September 27, 2019 Reading Time: 4 minutes
climate change

Last week, economists Andrew Oswald and Nicholas Stern (he of the Stern report on climate change) published an article denouncing the fact that economists abandoned the topic of climate change. To make their case, they pointed out the small number of articles published on the topic of climate change in some of the top journals. 

For example, the Quarterly Journal of Economics was accused of having published no articles on the topic in recent years. Economists like Richard Tol pointed out that this was untrue by highlighting three articles recently published in that journal while Roger Pielke pointed out an even greater number. 

The argument that economists are not studying “the big questions” of the day is becoming increasingly popular. For example, it has also been used to the topic of economic inequality. The argument there, as in the case of climate change, is that economists ignored the topic for decades. 

Even if this is an inaccurate depiction of the works of economists on inequality (just as in the case of climate change), the goal of this argument is to press economists to action. Renewed interest in a topic, so it is argued, implies renewed actions. Yet, it is precisely because those topics are important that we need to be cautious, not rush in headfirst and add extra layers of government policies. 

In fact, climate change is a perfect topic to illustrate the need for caution. 

Climate change is real (and caused by humans). The greenhouse gases that we emit are, in the lingo of economists, a social cost. That social cost is the cost that is not embodied in the private cost of any transactions. 

For example, when one pumps gas into his car – the private costs to the parties involved (i.e. the car-owner, the gas station, the oil refiners etc.) are embodied in the exchange between the car-owner and the other parties. The social cost comes from what happens to parties not involved in this exchange when the car-owner drives his car (i.e. the emission of greenhouse gases). The gap between the social cost and the private cost is pollution. 

This gap is why there are costs to humanity from climate change and why the problem is real. From this, the economists who deplore the current level of attention to climate change argue that more must be done. New regulations must be passed. New taxes must be enacted. New laws must be introduced. All of these new policies must act to reduce the gap even if it means slower growth in the immediate future. This is where I disagree.  There are a great many policies that could be removed that would boost growth and reduce the social cost of pollution. 

After all, if the idea is that we need to reduce the gap between social and private costs, the elimination of subsidies that reduce private costs will have the same effect as pollution taxes. Consider the case of fossil fuel subsidies. Roughly a quarter of the world’s oil consumption is indirectly subsidized through price controls. Governments across the world price oil and gas below the international market price. This pushes consumption above the market equilibrium. These governments make up the difference via the revenues from general taxation. These are subsidies to consumption. They reduce the private cost of gasoline thus widening the gap with the social cost. These governments basically subsidize pollution. 

What if these subsidies were removed? Simulations by some economists suggest that eliminating them would reduce greenhouse gases by 10% by 2050. Another group of economists suggest that if the subsidies had not existed, greenhouse gases emissions would be 36% below what is observed. This is not a negligible reduction from eliminating a single set of policies. Moreover, these subsidies have existed for decades now. This means that for decades, they allowed for the accumulation of greenhouse gases into the atmosphere. If they had never existed, the growth of emissions would have been inferior for decades which entails that the efforts left to accomplish to mitigate climate change would be minimal. 

On top of it all, the elimination of the subsidies would allow for reductions in taxes in these countries as governments would no longer need to use tax revenues to subsidize consumption. 

In essence, climate change is in part a problem that governments created by subsidizing consumption decisions that widened the gap between private and social costs. So, why should economists believe governments to be able to remedy with new policies the problems they helped create? This is a leap of faith that many, if not most, should be reluctant to take. 

It could be that the policies advocated to mitigate climate change would alleviate the problem. This would make us all better. However, what would be the unintended consequences? Would they create another problem down the road that is more difficult to tackle with? 

Consider another example related to the environment: agricultural protection. Most advanced countries have very sophisticated forms of trade protection to shield their farmers from international competition. The result of this is that there are more farmers in advanced countries than there would be under free trade. In terms of the environment, this means that more land is being used.

 Rather than specializing food production in the most suitable areas, relatively less productive areas are kept under production. These are acres of lands that cannot be returned to nature. This is important because we know that when forests reclaim agricultural land, the trees that grow sequester carbon emissions and contribute to cooling down the planet. It is also worth pointing out that planting trees has one the lowest costs per ton of greenhouse gas removed of all climate mitigation policies. This means that agricultural protectionism has had an unforeseen consequence on the environment. 

What if the round of policy that are adopted in order to mitigate climate change yield secondary effects just like those of agricultural protection? I dare say that I cannot predict how things might backfire. Why should other economists be less modest than I am? 

All of these elements amount to a call for caution. They tell us that we should be wary of trusting the actors who caused the problem in the first place to solve it without important secondary consequences. A truly modest economist would, before advocating the addition of layers of policies, rather prefer the physician’s motto: first, do no harm. At the very least, one should stop doing harm. 

Vincent Geloso

Vincent Geloso

Vincent Geloso, senior fellow at AIER, is an assistant professor of economics at King’s University College. He obtained a PhD in Economic History from the London School of Economics.

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