The Poverty of Economic Reasoning about Climate Change

Abstract

A New Yorker cartoon illustrates the intergenerational aspect of climate change. It shows an Eskimo mother, father, and young child as they wave a tearful farewell to an old man, presumably a grandparent, whom they have placed on an ice floe. The family itself stands on a floating piece of ice. Which generation is responsible for the plight of which? I want to argue that the intergenerational aspect of climate change makes economic reasoning about it more problematic than one might think. Economic analysis depends on the idea of trade or exchange. It is hard to see, therefore, how it applies to our relations to people in the further future. We cannot bargain with them or they with us. Since they do not yet exist, they cannot have property rights. If ability to pay is a prerequisite of willingness to pay (WTP), moreover, then future generations cannot be willing--because they are not able--to pay us anything. We have exhausted all possible "benefits of trade" with them. I shall argue that the passivity of future generations--their inability to exercise market or political power--makes economic analysis irrelevant not just to justifying the goals of climate policy but also to designing instruments to achieve those goals. Economists often recommend that an international authority "cap" global greenhouse gas (GHG) emissions but allow firms to trade "allowances" under that cap. I shall argue that such a regime cannot succeed because generations in the further future, who are its principal beneficiaries, are in no position to defend it. Trading in GHG "allowances," as I shall argue, is more likely to reflect beliefs about the likelihood of enforcement--bets placed on election returns, for example--than to reveal the marginal cost of "sustainable" production or "clean" energy technology. [ILLUSTRATION OMITTED] A perfectly efficient or competitive market cannot respond to the need of future generations for a stable climate because future generations play no role as market actors. An efficient policy therefore cannot be a sustainable policy. This is an argument against efficiency, not against sustainability. That economic theory fails in this way suggests we must rely on other reasons and rationales to justify a response to the threat of climate change. Climate Change Is Not a Collective Action Problem According to Paul G. Harris, "Climate change is a collective action problem par excellence." One can see the appeal of this analysis. In 1965, Mancur Olson in The Logic of Collective Action showed that when each individual acts on self-interest, for example, to "free-ride" on the more socially motivated action of others, public goods will not be produced. Olson defines a "group" as "a number of individuals with a common interest." Olson wrote, "Unless the number of individuals in a group is quite small, or unless there is coercion or some other special device to make individuals act in their common interest, rational, self-interested individuals will not act to achieve their common or group interests." A little reflection, however, suggests that the "tragedy of the commons" or the analysis of a collective action problem does not fit the challenge of climate change. In the typical collective action problem, such as managing an open-access commons or preventing defections in a "prisoner's dilemma" game, each person will gain if all cooperate and all will lose if each acts in his or her own individual self-interest. In the case of climate change, however, one group, that is, people alive today and through the next generation, will make significant sacrifices, for example, by forgoing the consumption of inexpensive fossil fuels. A completely different group, whom one might call "posterity," will benefit. The coercion necessary to solve a collective action problem is justified by the mutual reciprocity of advantage, that is, the idea that each person gains more by the restriction of the freedom of others than he or she loses by accepting that same restriction. …