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A possibly common perception of "economics" is that it is only concerned with money, that it is dull, and of relevance only to bean counters. Whether or not this is an accurate assessment of some sub-disciplines of economics, other aspects (generally classified as macroeconomics) are concerned with, or relevant to, broader issues of prosperity, political stability, social justice, motivation, and even the survival of humanity.

Another popular impression of economics is that it is politically conservative and supportive of capitalism and financial institutions. Whilst many economists may be right-leaning, it is not inherent in the discipline. Karl Marx and John Maynard Keynes were economists. And economic analysis can be applied to systems other than monetary ones, such as the relationship between abortion laws and violent crime.[1]

In his book "The Undercover Economist"[2] economist Tim Harford gives an accessible (and possibly amusing) explanation of some concepts in economics such as the theoretical 'perfect market', 'efficiency' and fairness, 'externalities', imperfect markets such as used-car sales and the US health system, unintended consequences of regulations such as the Merton Rule, the effect of import tariffs on exports, of trade and trade barriers on world development and poverty, and more.

Of relevance to the issue of how we sustain human life on Earth, Harford addresses issues such as the environmental costs of transport of goods, the relationship between development and pollution and environmental degradation and climate change, whether free trade is better or worse for the world's poorest people, and how economic measures could determine the cost of decarbonising electricity and drive decarbonisation generally. Using the thought experiment of a conscientious consumer who wishes to minimise their carbon footprint by gathering infeasably massive amounts of data on everything they consider buying in order to make informed choices he shows how carbon pricing can achieve much the same effect without any effort, or indeed desire, on the part of the consumer to do the right thing.[3]

Behavioural economics (see Wikipedia) brings psychology into economic analyses. Perhaps the best known part of this field is nudge theory.

Economics of climate mitigation

Taking the actions needed to effectively mitigate climate change - replacing fossil fuels with clean energy sources, changing land use etc - will obviously cost money, at least in the short term (some changes may result in cost savings in the long run, similarly to the way that buying an Electric Vehicle is more expensive than one with an Internal Combustion Engine, but results in lower fuel and maintenance costs).

However the effects of climate change will also result in costs, such as storm, fire and flood damages, increased cost of food due to poorer crop yields etc. So the multi-billion dollar question is which costs are higher. For decades the conventional wisdom amongst economists was that the costs of mitigation were far high than the costs of dealing with climate change, but more recent research using improved estimates of costs has found that decarbonisation is less expensive and the effects of climate change are more expensive than first believed.

For decades, many economists’ analyses seemed to justify inaction on weaning the economy from fossil fuels, saying the astronomical cost of such rapid transformation would strangle economic growth. These experts were heeded over scientists who warned that acting too slowly would court climate catastrophe.

But in recent years, more economists have begun to agree that the short-term costs of aggressive action are not as high as once thought, while the long-term costs of inaction are much steeper. A new working paper by two climate scientists and one climate economist, using the most up-to-date data available, concludes the best path for the global economy would involve a rapid and dramatic cut in climate pollution to meet the ambitious Paris target of limiting global warming to 1.5 degrees Celsius (2.7 degrees Fahrenheit) above preindustrial temperatures — a target that is quickly slipping out of reach.

The new study adds to research over the past decade that has incorporated newer, more realistic representations of climate damages into economic models. Several other updated analyses also have concluded that meeting the Paris targets would result in the best economic outcome. Fewer experts are basing their advice on prior studies that actually concluded a potentially catastrophic amount of global warming would be economically optimal.

“Based on everything we think we know about technology, climate damages, etc. it would indeed be ‘optimal’ to cut emissions massively now,” said the paper’s co-author Gernot Wagner. Achieving such rapid decarbonization would require climate policies commensurate with a global carbon price of about $250 per ton of carbon dioxide today but declining to below $40 per ton in 2100 as the prices for clean technology come down.

Wagner has compared climate economics to financial investments. Many investors put money in bonds despite their lower returns than stocks because bonds are less risky. This is analogous to investing in decarbonization today to reduce long-term risks, rather than trying to accumulate wealth in the hopes that it can pay for the costs of potentially catastrophic future climate damages.

(from Drastic climate action is the best course for economic growth, new study finds, by Dana Nuccitelli in Yale Climate Connections, 14 April 2023)

Economics as a tool for climate mitigation

In this interview with Syed Kamall of the Institute of Economic Affairs (a UK free-market think tank), Professor Dieter Helm discusses the costs and economic mechanisms by which the UK could meet its 2050 target of net zero emissions. Dieter Helm is Professor of Economic Policy at the University of Oxford and Fellow in Economics at New College, Oxford, and has provided extensive advice to UK and European governments, including The Cost of Energy: independent review for the UK government in October 2017 and for the European Commission in preparing the Energy Roadmap 2030.

Further Reading

What is the cheapest way to cut carbon? The Economist; 27 Feb 2021

In the trendier parts of Berlin, cargo bikes are the rage. Locals use the bicycles, which have a wheelbarrow-sized box at the front, to do the weekly shop or ferry children around. Because they cut carbon-dioxide emissions, local authorities are subsidising the craze. But the well-intentioned schemes look pricey when you consider how much carbon is abated. One such scheme costs the city €370,000 ($450,000), but is expected to reduce emissions by only seven tonnes a year. That works out at over €50,000 per tonne abated. The equivalent figure for schemes that support the sale of low-carbon heating systems, by contrast, is €200 per tonne.

Footnotes and references

  1. See Freakonomics by Steven D. Levitt and Stephen J. Dubner [website]
  2. The Undercover Economist (ISBN 0-19-518977-9) (ISBN 0345494016) by Tim Harford published in 2005 by Little, Brown. See book description on Harford's website: [link]
  3. Adapt: why success always starts with failure (ISBN-13: 978-0349121512) (ISBN-10: 0349121516) by Tim Harford See book description on Harford's website: [link]