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The climate crisis is the most pressing issue humanity is facing today; global temperatures have increased by 1C since the pre-industrial period and under current policies, are expected to increase by 3.1-3.7C by the end of the century. Why do we need to reduce carbon emissions? Carbon emissions remain in the atmosphere for 100 years and up to 80% of this dissolves into the ocean over a period of 20- 200 years. The crisis not only has impacts for the environment, but also for the economy. Evidence shows that reducing carbon emissions will benefit the economy, but will governments make the decisive actions needed?

Why Do We Need to Reduce Carbon Emissions?

Global temperature increase and climate change are causing environments inhospitable and posing greater risks to public health. Problems caused by excessive carbon emissions to the atmosphere are vast and widespread. From exacerbating outdoor air pollution, which according to World Health Organisation led to an estimated 4.2 million premature deaths, about 90% of them reside in low and middle-income countries, to ocean acidification – causing ocean temperature to rise, coral bleaching and creating irreversible damage to marine ecosystems – to food insecurity, where changes in temperature and precipitation affect crop yield and shift agricultural zones.

How Do Greenhouse Gases Affect the Economy?

A 2017 study found that in China, 1.23 million air pollution-related deaths in 2010 represented up to 13.2% of the country’s GDP. In the same year, air pollution caused over 23 000 deaths in the UK, representing up to 7.1% of the GDP. Another report projects that annual premature deaths due to outdoor air pollution will increase to up to 9 million people in 2060 from 3 million in 2010, as well as an increase in annual global hospital admissions: 11 million people in 2060 from 3.6 million people in 2010. One of the biggest benefits of reducing carbon emissions is that it would decrease the number of deaths related to air pollution and help to ease pressure on healthcare systems.

To achieve growth in the economy while still prioritising the reduction of carbon emissions, a decoupling between the two is needed. There are a variety of ways this can be done; a notable example is implementing a carbon tax

Carbon taxes are seen as a way to reduce emissions, while making the economy more efficient, and are advocated as a means to improve the operation of the economy, lower dependence on foreign fossil fuels (for importing countries), reduce pollution and cut government spending. Over the last 20 years, Sweden has proven this with their carbon tax; announced in 1991, the price of carbon has risen steadily from €29 to €125 in 2014. Globally, Sweden has the highest level of carbon taxation in the world and has been able to achieve decoupling. The revenue from this tax is used wherever the country needs it. 

China is the highest global emitter of carbon and experiences high levels of air pollution. In 2010, China’s Low-Carbon Pilot Policy (CLCP) was implemented in five provinces and eight cities aimed at decoupling economic growth from fossil fuel use by shifting to an economy based on energy efficiency and renewable energy. While the pilot cities have made progress in establishing low-carbon plans, there are barriers such as a lack of explicit definition for ‘low-carbon city’, confusion resulting from several parallel programs, and insufficient supporting policies. However, the CLCP promotes regional economic growth and while it increases production costs, it also promotes the growth of enterprises’ output and benefits. Additionally, it helps to strengthen internal management, efficiency and innovation, which fosters competitiveness and higher productivity. A 2019 study shows that as a result of the CLCP, the degree of competitiveness in markets has been magnified, encouraging economic growth by not only selling products at competitive prices, but also driving for innovation. This is clearly evident in July 2021 when China managed to launch a national emissions trading scheme after much delay. The market saw 4.1 million tonnes of carbon dioxide quotas worth USD$32 millions traded on the first day of its opening, making it the world’s largest carbon market

A 2017 study claims the best way to avoid increasing production costs is for developers to produce new technologies that reduce CO2 emissions while also decreasing costs. According to the National Statistics, as a result of not only climate regulation and economic structural change, but also technological advancements that took place in the UK, the region was able to achieve decoupling between 1985 and 2016 with GDP per head rising by 70.7% while emissions dropped by 34%. These technological advancements involved developments in vehicle efficiency and replacement of fossil fuels with renewable energy; between the years 1990 and 2017, the use of energy from renewable sources grew by 1 267% while fossil fuel consumption decreased by 22%. Denmark’s rapid increase in renewable energy reduced emissions while encouraging local production. 

Conversely, productivity is negatively affected by the climate crisis through the loss of infrastructure through disasters like flooding, sea level rise and the hampering of agriculture. 

A study in the journal, Nature, says that for each trillion tonnes of CO2, GDP losses could be nearly half a percent. Developed countries such as Canada, Germany, New Zealand and the UK will have less than 0.1% of productivity loss per unit emission. However, productivity losses in developing countries like India, Thailand and Malaysia will range from 3-5% of total GDP per year for every trillion tonnes of carbon emitted. Implicitly, keeping carbon emissions down would result in a reduction of productivity losses (the degree of reduction depending on the country). 

Further, if we pursue all of the low-cost climate crisis abatement opportunities currently available, the total cost of mitigating the climate crisis would be 200-300 billion Euros per year by 2030 – less than 1% of the forecasted global GDP in 2030

It is imperative that countries achieve this decoupling and reduce carbon emissions, ideally through a carbon tax, to ensure a more sustainable and prosperous economy. Failure to act, or acting too late, will result in even further climate breakdown, affecting any chance humanity has of extending its lease on the planet.

The effects of the climate crisis are being felt today across ecological, social and financial dimensions, threatening the global economy, with some effects being observed decades ahead of previous estimates. Whilst the former two aspects cannot be directly quantified, financial losses in recent years have been significant, reaching US$340 billion in 2017, of which only USD$140 billion was insured. It is clear that the status quo is threatening long-term global stability. How can central banks take the lead in facilitating the transition towards more sustainable models?

How does the climate crisis hurt the global economy?

The increasing frequency and severity of natural disasters such as wildfires, storms and droughts not only impose hefty fiscal burdens on authorities and local communities to repair and upgrade damaged infrastructure (the recent bushfires that tore through Australia cost an estimated US$100 billion, while Hurricane Harvey in the US in 2017 cost US$125 billion), but it also presents disruptions in production and supply, with especially pronounced impacts in the agricultural and logistics sectors. An impact assessment for agriculture by Climate Impact Group projected that given current warming trajectories, the second half of this century would feature decreasing crop yields globally, even in temperate regions which are benefiting in the short-term. The assessment says that farm-level adaptation may be able to cope with up to 1–2°C warming, but considering that the UN has warned that the planet is on track for 3-5°C warming by 2100, this is cold comfort. 

Coupled with a soaring demand for food- particularly energy-intensive varieties like red meat– from booming global population and income, real prices per caloric unit of food will soar in the long-term, before accounting for increased likelihood of price spikes  from extreme weather events. This phenomenon is likely to become increasingly pronounced over time, presenting inflationary pressures which will hurt the poorest segments of society. Even food-exporting countries may experience net welfare losses, as any increases in export revenues risk being outweighed by rising infrastructure expenses from potential natural disasters.

Despite such poor outlooks for the planet and the global economy, there is insufficient action being taken to tackle the climate crisis. Perhaps the greatest impediment against extensive policy action stem from its accompanying transition risks, which will lead to immediate disruptions in our current business models. Hypothetically, imposing hard limits for energy consumption or greenhouse gas emissions even 5-10 years in the future would lead to massive present-day repricing for tradable equities, since conventional valuation techniques like the Discounted Cash Flow (DCF) model are based heavily upon short-term revenue and cost projections. For instance, if environmental protection policies result in a 5% decrease of shareholder dividends for traditional fossil fuel companies could reduce their valuation by up to 40%, causing global stock markets to plummet by 11%.

Since many financial institutions invest in heavily-polluting industries, this would erase a substantial amount of value from their balance sheets, risking the stability of entire financial systems. Consequently, several central banks and financial institutions, for example the Bank of England and investment firm Blackrock, have called for companies to disclose their greenhouse gas emissions, as increased availability of such information allows the relevant financial risks to be priced into the market at an earlier stage, reducing the magnitude of sudden disruption. For instance, implementing a carbon tax would prompt companies to adopt more environmentally-friendly practices, which facilitates the transition towards a greener business model.

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climate crisis global economy
Potential carbon emission trajectories alongside climate-related risks accompanying different pathways (Source: Bank Underground).

To tackle climate change as a key policy objective, central banks can start by targeting an ‘Earth budget’ every year to restrict its damaging effects. This can take place through implementing mandatory disclosures of greenhouse gas emissions and other polluting acts from all companies above a stipulated size, including indirect holdings in the financial sector. At present, some information on climate-exposure can be gathered from private-sector research firms like S&P, Moody’s and Fitch, which has begun to consider climate-related risks within their rating decisions. Central banks can aggregate this data to assess all listed companies, imposing penalties (such as lending above the standard policy rate) on financial institutions involved in dealings beyond a predetermined pollution threshold, alongside regular press releases of firms which exceed their environmental footprint to raise public awareness and exert external pressure for change. Where quantitative easing- whereby a central bank buys government bonds or other financial assets in order to inject money into the economy to expand economic activity- is used in monetary policy, asset purchases by the central bank can favour those that fulfil predetermined ‘green’ requirements, as a form of ‘Green QE’

While disruptive to the status-quo, it is vital that action be taken urgently, as longer delays translate to shorter transition periods for cutting greenhouse gas emissions, necessitating even more drastic measures which stretch the limits of the financial system.

The International Renewable Energy Agency (IRENA) released its Global Renewables Outlook report, which shows that renewable energy could power economic growth post-COVID-19 by spurring global GDP gains of almost US$100 trillion between now and 2050.

Impact of Renewable Energy on Economic Growth

The report says that advancing the renewable-based energy transformation is an opportunity to meet international climate goals while boosting economic growth, creating millions of jobs and improving human welfare.

While the report acknowledges that the path to deeper decarbonisation will require total energy investments of up to USD$130 trillion, the socio-economic gains of such an investment would be ‘massive’. Investing in renewable energy would boost global GDP gains above business-as-usual by USD$98 trillion between now and 2050 by returning between USD$3 and USD$8 on every dollar invested. It would also quadruple renewable energy jobs to 42 million, expand employment in energy efficiency to 21 million and add 15 million in system flexibility. 

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Further, low-carbon investments would yield savings eight times more than costs when accounting for reduced health and environmental externalities, the report says. 

The agency’s director-general, Francesco La Camera, said the global crisis brought on by the COVID-19 pandemic exposed the ‘deep vulnerabilities of the current system’ and urged governments to invest in renewable energy to encourage economic growth and help meet climate targets.

Camera says, “Governments are facing a difficult task of bringing the health emergency under control while introducing major stimulus and recovery measures. 

By accelerating renewables and making the energy transition an integral part of the wider recovery, governments can achieve multiple economic and social objectives in the pursuit of a resilient future that leaves nobody behind.”

The report also looked at energy and socio-economic transition paths in 10 regions globally, which are all expected to see higher shares of renewable energy use, despite embarking on different paths. Southeast Asia, Latin America, the EU and Sub-Saharan Africa are poised to reach 70-80% shares in their total energy mixes by 2050.

The report also found that renewable energy would help to reduce the energy industry’s carbon dioxide emissions by 70% by 2050 by replacing fossil fuels. Renewables could play a greater role in cutting carbon emissions from heavy industry and ‘hard-to-decarbonise’ sectors, particularly through investments in green hydrogen.

The agency urges stronger coordination on international, regional and domestic levels, with financial support being directed where needed, ‘including to the most vulnerable countries and communities’. 

Andrew Steer, chief executive of the World Resources Institute, says, “As the world looks to recover from the current health and economic crises, we face a choice: we can pursue a modern, clean, healthy energy system, or we can go back to the old, polluting ways of doing business. We must choose the former.” 

Featured image by: Aaron Crowe

The current economic model is failing to adequately address the climate crisis. Can a radical alternative offer a better solution to a problem that requires immediate action?

Over the last 40 years, neo-liberalism has been the dominant economic system in the West. In that time, a global consensus over anthropogenic climate change has been reached, although progress has been slow in addressing it. Rising greenhouse gas emissions mean that global temperatures are expected to rise by 3°C to 6°C by the end of the century according to the Organisation for Economic Co-operation and Development, far exceeding the Paris Agreement goal of limiting warming to 2°C above pre-industrial levels.

While the failure to mitigate the effects of the climate crisis can be largely attributed to ineffective government policies, it is important to recognise the role of neo-liberal economics in hampering efforts to reduce greenhouse gas emissions.

At its core, neo-liberalism dictates that decision-making should be driven by market forces rather than state intervention; a flawed assertion when it is considered that 29 oil and gas companies account for a third of all global industrial greenhouse gas emissions. The question of how individuals can mitigate global warming becomes arguably meaningless when large corporations are polluting the planet on an unsustainably large scale.

The Role of Consumerism

The development of a culture of consumerism in the Global North (referring to developed societies in Europe and North America) and in other rapidly growing economies is problematic as people become dependent on certain products and services to sustain their way of life. An example of this can be found with ‘fast fashion’ in the clothing industry, where changing fashion patterns lead to people regularly purchasing whichever items are deemed trendy. The global liberalisation of trade has facilitated this, enabling the formation of global production networks that allow for the mass production of products with short life spans at a relatively low cost (Lewis 2017). As a result, these items remain affordable and in constant demand as people become dependent on them. 

This culminates in more greenhouse gas emissions from the carbon-intensive production and transportation of these goods and services. These items often end up buried in landfill sites when they reach the end of their product life cycles, and in the case of plastics, take hundreds of years to decompose. However, some plastics that are not disposed of properly end up in rivers and oceans, resulting in the contamination of freshwater and marine ecosystems (Dris et al. 2015).

The Role of Industry

Even if individuals collectively break free from these unsustainable levels of consumption, multinational corporations’ harmful practices will be protected by politicians wary of the jobs tied to these industries. One of President Trump’s key commitments during his 2016 US election campaign was to reignite the declining coal mining industries in ‘Rust Belt’ states. This policy appeared to be popular in these states with the majority voting for Trump. Consequently, jobs tied to fossil-fuel based industries are a source of political resistance to mitigating the climate crisis under the current economic system.

European Green New Deal

The current system’s failure to adequately address the climate crisis demonstrates the need for a radical alternative. The Green New Deal is one solution that has been proposed within the US and the UK and more recently, the EU, with the announcement of the European Green Deal. The deal outlines plans for immediate large-scale state investment in renewable energy sectors like solar and wind power, funded through borrowing and raising taxes. The private sector will be subject to more stringent regulation, reversing a trend of deregulation that has typified neo-liberalism in recent decades. This includes new laws that toughen standards for buildings to be classed as energy efficient. This is an indication that policy-makers are beginning to acknowledge that market forces cannot adequately address the problem of climate change on their own.

The European Green New Deal is ambitious but its supporters hope that the transition from jobs in fossil fuel-based industries to the renewable sector will generate wealth for the working class, helping to reduce social inequality by initiating a ‘Green Industrial Revolution’ of new manufacturing jobs (Clark III and Woodrow 2015). The biggest hurdle for the deal is the resistance it faces from EU member states with economies that still rely on coal power like Poland, which is refusing to accept the deal’s main pledge of achieving carbon neutrality by 2050.

Perhaps the most important aspect of the Green New Deal is that it forces politicians and economists to re-evaluate what constitutes a healthy economy. Some advocates argue that GDP should be dropped as an economic indicator because it fails to incorporate the environment and regards it instead as an externality. Replacing GDP with an indicator that includes measurements of social and environmental wellness, as has been done in New Zealand, allows climate change mitigation strategies to be assessed more comprehensively.

The European Green New Deal challenges the hegemony of neo-liberalism and offers an immediate solution to tackling the climate crisis. It gives nations the opportunity to correct historic market failures that have seen the natural environment abused by people and businesses. It is almost certain that any action to replace the current economic system will be vehemently opposed to by those who benefit from the status quo, but with scientists warning that we have until 2030 to prevent ‘the irreversible loss of the most fragile ecosystems’, humanity has no choice but to challenge the status quo.

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