Trying to solve the seemingly intractable problem of global warming

Robert Shiller, the Nobel Laureate, economist and academic, provides an excellent article in the New York Times about combining idealism with economic theory. He argues that with other things in life, good things can happen when there is a sense of idealism that creates an atmosphere for change. But it will also help to have a realistic structure that puts clear penalties on bad behaviour by individuals and by entire countries.


How Idealism, Expressed in Concrete Steps, Can Fight Climate Change

Idealism combined with an intriguing application of economic theory may accomplish what international conferences have not: solving the seemingly intractable problem of global warming.

Despite periodic flurries of optimism, diplomacy has been largely disappointing. The 1997 Kyoto Protocol, for example, in which many nations agreed to impose strict taxes on carbon emissions, hasn’t accomplished much. And subsequent climate conferences haven’t come up with an effective solution. Secretary of State John Kerry summed up the diplomatic landscape in December at the United Nations climate change conference in Lima, Peru: “We’re still on a course leading to tragedy.”

From an economic standpoint, international efforts until now have foundered on a fundamental “free rider problem.” In a nutshell, individuals and nations that bear the immediate costs of measures to protect the atmosphere will experience only a small fraction of the benefits, which are shared by all the people and nations on the planet. Why not just take a “free ride” and let others do the hard work?

In traditional economic theory, the benefits of reducing emissions take the form of an “externality,” meaning they are external to the local environment because they are spread over the whole world. Our own contributions are often too small to see or feel.

When the problem is an externality, it is, for the most part, futile to ask people to volunteer to fix it — by taking actions like car-pooling or riding a bike to work to cut back on emissions or, in the case of governments, by enacting laws and regulations.

Yes, some individuals with a strong moral compass will take action, and some nations will do so occasionally, but most people and countries will not do so consistently. That’s what the theory says, anyway.

But in a new book, “Climate Shock: The Economic Consequences of a Hotter Planet” (Princeton 2015), Gernot Wagner of the Environmental Defense Fund and Martin L. Weitzman, a Harvard economist, question that assumption. In a proposal that they call the Copenhagen Theory of Change, they say that we should be asking people to volunteer to save our climate by taking many small, individual actions.

Copenhagen has motivated half of its habitants to commute to work by bicycle every day, the Danish government says. How did that come about? A half-century ago, the city’s inhabitants were becoming almost as reliant on cars as people anywhere else. But after the oil crisis of the 1970s, the authors point out, many Copenhagen residents made a personal commitment to ride bicycles rather than drive, out of moral principle, even if that was inconvenient for them.

That happened in American cities, too, but in Copenhagen there was more social support and, perhaps, social pressure to join in the movement. The sight of so many others riding bikes motivated the city’s inhabitants and appears to have improved the moral atmosphere enough to surmount the free-rider problem.

Elinor Ostrom won her Nobel in economics partly for observing that communities often solve free-rider problems. She was talking generally about contained communities like Copenhagen, not global ones. Its idealism about global warming has not spread worldwide. But she argued for a polycentric approach to climate change, with actions against global warming taken not just on a global scale but on a whole array of scales, involving smaller communities as well as the entire planet.

There are communities based on shared interests, not on geography, and people who believe in socially responsible investing may be considered one such community. If ethical investing takes the form of investing only in “green” companies, for example, excluding companies that pollute the atmosphere, such measures may have a similar positive impact.

Of course, one might dismiss ethical investing as achieving nothing more than creating opportunities for unethical investors, who will be more than happy to step in if there is money to be made. But placing a deviant enterprise on a list of companies to be avoided by ethical investors could change the moral atmosphere, much as bicycling has in Copenhagen — increasing the likelihood of a broader, successful social movement against pollution of the world’s atmosphere.

The world is a diverse and complicated place, however. To combat global warming, social movements aren’t enough. We also need a concrete framework on a global scale.

In his presidential address before the American Economic Association in Boston in January, William D. Nordhaus of Yale proposed what he calls “climate clubs.” Here is a genuinely concrete idea that might work to stop global warming. As he defines it, a climate club is a group of countries that agree to create incentives for people to reduce carbon emissions, while also erecting tariff barriers on imports from countries that are not members of the club.

The tariff barriers contribute to a virtuous cycle: They provide an incentive for countries in the club to create incentives for individuals to reduce emissions. Professor Nordhaus’s analysis relies on the economic theory of clubs and on his own Coalition DICE model, which shows costs and benefits from reducing emissions for each country or region in the world today.

A climate club may start with only a few countries and then grow as others join. The club may grow through time rather than collapse as we saw with the Kyoto Protocol. Now they will be coming into the club as they see, over the years, the advantages of membership.

In its pure form, the economic theory of clubs assumes that each country and individual is completely self-interested and has no interest in helping any others. But, in reality, people are not quite like that. There is some community feeling — including a sense of responsibility for the world community. Clubs might ultimately rely on such feelings to be successful.

Club founders must overcome real-world obstacles, objections from climate change deniers and those who simply don’t understand the issues or the stakes we are facing. Who is going to undertake such difficult and expensive actions without some sense of moral principle?

To solve the extremely challenging problem of climate change, we may want to rely on both theories: the Copenhagen theory and the climate club theory. As with other things in life, good things can happen when there is a sense of idealism that creates an atmosphere for change. But it will also help to have a realistic structure that puts clear penalties on bad behavior by individuals and by entire countries.

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