Reading Group on Five Times Faster #3: Rethinking the economics of climate change

Reading Group on Five Times Faster #3: Rethinking the economics of climate change

Reported by Patrick McAlary, Policy Assistant, Centre for Science and Policy

In July 2023, the Cambridge Zero Policy Forum met for the third of four reading group sessions on Five Times Faster: Rethinking the Science, Economics, and Diplomacy of Climate Change, by Simon Sharpe, Senior Fellow at the World Resources Institute. The session focused on economics and included opening remarks by Dimitri Zenghelis, Special Advisor, Bennett Institute for Public Policy, University of Cambridge.

A risk management problem

‘Traveller, there is no path

The path is made by walking’

This citation from Antonio Machado encapsulates Simon Sharpe’s approach to dealing with climate change: the course ahead must be forged by action. There is no such thing as making no choice when it comes to climate change: inaction is a choice. The question, then, is what choices should be made to tackle the challenge. Sharpe’s book makes the case for treating climate change as a risk management problem, much like insurance. Participants were largely supportive of Sharpe’s critiques of orthodox economic modelling, which claims, like a false prophet, that it can predict outcomes with a degree of deterministic accuracy. One thing that can be predicted with certainty is that the future is prone to change, however, such modelling approaches are blind to technological and social innovation and change: they are, therefore, as useful for peering into the future as a kaleidoscope is for seeing ten paces ahead. It is the processes of change that determines the outcome, and advice and policy actions need to be targeted at these processes.

The economy as an ecosystem

Sharpe’s arguments buy into the importance of reinforcing feedbacks and path dependencies. He calls for a long-term perspective that embraces change and this informs his critique of orthodox economics. He argues that while market shaping policies may appear inefficient in the short-term—and thus anathema to classical economists—the end result is more than worth it. It was only recently that it was implausible to think of electric vehicles as anything more than the playthings of the rich or that renewable energy sources could be used for commercial, rather than solely environmental, purposes. However, a tipping point was reached and now such technologies compete with, and even outperform, incumbent technologies: solar PV is now the cheapest form of electricity in history.

Such strides would not have been reached without a policy push: the ‘minimum cost approach’ must be discouraged in favour of a ‘do maximum approach’. This step change will help engender a view of the economy as an ecosystem, where the future cannot be predicted, but it can be shaped. From this perspective, policy actors should identify tipping points and leverage areas where a small push can cause a sector to tip, delivering an outsized effect. Participants highlighted examples such as solar PV for Germany and China, electric vehicles for Norway, and offshore wind for the UK: these great successes are despite the advice of economists that moot the low-cost option.

Innovation and (de)growth

Given that economists have an important role in providing advice to politicians and policy actors, they may not only get the future wrong, they can make it wrong. On the advice of economists, policy actors are liable to underinvest in strategic thinking and risk-taking for fear of failure (and for politicians it is failure, not success, that is brandished across the newspapers). However, it is the act of investing at scale that creates a chain reaction where tipping points are pushed, innovation is proposed, and costs come down creating positive, and useable, outcomes. The static model of economics strives for efficiency, and as such any disturbance is a cost. However, constraints can sometimes be exactly what is needed to promote dynamic efficiency. One participant pointed out that producing things without access to the cheapest possible labour and easily acquired resources could be considered as inefficient, however, it forces industries to get more out of the resources that they do have access to and in doing so become more productive. The limitations are not, as is often presumed, economic or technological, they are political, cultural, and institutional.

Participants challenged the notion that decarbonisation is intrinsically tied to de-growth. The future proposed in Sharpe’s book is one that boasts a cleaner environment, better living standards, and still allows room for growth. Humans have never managed to decouple growth from environmental exploitation, but it would be a mistake to suggest that this is impossible—it has never been attempted. Areas, like offshore wind in the UK, that have received minimal policy effort have witnessed transformative change.

Participants noted a distinction between investment mechanisms for supporting decarbonisation and promoting innovation. One participant noted that there is an assumption in the book that if enough resources are poured into innovation that our problems will be solved. However, it is important to acknowledge that there are some things that go beyond the realms of possibility and it is important that companies and industries do not make promises that cannot be delivered. Other participants agreed with this sentiment and noted that it is worth taking risks to produce moments of truly transformative change. Another participant noted that the top one percent in society are estimated to emit as much as the bottom fifty percent and that this imbalance is absent from discussions, even though effort can be more productively spent in tackling the emissions of this one percent group.

Conditional optimism

Participants agreed that decarbonisation was possible, but urged, in the words of Paul Romer, conditional, not complacent, optimism. A decarbonised world will not emerge by leaving decisions to markets alone. The economic ecosystem is shaped by the decisions that policy actors take, and market shaping policies that safeguard, nudge, and steer individuals play an important role in shaping the path that we will walk along.

Image by Lili Popper on Unsplash.