Pursue profitability – even at the cost of the planet?!

Sandrine Dixson-Declève, Co-President of the Club of Rome, Jorgen Randers, full member of the Club of Rome, Anders Wijkman, Honorary President of the Club of Rome

While we appreciate the recognition by the Economics Prize Committee of the Swedish Bank of the importance of integrating climate change into long-run economic macro-economic analysis, we seriously question the decision to give last year´s Economics Prize (the so called Nobel Prize) to William Nordhaus.

It is true that Nordhaus has been an early proponent for responding to climate change. He was among the first people to suggest that warming should be limited to no more than 2°C of pre-industrial temperature. Had the world listened to him at the time – some twenty years ago – we would have had a much better chance today to curb GHG emissions and avoid dangerous climate change.

But while being clear about the serious risks posed by climate change, Nordhaus has in parallel maintained that climate mitigation must not lead to a reduction in the current rate of economic growth. This is where we and many others don’t agree with Nordhaus. The assumption is that by promoting growth in GDP, society will be better off  to deal with climate impacts in the future. To quote Julia Steinberger, an ecological economist at the University of Leeds: “Instead of spurring governments to take action against climate change, Nordhaus’ approach has been used to putting it off. His kind of analysis has been used to delay, delay, delay.” As late as in September 2018 Nordhaus wrote an article where the preferred action for mankind was to ensure that warming would not exceed 3,5°C. A more ambitious policy in terms of mitigation would be “too expensive” he claimed. We think it would be difficult to find a single leading climate scientist agreeing with this view.

It is, indeed, an irony that Nordhaus has been awarded this Prize the same year the IPCC 1,5°C report concludes that extraordinary emission reductions must be made to save future generations from having to live in a world where warming will by far exceed the Paris target of “well below 2°C”. In other words, we risk placing on our children and grandchildren a huge cost, which unfortunately ends up as a small number in the net present value calculations which form the basis of Nordhaus’s Economics Prize for 2018.

William Nordhaus has received this Economics Prize for his effort to formalize the economic analysis of global climate policy. However, by honoring him with this prestigious prize the world is also acknowledging his orthodox neo classical macroeconomic thinking, i.e.  that it is optimal to postpone action until the external cost of climate damage exceeds the cost of action.

We live in a world where thought leaders – also economists – are increasingly defending a more realistic economic theory that recognizes the crucial role played by natural capital , including a stable climate system, and accepts the constraints of traditional growth indicators such as GDP. In this situation, it is ironic that this year’s Economics prize honors a neoclassical economist who’s axioms are valid in the world of models but not necessarily in the real world.

Nordhaus has specifically caused damage by spreading six ideas or concepts, that all help excuse postponing strong climate action:

  1. The external cost of climate change grows monotonically as the temperature rises. This has helped reduce the worry that there may be “tipping points” – points of no return – after which it is not possible to return to the world as we know it. The world appears to have passed two such points already, namely the destruction of the coral reefs, and the melting of the permafrost. The first has already partially occurred, and the second may no longer be stopped.
  2. It is meaningful to try to measure the total cost of climate change in monetary terms. What is the value lost when the coral reefs will all be bleached and destroyed because of ocean warming? What is the cost of millions of people having to leave their livelihoods because of sea level rise or severe drought conditions?
  3. Future damage should be discounted to current costs, using a discount rate which reflects the returns that can be obtained in investments in today’s capitalist society. In order to put a meaningful value on a human life in 2100, one needs instead to use low discount rates, for example the rate of 1 % per year, chosen by the economist Lord Stern in his famous climate report in 2007.That ethical and realistic rational was attacked by Nordhaus and most other neoclassical macroeconomists as not being “cost-efficient”.
  4. In a free market economy, with minimum government intervention, technological innovation (for example substitutes for scarce resources) will emerge fast enough to avoid loss of general wellbeing, because of rising prices for the scarce input and increasing profitability in providing alternatives. This assumption – Nordhaus´ defense when being questioned about possible “tipping points” – is extremely risky.
  5. The damage arising from climate change is equally shared by people around the globe. This is clearly not the case. Experience shows us that the world’s poorest and most vulnerable in low-income countries are and will continue to be on the front lines of climate change and climate related disasters.
  6. The final and ultimate misleading idea that the wellbeing of the majority is measured precisely by output (i.e. by total national GDP measured at market value), when it is fairly obvious that GDP growth in the capitalist world over the last 40 years has not benefitted the majority of working men and women and in truth has led to greater income inequality and disparity between rich and poor.

In sum, Nordhaus has promoted the idea that cost-efficiency and profitability should serve as the main guide for our response to the climate crisis. This is in stark contrast to a growing knowledge and evidence base showing the contrary. The whole rationale of the Paris agreement was to call for long term governmental plans, taking into account the sensitivity of natural systems, possible tipping points, and the devastating effects that future warming will have on humans and ecosystems all over the world, first and foremost on the most vulnerable.

So we call on Mr. Nordhaus to do one of two things:

  1. Admit that economic thinking has moved away from growth and free market economics as the primary solution to climate change, or
  2. Confess that for him profitability should be pursued even at the cost of the health of the planet.

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