How to Master the Climate Labyrinth

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Written by Lucas Bretschger

If nothing more, the world’s current political situation illustrates the vast complexity of political decisions.  Climate policy sets a prime example, stretching complexity to its outer-limits.  Damage from climate change occurs in the long-run and with uncertain outcomes, but political actors prefer reacting to imminent and more visible threats.  While the benefits are imperative, climate policy is perceived to come at a significant economic cost and yield a wide variety of effects on countries and industries.  The governing rules of the United Nations climate policy require both international negotiation and unanimous agreement.  Under these conditions, it is not surprising that the world’s climate policy efforts resemble a journey much like that of the Minoan labyrinth from Greek mythology.  In the story, only the wise use of Ariadne’s thread helped Theseus to find his way through a seemingly unnavigable system.

Paris Agreement and Economic Growth

The adoption of the Paris Agreement on climate change presented an Ariadne’s thread for international climate policy.  Ratified by more than 140 parties, to date, signing the climate agreement required countries to acknowledge stringent climate policies as beneficial on a global scale.  While a positive step forward, current country contributions to climate policy are inequitable and aggregate emission reduction insufficient.  Concerns abound that stringent climate policies harm economic growth, provide an uncertain benefit, and, in an international context, are imbalanced.  These issues impair the advancement of policy ambitions.  Economics offers essential insight into the central issues and how they can be addressed.

In the Business World, a popular “rule of thumb” for economic growth relates higher fossil fuel prices to lower economic growth (Economist 2016).  In contrast, international studies find that a green economy with high carbon prices supports growth, income, and jobs; labelling the trade-off between economic progress and environmental sustainability “a myth” (UNEP 2011).  The two statements apply to different structures and timelines.  Of course, an economy bears the cost of reducing the use of fossil fuels – if everything else remains constant.  Policy, however, always triggers further action, especially in the long run.  The concept of induced innovation – first proposed by Sir John Hicks – describes how rising energy costs lead to faster advances in energy efficiency.  Another relevant effect involves sectoral change that favors energy efficient sectors and describes how growth effects differ across industries.  Conversely, the lack of climate policy also has a growth effect: one that is negative.  Global warming not only harms current output, but also harms capital stock and infrastructure, diminishing economic growth, as shown in the book, “Greening Economy, Graying Society.”

The Momentum of Climate Policy Ambitions 

While climate policy positively affects the world’s economies in the long run, it does not favor all countries and sectors equally.  Considering the different responsibilities, it becomes crucial to define guidelines for equitable burden sharing in international climate policy.  While country pledges under the Paris Agreement are now available, it is not clear how they compare.  The UN Climate Convention relies on the concept of “Common, but Differentiated Responsibilities,” which for practical use, must be made operational.  The ETH Zurich climate calculator allows the transparent evaluation of country contributions.  While the official negotiation process does not rely upon a comparative approach, a systematic review and comparison of contributions could give countries confidence in their own position and increase their ambitions.

Uncertainty Requires More Stringent Climate Policy

Of course, anticipating many of the elements along the path to a sustainable future presents a challenge.  Uncertainty and doubt form an integral part of life and skepticism a common attitude – especially among scientists.  Uncertainty prevails, because the long-term damage of climate change seems far off in the future, its progression is slow and erratic, but it will affect the economy in the form of random shocks.  Storms, floods, and droughts will occur more frequently and in greater strength impacting the world’s economies on local and national levels.  Stern (2016) stresses that climate shocks and uncertain events are not sufficiently represented in the current research on climate change, concluding that “current climate models are grossly misleading” and that “many estimates do not account for factors such as catastrophic changes and tipping points.” These major climate events include: the melting of Greenland’s Ice Sheet, a collapse of the Atlantic thermohaline circulation, the disintegration of West-Antarctic Ice Sheet, and a dieback of the Amazon rainforest.  Such “high-consequence” outcomes might result in a global income loss comparable to that of the 1930s’ Great Depression.  The dependence of such shocks on the degree of global warming is well recognized, in principle, but not yet integrated into standard economics.  Should the existence of uncertainty be a reason to delay climate policy? Results from recent research conclude the opposite: With uncertainty it is not a less, but rather a more stringent climate policy that is required (Bretschger and Vinogradova 2014).  It is comparable to life insurance, for example, which is more expensive and more valuable when the negative events are uncertain.

Scientists have derived a solid foundation for an efficient and equitable climate policy, based on equitable burden sharing, uncertainty factors, and the growth effects of climate change.  While top-down approaches serve as guidelines, real policy making occurs from the bottom-up, reflecting the preferences of countries and voters.  In more climate vulnerable countries, this approach has already been successful. Almost 50 countries committed to one hundred percent renewable energy by the middle of the century – a result of the United Nations Climate Change Conference in Morocco.  Contributions from the remaining regions in the world included plans that, while optimal for individual countries, do not serve the world community as a whole.  Technical progress may also help governments set more ambitious targets over time, induce further innovation, as well as, scale and learning effects.  When big countries and supranational organizations persistently push forward climate policy agendas, as Germany did when deciding to prioritize climate action during its G20 presidency, it perpetuates progress.  Public skepticism about climate policy will always be present to some extent and has to be considered, especially when it comes to funding climate change policy.  

Creating a Prosperous Global Economy

Environmental policies resulting in limited costs, but a strong impact on emission reduction and income growth appear to be especially desirable.  When governments credibly commit to stringent policies over a long period of time, market expectations accelerate change and create policy-enforcing momentum (Bretschger and Schaefer 2017).  Public investment in new networks – like charging stations for electric mobility – can act as a commitment device and frame general expectations about a carbon-free future.  If the process of international comparison and policy propagation is effective, the rate of emission reduction can be steadily increased and temperature targets eventually met.  When the world succeeds in stabilizing greenhouse gas concentrations at a level the UN climate convention identified, “…would prevent dangerous anthropogenic interference with the climate system,” only then will we have found our way out of the climate labyrinth.  It is almost certain that such a state would promote a prosperous global economy.  Getting there requires that countries willingly and wisely hold onto the thread of Ariadne: adopting climate policies that lead to a carbon-free economy in the second half of the century.

About the author: Lucas Bretschger is Professor of Economics/Resource Economics at ETH Zurich, Research Associate at Oxford University, and President of the European Association of Environmental and Resource Economists (EAERE). He has been a member of the Swiss Delegation at the UN climate negotiations.