The economics of the climate emergency
Can we afford a climate emergency mobilisation?
It is a very odd question, isn’t it? Can we afford to take action to address an existential risk? One that experts tell us could trigger the largest economic crisis in human history, with the possible collapse of civilisation. Imagine doing a cost benefit analysis of that!
But this question, of the economic implications, has been at the core of the climate debate for decades. What is the cost of acting, who will pay for it, which countries will lead, will the consequences be fair, who should be compensated? That whole debate was predicated on an idea that is now clearly wrong - that if we didn’t act, the economy would carry on as it had been, and therefore action on climate change imposed new costs and risks to the economy.
We need to now jettison all that and start again. The economics of our situation today - and of a climate emergency mobilisation - are completely different.
There are three key reasons:
The cost of not acting in emergency mode could be the collapse of the global economy. Such a collapse is not certain, but the consequences of one would be so great, it would quite irrational to ignore the risk. Whatever the ‘cost’ of acting is, it will be less than the ‘cost’ of collapse.
It seems increasing likely that a well-managed emergency mobilisation would be enormously beneficial for the economy and society, driving innovation, creating wealth and enhancing quality of life globally. Not just better than the alternative risk of collapse, but better than today.
With the historical assumption of ‘action = cost’, the follow-on assumption was that action would therefore only occur through policy intervention (e.g. a carbon price). This is now quite flawed. Already today, action does not always equal extra cost, in fact it often lowers direct costs and even more often, indirect costs. We also now live in a modern globalised and highly connected market economy. This means financial risk is managed based on constantly adjusting assumptions about future policy, physical risks, public attitudes and the complex interplay - and sometimes contagion [FN1] - between these factors. Together these unleash powerful drivers that are currently effecting and will also soon accelerate change.
Understanding and accepting these shifts in assumptions is crucially important because the economic debate will be central to both the process of both deciding to embark on an emergency mobilisation and to managing it well.
This section explores how these three economic drivers are finally, steering us towards action.
Footnotes
FN1 A contagion is the spread of an economic crisis from one sector, market or region to another and can occur at a regional, domestic or global level. Consider this description of climate risk contagion from Rostin Behnam, US Commodity Futures Trading Commission: “Thinking about the flooding in the Midwest and the tornadoes that we experienced this past spring, you have farmland, homes, businesses that are still literally underwater and recovering from the floods. Tied to all of these are personal mortgages, commercial mortgage, or farm loans for purchasing truck equipment, or seed, or any number of farmer needs. When this land is not able to be used there’s going to be an asset impairment which could affect the lender. In that case, you could have a regional bank or a national bank that has a series of loans that are not being paid back. And if they’re not being paid back, I think it’s important that regulators start to think about what risk and what risk exposure those financial institutions have”.