The Economics of CO2 mitigation

Economist now realize that there are more types of capital than monetary capital alone, and that each has its own value to societies, and effects on those societies’ GDPs. They acknowledge that there is inherent value to cultures, to individuals, to the environment, to ecology, and to technology, among other things, and they consider the changes in cultural capital, human capital, environmental capital, ecological capital and technological capital when assessing the wisdom of an investment. And while economists agree that a wise investment will result in an overall increase in capital, they disagree over the wisdom of an investment that increases one capital at the expense of another. Some believe that the various forms of capital are commensurable – a belief that has been termed “weak sustainability,” while others believe that the various forms of capital are not commensurable – a belief that has been termed “strong sustainability” (for further reading see Harris).

The terms weak and strong sustainability arise from differing views of sustainability itself – the idea that one generation should leave the next generation with as much total capital as they were given, with the end goal being that the next generation’s well-being will be of at least as high of quality as the first’s. Proponents of weak sustainability argue that as long as the overall capital one generation gives to the next is at least as great as they were given, the end goal of sustainability will be achieved. As Marilyn Power sums up this belief, “in this view, exhaustion of a natural resource can be compensated for by technological development, loss of a species by a rise in human capital” (Power 13).

In the case of higher CO2 levels in the atmosphere, the trade-off in different forms of capital of investing in CO2 mitigation progressively, instead of immediately, would be the negative would be losing the natural capital of 15-40% of the world’s species, which will be driven to extinction, the cultural capital of the 200 million people of the world who will be displaced from their traditional homes, and the human capital of the many, many more people who will die of malnutrition and heat stroke in the second half of this century (Stern, 56).

Economists that advocate for strong sustainability argue that these trade-off do not meet the end goal of sustainability – that the well-being of future generations will be diminished by these trade-offs, even if overall capital increases, because these economists believe that well-being is not derived from overall capital, but the capabilities one has – the amount of ways one has available to make oneself happy – which are decreased when one form of capital is traded for another (for further reading see Amartya Sen).

When considering investing in CO2 mitigation through the lens of strong sustainability, an immediate, decisive investment is clearly wisest, because, as Marilyn Power puts it, “we cannot predict what will make our grandchildren happy” (Power, 23), and while we allow CO2 levels to rise while we ramp up our investment in its mitigation we risk crossing “poorly understood, threshold crossing disasters” that, if crossed, will severely limit the types of capital our children have to support their well being. Thus to live sustainably, to protect future generations, as well as our economy, from as yet unknown catastrophes from higher CO2 levels in the atmosphere, we should asses investing in CO2 mitigation in terms of risk-management and not cost-benefit, because such an investment is actually more like an insurance – an insurance like any other, that we pay in order to protect us from disasters we hope will never occur, but will be able to work through much better because we did. And this insurance is even better than most, in that it will also help prevent those disasters from occurring. As Marilyn Power concludes, “The danger of future generations being worse off through catastrophe far outweighs the possibility that they will be better off than we predict” (Power, 23).

To me it seems that different forms of capital are incommensurable when it comes to well being, just as the different realms of ones life are incommensurable when it comes to ones personal well being. A stronger economy cannot compensate for a lack of community, just like more money cannot compensate for a lack of family; and the most economic housing development may not be the most valuable if it erodes the environment around it, just as a higher paying job may not make one happy if the time and stress that it consumes leaves too little time or energy to pursue ones passions. Similarly, in the case of deciding whether to invest in CO2 mitigation, giving future generations the choice to utilize whatever type of capital they may value seems the only justifiable option, just as it would not be justifiable to ensure that all of ones offspring from ones grandchildren on could do nothing but work for the entirety of their lives.

The ramping up approach to investing in CO2 emissions allows for a utilitarian commensurability of types of capital, such as in the case of Nordhaus, who believes that increasing technological and monetary capital at the expense of social capital is sustainable, while the Stern Review’s model for investing in CO2 mitigation allows for some commensurability between types of capital, but its resulting investment strategy would actually keep commensuration between types of capital to a minimum. This distinction could lead one to believe that deciding which type of investment in CO2 emissions is wisest is a choice between two types of sustainability. However, Marilyn Power has added another argument to the belief that an immediate, small, decisive investment in CO2 mitigation is the wisest economic course of action, purely on economic grounds, no matter what type of sustainability one supports.
As I have said, Marilyn points out that most all economists agree that investing in CO2 mitigation is a valuable opportunity. But she also points out that few economists have noted that opportunities that are viewed as this obviously wise are often fleeting, and that this particular opportunity is no exception. Right now policy makers are willing to invest in CO2 emissions because people have been horrified by its deadly effects such as Hurricane Katrina and lethal heat waves across Europe. Right now governments are commissioning reports such as the Stern Review, asking for economists suggestions on the best course of action regarding CO2 mitigation. But this might not be the case in the near future, particularly if a progressive investment in CO2 mitigation is made.

In her paper, Marilyn points out that:
Policies to decrease CO2 emissions will require increases in carbon taxes and/or fees, the establishment of complicated international trading schemes and regulations, and changes in ‘business as usual’ at levels from the individual to the global. Costs will rise, habitual ways of doing things will be challenged, consumption patterns will have to be changed, and global wealth redistributed toward poorer countries…much of the public in rich countries will find themselves inconvenienced; and regimes in developing countries will have to retool development paths to which they have become committed…It would be all too easy, with the “ramping” policy, for future policy makers to respond to public annoyance, or the pressures from affected interest groups, and back away from the mandate to increase mitigation (Power, 24-25).

I would add to this that a future populace may be less encouraged to continue investing in CO2 mitigation while it appears to them that such investments are not working because of the negative effects that will occur because of the higher levels of CO2 in the atmosphere that will be present because we did not make a decisive investment.

While it seems natural to believe that clear signs of the negative impacts of growing CO2 levels in the atmosphere would upset people enough to change policy, that is not what we have learned from the history of Global Warming or Ocean Acidification. We have learned that interests invested in low carbon costs have been able to affect public opinion and policy makers enough to curb investing in CO2 mitigation because of economic and political power, and there is no reason to believe things will be otherwise in the future, there is only a glimpse of hope that things could be otherwise now.

Marilyn Power argues that the potential of this political change should be considered when deciding what type of investment in CO2 mitigation is wisest; and she argues that if economists who currently believe the ramping policy is the wisest economic investment in CO2 mitigation did, in fact, consider that the possibility to make that investment might not be there tomorrow, they would quickly realize that it is imperative to seize that opportunity today.

After all, windows of opportunity are always considered when deciding on a course of action for an investment. If one knows that they have the opportunity to make a wise investment today, but may not have that opportunity tomorrow, it affects whether or not they make that investment, both because that loss of an opportunity will feel like a loss of something they had, and in the future they will most likely suffer from regret for having missed that opportunity. In the case of global warming, missing the opportunity to invest in CO2 mitigation will indeed be a loss – a huge loss in global GDP as well as environmental capital and human lives – and humanity will regret it far more than anyone regrets missing the opportunity to invest in Microsoft 20 years ago. Investing in CO2 mitigation is not an opportunity we can let slip by – the results will be far too catastrophic.

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2006 Performance Report:
Alaska Magazine, August 2007, “What is Wilderness Worth”
Anchorage Daily News, August 16, 2007, “Two oceans could be choking to death”
Anchorage Daily News, August 17, 2007, “Wainwright sees the effects of warming now”
Anchorage Daily News, September 6, 2007, “NOAA study backs up prediction of sea ice loss”
Anchorage Daily News, September 7, 2007, “Scientist project 2/3 drop in polar bear population by 2050”
Harris, Jonathan, Environmental and Natural Resource Economics. Houghton Mifflin College Div. 2002.
Power, Marilyn, “The Economics of CO2 Mitigation: the Stern Review and its critics”, Unpublished.
Sen, Amartya, Development as Freedom. Oxford University Press. 1999.
Stern, Sir Nicholas, The Economics of Climate Change. Cambridge: Cambridge University Press. 2007.
Quamman, David, “Planet of Weeds”, Harpers, October, 1998.

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