Blog: Economics does not hold the key to solving Climate Change

– Professor Julian Allwood, 29th June 2022

We had a hot week, but that’s not the problem. The Bonn Climate Conference last week prioritised financing and compensation for loss and damage, but that’s not the solution. Energy prices are high, and that’s a hint. Food prices are high and will rise further as the Ukraine invasion leads to fertiliser shortages. That’s a portent. And perhaps, if we take notice, we might at last recognise what Climate Change is really about.

The primary problem created by Climate Change is not temperature rise, sea-level rise, or extreme weather. It’s starvation. Without mitigation, around a billion people will starve by the end of this century. Crop productivity is virtually zero when national average temperatures are below -2° or above 25°C and peaks around 15°C. Over the past 60 years, productivity has risen with agri-tech developments, but in the countries near the equator, it is now falling as average temperature increases outweigh further technology gains. In the second half of this century a large band of equatorial countries will neither be able to supply their food nor have the resources to purchase it.

But we haven’t faced this yet, because we’ve allowed a misuse of economics to define our political response to climate change. That’s not my conclusion, it comes from the top. In his Volcker lecture “Climate policy is macro policy”, given in March this year, Dr Mark Carney opens with the statement “human health is outside the market economy”.

One billion people starving to death this century is surely the ultimate problem of human health.

Yet Carney fails to follow his own logic. Fifteen minutes later, he concludes that “it is imperative that governments allow markets to drive solutions.” He sees no contradiction in this and goes on to see no contradiction in the rest of the climate dogma of misused economics.

“We need a carbon price”: we don’t have one after thirty years of economists telling us it’s essential and it won’t appear until we have the global governance structures required to enforce it. Where localised carbon prices exist, they are riddled with exceptions in favour of incumbent high-emitters and nowhere yet have they been connected to border controls to prevent carbon leakage. If it existed, a global carbon price would make no change to the physical options available for mitigation (all combustion engines and burners must still be eliminated) but would provide a guide to sequencing. Yet at COP26, the most egregious anomaly in current carbon pricing, the absence of tax on aviation fuel, wasn’t even mentioned.

“All else being equal”: economics provides tools that inform decisions about marginal changes to social welfare during a period of notional equilibrium. It doesn’t deal with human health.

“Net zero”: there aren’t any physically credible negatives at scale. There isn’t time to plant new trees and have them reach maturity by mid-century. Any use of renewable electricity to power inefficient direct air capture processes diverts it from the much greater benefit of replacing fossil-fuel generation.

“The transition represents a multi-decade investment boom”: of course, we want businesses that deliver efficiency and emissions-free energy to grow rapidly. But overall, it’s more likely that we will enter a period of economic contraction, and that’s much less important than dealing with starvation. Belief in this “boom” assumes that there are like-for-like technical substitutes for today’s emitting activities that will appear concurrently with investment decisions.  However, this fails to account for deployment rates or aggregation. For example, plans for zero emissions by today’s steel, chemical and aviation sectors rely heavily on emissions-free hydrogen, but by mid-century we won’t have enough of it for any of them.  To make it you either need carbon capture and storage (global capacity is currently 0.08% of global emissions, growing at 0.004%/year) or spare emissions-free electricity (in the UK, we’re on course to have only half the supply we’d like if we electrify today’s energy uses without any use of inefficient hydrogen.)

We didn’t deal with Asbestos by using economics or markets. Nor slavery, thalidomide, apartheid, the ozone hole, genocide, Covid 19 or nuclear weapons. Once we understand a threat to human health or social wellbeing, we respond with regulation and enforce it.

The six primary causes of Climate Change are combustion engines, boilers and furnaces, industrial process chemistry, ruminant and rice farming, land-use change and waste. Europe and the UK have regulated to ban sales of combustion engine-cars within a decade. If we are to deliver climate mitigation in time, we need to expand that regulation to all other combustion engines and to the other five sources, rapidly and globally.

Write it in neon lights over the world’s ministries: “human health is outside the market economy.” Climate Change is the most severe threat to human health. Ergo, economics does not hold the key to solving Climate Change.

The problem is starvation. The solution is regulation. All else is very definitely not equal.

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