The costs of climate change

Storm Clouds1One of the most interesting avenues for economics research today is in the area of environmental economics. From Mancur’s classicThe Logic of Collective Action: Public Goods and the Theory of Groups” to today, we are still struggling with the economics of collective action and the tragedy of the commons. Our political paralysis over climate change and other environmental issues illustrates the need for new economic theory, policy mechanisms and political practice.
So I read with great interest the news of a report from the UK that attempts to take the climate change debate from the world of climate science to that of economics. The “Stern Report” was written by a former World Bank chief economist, Sir Nicholas Stern.

“Our actions over the coming few decades could create risks of major disruption to economic and social activity later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of the first half of the 20th century,” Sir Nicholas writes.

The report suggests that 1 per cent of global domestic product be spent immediately on dealing with climate change, to avoid higher costs later. Failure to act would lead to a drop of 5 to 20 per cent of global GDP and make large swaths of the Earth’s surface uninhabitable.

Tony Blair is positioning the UK as a global leader in the efforts to deal with climate change, and has signed on Al Gore as a special advisor to the government.

Mancur’s work on the logic of collective action argues that “in the absence of collective incentives, the incentive for group action diminishes as group size increases, so that large groups are less able to act in their common interest than small ones.” His work concludes that “not only will collective action by large groups be difficult to achieve even when they have interests in common, but situations could also occur where the minority (bound together by concentrated selective incentives) can dominate the majority.”

Globalized capitalism’s efficiency at creating externalities is incredibly powerful. Creating collective incentives and internalizing those externalities onto political powerful minorities is a key strategic lever to collective behaviourial change. A number of policy options are readily available, including tradable pollution credits, carbon taxes and regulatory changes. The problem is resistance to change by those same politically powerful minorities. In this way, we can see the current debate over Harper’s Conservative government’s “Clean Air Act” as merely a microcosm of a global dynamic.

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