Can environmental economics provide a solution to climate change?

Environmental economics has become increasingly important, with a growing number of research papers and, at the same time, an equally growing number of public voices calling for action. When William Nordhaus received the Nobel Prize in 2018 for his work on integrating climate change into macroeconomic analyses, the committee emphasized the important challenge to create sustained and sustainable economic growth in the future.

“It’s a race between growth on the one hand and changing the growth model enough,” says Michael Spence, a colleague of Nordhaus’s and a vocal supporter of the importance of his work.

In 2012, Finn Kydland was a member of a Copenhagen Consensus panel that analyzed different approaches to address the world’s biggest challenges. One of the top solutions presented was instituting a tax on carbon emissions. “This tax could start off being initially small,” Kydland suggests, “but then it would grow exponentially. That’s a solution that will affect incentives.” He explains how providing incentives is a core aspect of economic theory, and that carbon pricing is a good example of this.

Carbon pricing today is understood as a crucial element in the fight to mitigate climate change. “There are relatively few things that are almost anonymously agreed upon among economists, but this is surely one of them,” says Spence.

There are proposals on the table in many countries, including the US, China and Canada. “If we don’t manage to put a price on carbon, we can’t solve the problem for two reasons,” explains Spence. “One, we create an incentive to overuse fossil fuels and generate carbon dioxide and second, the new technologies that are clean are disadvantaged because one output of the old technology, the fossil fuels, is not being priced properly, in this case negatively.”

According to the World Bank, more than 45 nations have carbon pricing mechanisms in place, which translates to roughly 20 percent of annual global greenhouse gas emissions. The Carbon Pricing Leadership Coalition (CPLC) emphasizes how a carbon price shifts the burden to those who are responsible for polluting and can thus reduce, or prevent, the damage. Not only does a carbon price incentivize businesses to reduce their own emissions, it also encourages innovations in the clean energy sector.

Still, without global rules, there is the concern that companies would relocate to avoid these taxes, causing people to lose their jobs as a result. “Taxing carbon is an essential step in dealing with climate change, but whether it’s going to happen politically is very difficult to understand,” says Spence.

While international agreements are crucial, Spence sees most of the progress in the area of individual engagement. “Tens of thousands of people are in one way or another directly working on this,” he says. “That’s good. It’s essential.”

Spence emphasizes that one approach alone won’t be sufficient; you need to change the mindset of people and deliver a better understanding of the positive outcomes it would carry.

“A carbon tax would be top-down, regulation would be top-down, but bottom-up means changing your behavior based on shifting values,” says Spence. “It means educational programs. It means recycling stuff.”

The younger generation have been among the most motivated to reduce and prevent further climate change. The school strikes for climate, an international movement of students striking to demand climate action, inspired strikes in nearly 300 cities worldwide in 2018. Their hope is that by applying enough pressure on politicians, they will be able to make a difference.

“Economics evolves,” says Spence. “At no point in time could you say the economics profession has got all the right models, all the right solutions, but I think it evolves and it will make a contribution.”

The debate around climate change is here to stay. How we can reduce the human impact on the environment is one of the most important topics on the global agenda. It’s clear that economists will play a big role in finding good solutions, even though exactly what those solutions will be is much more complex.