60 second intro

  • Climate change has a business case, as any endeavour does.
  • And as with other business cases, the first thing we should consider is the costs of “doing nothing”.
  • Those that have studied that question suggest the total economic cost of doing nothing about climate change is about $1.8 trillion.
  • Unfortunately, the numbers suggest the real reason for the inaction comes down to who will bear the cost of the Do Nothing scenario – the less powerful countries.
  • There is the matter of global warming to consider but, in my view, the answer to that is more capitalism, not less.
  • Putting a price on carbon, and using the revenue to eliminate some of the other less efficient types of tax we have, seems like the way to go.

A New Hope

It might appear that we live in a divided and partisan world. That’s not always the case.

Consider the global approach to developing a COVID-19 vaccine. The international medical community has coordinated its efforts to produce 100 different types of vaccines, increasing the likelihood that at least one will succeed. University research teams are working with private companies. Individuals are even volunteering to get infected in order to get a working vaccine as quickly as possible. Results are published globally and peer reviewed immediately. It’s inspirational stuff.

This sort of unified effort demonstrates at least a coupe of things:

  1. We do best when we listen to scientists, and
  2. We do best when we work as a coordinated global team

So why do we behave so differently when it comes to Global Warming?

Why don’t we work together on climate change, then? In my view, the reason could come down to the cost of the “do nothing” scenario.

Companies and governments decide on whether to undertake an endeavour by considering a business case. In a situation where you have multiple opportunities (or problems) and limited resources, business cases can provide a powerful tool for making rational decisions.

Business cases can help explain an important concept. Inactivity can often have a cost. Preventing a problem can be cheaper than waiting until it’s happened before tidying it up. For example, avoiding larger costs is why state governments recently spent money on quarantining people.

Economists rarely agree

Mostly, economists agree on very little. You’ll always find a different point of view within their community as you do in almost every other area of life. No economist I’ve ever heard, however, agrees on the value of price as a mechanism to ensure the efficient allocation of resources.

Not pricing carbon leads to an inefficient allocation of resources which is not very capitalist at all. Simply put, when stuff is free, people use too much of it. A basic example is how behaviour related to shopping bags changed in Australia when people started getting charged 15 cents per bag. That tiny charge dramatically reduced the number of bags used – simply because they were no longer free. Some estimates suggest that plastic bag usage was reduced by 85%.

Business Casing the Do Nothing

Every business case starts with the same question. The person with the spreadsheet asks, “What if we do nothing?” The problem with global warming is that people talk about the costs of action but they don’t compare it to the “do nothing”.

Then you consider the effects of “doing something”. We talk a lot about that. The lost jobs, the industries that will have to change, the higher energy prices because a price now exists on Carbon.

But considering just one of the two elements of the business case is a flawed argument.

So what will it cost if we do nothing about Climate Change?

First, the OECD point out that the cost of doing nothing is more than doing something.

The OECD have measured the economic consequences of the ‘Do Nothing’ scenario. The Western World will be affected least. Which is possibly why so little is being done.

Above: This chart appears to show the real reason for inaction on climate change. The countries facing the biggest effects of the “Do Nothing” Business Case scenario are the less powerful.

According to them, it’ll cost about $1.8 trillion to deal with bridging the gap from carbon-producing fuels. However, spending that amount will ultimately save about 4 times as much. It’s also less than the $3 trillion the US government has spent trying to deal with COVID-19.

First, economist William North Ouse has worked it all out. His model is called DICE (Dynamic Integrated Climate Economics). He (along with every economist I’ve ever met) also supports the idea of putting in place a ‘carbon club’ that would impose tariffs on free-riders attempting to avoid an economic slowdown, by taxing their exports at 3%.

The truth is in the chart

It’s hard to imagine that the “Do Nothing” scenario has not been considered by politicians around the world. Business cases are used by governments as much as they are by businesses. They just don’t talk about them. Their disingenuous arguments about the cost of doing something are short-sighted and don’t make sense.

Looking at the chart, the reason appears pretty clear. It seems we, in the West, are the free-riders.

We can decide to act together when we see a shared economic cost. We’ve done it with COVID-19. But we seem several steps away from discussing the reality of the situation and the real nature of the problem from an economics point of view.