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The Economy of Climate Change

by Duygu BAYRAM

The universe we live in often rests on a careful balance, however chaotic it may look from the outside. The existence of life is dependent on an even more ordered balance as we need certain conditions to keep existing. This balance is usually not threatened by the living themselves because we tend to fit into nature in order to exist; however, recently, humanity has been visibly proud of its quest to conquer nature and to bend it to its will. While it was not necessarily intentional, we have declared a war against nature when we stopped being restricted by it and began using certain limited resources without any limitations. However, we are losing the war, and we are taking everything else with us. In an unsurprising turn of events, it seems that a war against nature is a war against ourselves.

In simplified terms, the Earth’s atmosphere absorbs sunlight for the most part while reflecting some of it back as heat; however, some gases in our atmosphere can reabsorb some of this heat and trap it. When we have too much of these gases, called greenhouse gases (GHGs) as they produce a greenhouse effect, the Earth starts to warm up. That is what the climate change we speak of essentially is. What is humanity’s involvement in climate change? Well, under normal conditions, these gases are naturally produced regardless of our lifestyles but normally they exist in a balance. For instance, carbon dioxide in the atmosphere is continuously consumed and produced by simple activities such as photosynthesis and aerobic respiration. Recently though, we have been producing way over our share in the natural balance. Since the industrial revolution, carbon dioxide in the atmosphere has increased by about 40% (1).


The issue of climate change is deeply intertwined with the economy. Over the years, especially after the technological boom following the industrial revolution, our lives started to become more luxurious and costly. As some countries began to develop, those who industrialized got richer, while the rest of the world acquired the status of a developing country. This wealth allowed them to develop, produce, and sell more. However, production depletes natural resources, mainly fossil fuels in our case, and unfortunately, that depletion generally turns into carbon dioxide. Today, how much money you own noticeably correlates with how much you contribute to climate change (3) (4). The problem is, while the gap between the rich and poor is still there, even the poorest countries have been getting richer. Economic growth, powered by our limitless consumption of resources, has led to the highest standards of living and the largest reduction in extreme poverty in human history (5) (6) (7).


The relationship between climate change and economic growth leads to a dilemma. We need to stop growing at the rate that we are, at least until we have working alternative technology; however, this idea creates an unfair situation. Developed countries are the biggest contributors to climate change, and yet, if we stopped relying on industrialization right now, the developing countries would suffer the most loss. Currently, China is the largest contributor with 27% of the total emission of carbon dioxide. The USA and the EU follow China with 15% and 10% respectively. Together, these three alone make up over half of the total global emissions. However, the picture changes slightly when we take a look at historical emissions and the total emission per person. Historically, China’s emission rate sits at 13% compared to the 25 and 22% of the USA and the EU. Similarly, if we measure contribution by emission per person instead of total, China’s rate at 7% is pretty average. In contrast, a single American produces over twice that amount (8) (9). The richest half of countries contribute 86% to global emissions (10). These numbers suggest that while developed countries point to their efforts in being environmentally friendly, they have been and are still the biggest contributors to climate change. When this is the case, developing countries become reluctant to apply these policies as to them, carbon emissions are not a luxury but a necessity for survival.


There are other issues concerning how to deal with climate change. To start with, sometimes items that seem environmentally friendly may end up not necessarily being so. For example, while single-use plastic bags are dangerous to animals, the energy required for their production is lower, therefore, it is more environmentally friendly than producing a reusable cotton bag. As a result, you would have to use the cotton bag 7100 times for it to have a lower environmental impact (11). Another issue is that the key to reducing carbon emissions is to use efficient technology, meaning it does the same thing for less energy. However, there are some issues with the real-life implementations of these as well. Firstly, when something becomes more efficient, it is often used more which may cancel out whatever reduction it was planned to cause, this is called the direct rebound effect (12). Another problem, the indirect rebound effect, happens when you buy something more efficient which helps you raise money that you might spend on another luxury item. For example, buying a cheap, efficient car might allow you to save some money for a vacation that you then take a flight to (13). Finally, as usual, the more you optimize something, the harder it becomes to optimize it even more (14).


So far, the world has made some effort in acknowledging the problem, albeit slowly. The Paris Agreement specifically tackled what can be done while taking developing countries into account. The agreement aimed to keep the temperature increase below 2 degrees Celsius while offering support to developing countries in order to increase their ability to combat climate change. Another aim was to help the involved parties in dealing with the environmental impacts global warming would bring. In return, parties were required to regularly report emissions and implementations of their nationally determined contributions (NDCs). The agreement adopted a transparent policy and additionally aimed to develop a new technology framework (15).


Another such agreement is the Kyoto Protocol which was adopted in 1997 but entered into force in 2005, operationalizing the UN Framework Convention on Climate Change (16). The Kyoto Protocol, in contrast, only dealt with developed countries. The countries were expected to meet the measures mostly through national measures and report back much like the Paris Agreement; however, the difference was the establishment of flexible market mechanisms: International Emissions Trading, Clean Development Mechanism (CDM), Joint Implementation. The benefits of this decision were that it encouraged investment in developing countries, included the private sector in the process of emission reduction, and made transitioning from fossil fuels to clean energy easier.


A problem with these agreements is that they mainly include governments and major contributors like the US can and has refused to participate in both the Paris Agreement and the Kyoto Protocol. This is worrying as US companies have a troubled past with climate change science. For example, Exxon, the world’s largest oil and gas company, was detected to be aware of potential climate change issues over a decade before it became a public issue (17). Furthermore, they have spent over 30 million dollars to promote climate change denial over the years. Currently, Exxon is part of the Oil and Gas Climate Initiative (OGCI) with other oil and gas companies like BP and Shell to reduce GHGs and cut back their contribution to climate change (18). Their website lists their goals and policies they wish to follow to decrease GHG emissions and encourage transmission to clean energy.


Another agency that deals with climate change in the US is the United States Environmental Protection Agency (EPA). EPA conducts research to find ways to reduce US contributions to global warming (19). They suggest that market-oriented economies work better compared to prescriptive regulatory policies as the latter restricts the choices of the companies, forcing them to control their emission at higher costs. In order to achieve market-oriented policies, they provide two options. First is an emission tax, this encourages polluters to cut back on their omissions to avoid paying higher taxes. The second one is a tradable permit system where the company is given a number of pollution permits referring to how much GHGs they are allowed to emit. Polluters can then reduce their emissions to avoid buying these permits or can sell these permits to other companies.


However, what we have been doing has not been enough. The Paris Agreement is failing (20), developed countries that follow environmental policies continue to give extensions to oil pipelines (21), the policies still seem to place more emphasis on preserving the profit of these companies rather than cutting down emissions, and even during the pandemic the carbon dioxide levels hit another record high (22). We simply are not doing enough (23). What is worse is that the economy stands to lose if we keep this up as well. The NRDC predicts that dealing with hurricanes, real estate loss, energy, and water will alone cost 1.9 trillion dollars (1.8% of US GDP) annually by 2100 (24). In 2019, the world has spent 100 billion dollars on damages caused by extreme weather conditions. It is estimated that by 2050, the cumulative cost of damage might increase to 8 trillion dollars, losing 3% of gross world product and the poorest regions losing more than their GDP (25). Furthermore, these estimates do not account for human deaths or loss of biodiversity so the reality we end up facing might be even more severe.


Despite our history of failure, all is not lost. There is still a lot we can do. We can start by leaving nuclear power plants online for longer (26), we can invest less in fossil fuels and more in renewable energy sources (27), we can make carbon emission itself costly (28), and we can rely less on fossil fuel vehicles (29). Climate change is a complicated issue that touches on many different aspects of our lives; however, that does not mean that it is unsolvable (30) (31) (32)

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