With the recent conclusion of the 26th United Nations Climate Change conference (COP26) held in Glasgow in November 2021, climate change issues have been at the forefront of many media outlets. As economists, it is an opportune time to reflect what economics as a profession has done or can be doing in the future to help combat climate change.
Action on climate change is the greatest challenge for public policy of our times. In the past, there has been some important work done on climate change by economists as reflected, for example, in the Stern Review that was released in 2006 and by the seminal work done by William Nordhaus who was awarded the Nobel Memorial Prize in Economic Sciences in 2018 for integrating climate change into long-run macroeconomic analysis. More recent notable efforts include work by Solomon Hsiang and his colleagues at the Global Policy Lab on understanding the effects of climate change on societies around the world.
In a nutshell, in response to the global warming problem that has been caused primarily by the burning of fossil fuels and carbon emissions, the policy solution put forth by economists is to correct for the market failure and put an appropriate price on burning carbon that reflects its true cost to society. This could be achieved via carbon taxes or cap and trade systems. There are currently 27 countries with a carbon tax implemented. However, there can be a problem implementing theory in the real world, as some political leaders in Australia belatedly discovered when they introduced a carbon pricing scheme in 2011. Taxes are unpopular with the general public, even if they are introduced for environmental reasons. For this reason, politicians in many countries are doing the exact opposite and continue to subsidise the fossil fuel industry. Consequently, economists repeatedly banging their fists on the table and chanting ‘carbon tax’ every chance they get is highly unlikely to make much of an impact and help the world get to net zero carbon emissions by 2050.
It appears that much more needs to be done if economists are to be able to meaningfully engage in dialogue with policy makers on climate change issues. As climate change is a global problem that requires expertise from many fields, perhaps the way forward is to have more interdisciplinary collaborations. This could involve an in-depth study of climate-society interactions in human history, and perhaps a focus on examining how societies can adapt and be more resilient to the changing world. It is also possible that economists could use their expertise in causal analysis to evaluate climate change strategies to better inform what works and what can be learned from past initiatives.
Economists are failing the world and their own grandchildren
In a 2019 article, Andrew Oswald and Nicholas Stern (two highly esteemed economics professors) express their disappointment in how little academic economists have contributed to discussions about climate change and how economists are failing the world and their own grandchildren. They are concerned that future generations will see that during a critical time of need, economists have stood silently by and continued in a narrow way to ignore climate-change issues and to write journal articles on topics of less importance. They suspect that academic publishing in economics is stuck in some kind of a Nash equilibrium, where few economists write climate change articles because other economists do not write climate change articles. In other words, the lack of climate change research in economics stems, in large measure, for career reasons. As the prestigious journals in economics publish very few papers on climate change, there is little incentive for economists to take risks by doing research on climate change and attempt to publish such papers in top journals.
A recent survey of economists in the IZA network by Nico Pestel and Andrew Oswald that was conducted in October 2021 sheds further light on this issue. Although more than 90% of respondents state that they are concerned about climate change, most do not engage with doing research on climate change because they do not feel they have enough time and resources to be able to work on climate change (answer given by approximately 80% of economists).
Can similar contributions that build on the work done by researchers in other disciplines be made by economists on climate change issues?
On a more optimistic note, fashion and trends can and do change in economics. A good example is the work economists have done on the later life impacts of nutritional shocks experienced during early life and childhood. Mainly emerging post 2000 and building on the epidemiological literature and the fetal origins hypothesis, economists have found a wealth of later-life impacts on outcomes including test scores, educational attainment, and income, along with health. This has allowed policy makers to identify some interventions that hold promise for improving child outcomes in early life and throughout the life course. Can similar contributions that build on the work done by researchers in other disciplines be made by economists on climate change issues?
In this blog piece, having highlighted the need for more work to be done by economists on climate change, I hope I have stirred an interest in you (the reader) to learn more about possible research that can be done by economists on climate issues. Having recently begun this journey myself, beyond this collection of Vox columns on the economics of climate change from the economist’s perspective that serves as a helpful starting point, I would like to suggest some key readings that I have found very useful in introducing me to some of the key issues in climate change.
Reading List Suggestions
Books
Here are some book suggestions for general reading:
How to Avoid a Climate Disaster (by Bill Gates)
Lots of useful statistics, as well as providing a good overview of how each sector contributes to climate change. There is also a discussion of proposed solutions and policies, and how challenges remain for finding the appropriate breakthrough cost-efficient technologies for helping to mitigate climate change.
This Changes Everything (by Naomi Klein)
This book will challenge one’s perspective of how the global free market has benefitted the world. The pursuit of economic growth is a key tenet in modern day macroeconomics and is taught in every principles course. A key message of this book is that continuing down this path of unfettered extraction and pursuit of profits without a fundamental restructure of the world economy will threaten the stability and resilience of the natural world.
The Climate Casino (by William Nordhaus)
Written and published before Nordhaus was awarded the Nobel Prize, it provides a good overview of how economics views climate change using its standard framework and toolkits and highlights the uncertainty in modelling and forecasting the effects of climate change over a longer time period. Nordhaus stresses that any projected climate cost-benefit analysis should incorporate the dynamic benefits of economic growth and adaptation, arguing against any extreme views that are anti-growth or pro-growth. In addition, a good discussion of climate policies and politics surrounding their implementation is provided.
Academic papers
For the more academically inclined, here are some relatively recent academic articles by economists that I found useful:
Envirodevonomics: A Research Agenda for an Emerging Field (by Michael Greenstone and Kelsey Jack)
This paper argues that a series of critical economic and policy questions about environmental quality in developing countries cannot be properly analyzed or understood with the tools of environmental economics alone or the tools of development economics alone. It develops four potential explanations for the poor state of environmental quality in developing countries that apply in varying degrees across contexts. It also provides a list of promising and unanswered research questions for the emerging sub-field of "envirodevonomics" such as what is the marginal willingness to pay (MWTP) for environmental quality and what factors determine this, as well as what policies can be effective for climate mitigation and adaptation.
Climate Change: The Ultimate Challenge for Economics (by William Nordhaus)
This article is a revised version of the lecture William Nordhaus delivered in Stockholm when receiving the Nobel Prize in 2018. It provides an overview of much of Nordhaus’s work, including the DICE model (Dynamic Integrated model of Climate and the Economy) and his thoughts on carbon pricing.
An Economist’s Guide to Climate Change Science (by Solomon Hsiang and Robert Kopp)
An article that describes in an accessible way the physics that controls global climate, and how scientists measure and model the climate system.
Climate Econometrics (by Solomon Hsiang)
For the more empirically inclined who are interested in using data to estimate the effect of climate on a population or economy using cross-sectional, time-series or a long-difference approach (a cross-sectional comparison of changes over time).
What Do We Learn from the Weather? The New Climate-Economy Literature (by Melissa Dell, Benjamin Jones and Benjamin Olken)
A review article that provides an overview of the literature in economics that examines the impacts of weather events on agricultural output, industrial output, labor productivity, energy demand, health, conflict, and economic growth, among other outcomes.
Globalization and the Environment (by Brian Copeland, Joseph Shapiro, and Scott Taylor)
Climate change is a global problem and affected by the globalization of trade. Written from a trade perspective, this review paper highlights some important stylized facts, for example: international trade accounts for a fourth to a third of global pollution emissions (stylized fact #7); rich countries are increasingly outsourcing pollution (stylized fact #8). It also discusses issues involving production-generated pollution, pollution from consumption, how global value chains affect emissions from transportation, and globalization's impact on resource use.
Wang-Sheng Lee
24 January 2022
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