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How Climate Change Impacts the Economy

Updated May 16, 2022
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How Climate Change Impacts the Economy essay

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It is becoming increasingly apparent to world scientific and economic experts, that the predicted effects of climate change will have disastrous effects on both global and national economies. A fact highlighted by the recently issued Fourth National Climate Assessment by the US government, which stated that climate change is likely to effect their economic output by a minimum of 10% by the end of the century, estimating the damages to the US economy at around $500 billion a year by 2100.

This figure does not seem at all outlandish or out of reach, and may in fact be conservative, considering that a 2017 report suggested that economic damages associated with climate change were already costing the US economy approximately $240 billion per year for the decade previous to the study.

Applied to the global economy such downturns in productivity and output would be disastrous in a way that we as a civilization have never experienced, with the potential of making the economic recessions and attached human suffering of the past seem inconsequential in comparison.

With the rising awareness of the costs of climate change on both the economy and in term of human life, one of the central questions facing governments of today is: What role does macroeconomic policy have in mitigating the deleterious effects of climate change?

This presentation will take a brief look at the potential roles of monetary policy, fiscal / tax policy on global climate change.

A report issued this year by the IPCC showed that global emissions had increased in 2017 after 4 years of stabilization, an increase the authors attributed to a upturn in the global economy, at this point it seems as if the global climate is inextricably bound to the global economy, thus effective economic action is mutually required along with other political, social, technological and scientific attenuation measures.

Basic economic theory postulates that “people respond to incentives”, so vital is this fact to the understanding of economics its is considered one of its ten foundational principles. Ergo, if this statement is true, then the reciprocal formulation of this principle should then also be true; “people should respond to disincentives”.

One measure that many economic and scientific policy advisers have been promoting is the carbon tax, a macroeconomic measure that disincentivizes the use of carbon based fuels, thus reducing their consumption. Initial analysis suggest that carbon taxes are an efficient and manageable way to the reduced the global net emissions, especially if large polluters like China were to embrace them.

In the executive summary of the UN’s 2018 Emissions Gap Report, it is suggested that government tax plans could be hugely important in reducing emissions. Currently only about 15% of the global carbon output is captured in carbon taxes or emission trading systems, but the addition of one country, China, could see an additional 5% of global carbon captured in mitigation measures.

Given the wealth of information that suggests that carbon taxes are a valid measure against climate change, and that they are a measure that is both feasible and simple to institute– especially in comparison to other potential mitigation measures like geoengineering– it is surprising to learn that only around half of fossil fuel emissions carry any taxation at all, and only 10% are taxed at a level consistent with the keeping global temperatures from rising beyond the 2 degree level agreed on by world scientist to minimize damages.

Carbon taxes may prove to be a particular effective mitigation measure if the governmental revenue they generate is directly invested in research and development of green technologies and the furthering of earth and atmospheric science.

However; carbon taxes have proven to be politically risky, with many citizens feelings that they put undue economic pressure on them and businesses, and with members of certain pollical parties arguing that they impact taxed regions ability to remain competitive. In some areas of Canada this disgruntlement is so great in that numerous provinces- included Saskatchewan, Ontario, and New Brunswick- are threatening to or are actively challenging their associated legislation in court. They are also reported to be one of the central issues inflaming the current riots in France, riots which are reported to the worst in a decade.

Thus, If carbon taxes prove a measure that most find to odious to endure, less objectionable actions like the recent the creation of a public market for “green or climate bonds” — bonds that are hypothecate towards climate and environmental projects– may be more plateable and serve as a way to encourage private sector investment, and can thus can functions as a macroeconomic solution to mitigate climate change.

Green bonds are often incentivized through tax credits or tax exemptions which can make them an attractive option to many corporate and private investors over conventional taxable bonds. Recently, the private sector has started to issues green bonds in addition to older public sector bonds and green bonds issued by the World Bank.

Governments can also make use of other taxes cuts and exemptions to encourage industry to adopt more energy efficient and lower emission technologies over conventional technologies. Or enact other measures such as green energy subsides to speed up the conversion to greener energy generation.

In line with the economic theory of people’s response to incentives, it should be noted that according to the 2018 emission’s gap executive summary, fossil fuels subsides were still prevalent and largescale. Subsides which these experts view to be responsible for the unhindered consumption of carbon based fuels in some areas of the world, they suggest the removal of these subsidies to curb emissions. Stating that if these subsides were phased out– and thus consumption disincentivized– the net global carbon emissions could be reduced by as much as 10% by 2030.

Other macroeconomic solutions that may prove effective in the attenuation of climate change: the partial redistribution of money created through quantitate easing and other monetary policies into decarbonizing economies/societies through the investment in green infrastructure or green technology and companies.

Or the even purchasing of green bonds by central banks as part of sterilization after selling currency in foreign exchange markets, or the purchase of public green bonds as a regular part of open market operations.

In summary, economic policy can have a meaningful impact on the mitigation of climate change and its associated damages, and though it may appear the gains from certain policies are minimal, the compounding effect of all the world’s national economic policies on the global environment is bound to be dramatic.

Hence, it is clear that macroeconomic theory has a vital and central role to play in the coming battle with climate change, exactly what shape economic interventions take is up to the next generation of politicians and savvy economists, but it is clear that the field of macroeconomics can offer as a vast spectrum of possible options if we are clever enough to employ them.

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How Climate Change Impacts the Economy. (2022, May 16). Retrieved from https://samploon.com/how-climate-change-impacts-the-economy/

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