human Development Index (PHDI) proposed by the United Nations Development Program qualify its own human development index (HDI). Country rankings change notably when moving from HDI to HDP – e.g. top-ranked Norway drops 15 places, and the United Statesranked 17thdrop of 45 places.

the world Bank estimated national wealth as the sum of not only produced capital and human capital, but also natural capital for 146 nations from 1995 to 2008. United Nations Environment Program (UNEP) also estimates inclusive wealth as the “social value of natural capital, human capital and produced capital” of 135 countries over the period 1990-2014. UNEP shows a larger adjustment for environmental loss, presumably since the World Bank measure, according to the report, does not subtract the social cost of carbon from fossil fuels, nor does it include the value of carbon sequestration from conservation of ecosystems.

The crucial question is whether economic measures such as those of the World Bank National Policy and Institutional Assessment adjust environmental losses. And if measures like the Doing Business Index rank performance on the false premise that the less regulation, including environmental and social safeguards, the better.

Growth analysis rightly emphasizes productivity in addition to physical and human capital accumulation as well as worker participation, but ignores environmental sustainability. the world Bank and the International Monetary Fund, which have produced reports on climate change, must incorporate climate impacts into growth projections. An important role for MDBs could be to help address global public goods, such as environmental health in all countries. If so, they could increase lending for climate change mitigation and adaptation, as some promise to do. The World Bank has a new Climate Change Action Plan which aims, among other things, to align the operations of the International Finance Corporation with the Paris climate objectives by 2025.

To advance climate action, mainstream economics must align with climate science. Economics of growthinfluential in the country’s politicscould integrate climate change and the environment. It is time to complement, if not replace, gross domestic product with a measure of quality growth net of climate cost damages.