WASHINGTON, DC – As the Nobel laureate economists Robert Shiller, Abhijit Banerjee, and Esther Duflo have argued eloquently in recent books, political debate and economic policy are driven much more by simple “narratives” than by complex and nuanced theories or models.
What counts are plausible “stories” that have broad intuitive appeal and can thus sway public opinion.
This is certainly true of climate policy. Modeling global warming is an immensely complicated undertaking based on “probabilistic” physical relationships and huge amounts of data about natural and human activities over many decades or centuries.
But relatively straightforward messages continue to dominate policy discussions.
When the climate policy debate began, the prevailing narrative was that economic growth faced a new constraint in the form of a carbon budget, and exceeding it would bring about an undesirable amount of global warming.
Policymakers would therefore have to consider a trade-off between more economic output in the near term and the damage caused by global warming in the longer term.
Unsurprisingly, the academic debate – epitomized by the work of Nicholas Stern, William Nordhaus, and Martin Weitzman – concentrated heavily on how to compare climate-change mitigation costs paid in the present with benefits accrued in the future.
The so-called “social discount rate” depends on two components: a rate of “pure time preference” that generally gives future generations’ welfare less weight than that of current ones (although some believe that ethical considerations require it to be zero), and a term reflecting the degree of diminishing returns to welfare with respect to consumption.
A higher discount rate makes ambitious near-term mitigation policies appear less desirable.
Another dimension of the story was the fact that climate-change mitigation is a textbook example of global public good.
Because there is only one atmosphere, any country’s emissions reductions cause the same reduction of atmospheric carbon dioxide and therefore the same mitigation, from which no country can be excluded.
This gives rise to a free-rider problem: every country has an incentive to let others mitigate, and thereby reap the benefits without incurring the costs.
Besides the discount rate, therefore, much of the climate debate centered on how to deal with the free-rider issue – for example, by trying to negotiate a binding international agreement tying rewards and penalties to mitigation performance.
The bottom line was that limiting climate change was necessary but involved some important upfront costs that would – for a while at least – result in lower growth.
Contrast that rather somber narrative with Stern’s key first sentence in the conclusion of his recent report for the upcoming G7 summit in the United Kingdom: “The transition to a zero-emissions and climate-resilient world provides the greatest economic, business, and commercial opportunity of our time.” This is an optimistic, uplifting green transformation story, not one of costs or burdens.
This new framing reflects the tremendous rate of technological change, which the old narrative had largely assumed to be constant or at least exogenous. Green innovation is now not only rapid but also endogenous.
The cost of producing renewable energy from solar and wind, and of battery storage to solve the intermittency problem, has already declined substantially.
This progress, as well as moves toward greener transport and urban design, is partly a response to policies that incentivize carbon-saving economic activities and discourage carbon-intensive activities.
These policies are justified by the fact that emissions controls are a public good, whose social benefits exceed private returns.
The new, optimistic story can be fully realized only with such policies, which now have a much better chance of widespread adoption.
After all, politicians obviously prefer to advocate climate measures that are embedded in a vision of global growth and a profit-enhancing technological wave to trying to convince their publics that reducing growth now is necessary for future generations’ sake.
Many countries are already deploying these green technologies, but continued innovation (and therefore cost reduction) crucially hinges on more and stronger policy incentives.
The recent systemically important commitments by the United States and China to become carbon neutral by 2050 and 2060, respectively, promise and anchor just such incentives.
And such pledges are becoming more credible as more countries complement them with shorter-term commitments contained in 10-15-year action plans.
The new win-win story, if it holds, implies less need for a binding international climate treaty, because national gains and commercial profit can now drive progress.
While green technology will continue to produce positive externalities, there would be plenty of private profits even without these added societal benefits.
The “Paris method” of relying on nationally determined contributions with reinforcing scale effects seems workable if it includes strong policy commitments.
But three caveats are in order. First, like all waves of technological change, the green transformation will produce both winners and losers.
Governments will need to compensate the losers, not as an afterthought but often to ensure that their climate-mitigation programs are politically viable in the first place.
Perhaps more important, emphasizing employment-oriented public policy rather than incentives for capital intensity can to some extent influence the pace at which economies create decent new jobs, as Daron Acemoglu and Dani Rodrik have emphasized.
Second, many of the adjustments will require large upfront capital investments that are difficult for developing economies to marshal.
This will put them at new competitive disadvantages, adding to and overlapping with the already threatening digital divide.
A large amount of long-term development finance is needed not only for equity reasons but also because these countries together account for almost one-third of global CO2 emissions.
Lastly, past ignorance, denial, and then very slow progress means that humanity’s race against potentially devastating climate change will be tight even under the most optimistic scenarios. Further policies encouraging green technologies are thus essential.
But the new, more positive climate narrative should make rapid progress toward a deep green transformation much more feasible.
What previously appeared to be a political suicide mission could now yield substantial benefits for those who lead it.
Kemal Derviş, a former minister of economic affairs of Turkey and administrator for the United Nations Development Programme, is a senior fellow at the Brookings Institution.
Copyright: Project Syndicate, 2021.