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What If Climate Action Actually Accelerates Economic Growth?
Alex Steffen, 28 Sep 09

Economics is not my strong suit, but I'm trying to wrap my brains around the economic discussion of climate action, and where it's gone wrong, since it increasingly seems to me that there's a strong argument to be made that climate action will accelerate the economy, not drag it down. Here are some of my notes. I'd love to hear your thoughts in the comments.

1) Harberger's Triangle is an economics term that refers to the "dead weight loss" created by a societal intervention in a market. In other words, the economic growth that we, in theory, forfeit by not allowing the market to find the perfect optimization of supply and demand.

Putting societal burdens on markets makes them less efficient.

capandtrade.jpg2) A cap-and-trade system, a carbon tax, or any other method of putting a price on carbon, does three things: it raises the price of emitting carbon (meaning less carbon is emitted), it transfers payments of that price from one party to another (say, carbon taxes from gasoline consumers to the government), and it makes the economy slightly less efficient (by introducing "dead weight loss").

Nobel-winner Paul Krugman sums it up like this:

[T]he emissions tax or, equivalently, the rent on emissions permits, does not represent a net loss to society. It’s just a transfer from one set of people to another — from the emitters, and ultimately those who buy their products, to whoever collects the taxes or gets the permits, and ultimately whoever benefits from the revenue or rents thus generated. The only net loss is the Harberger triangle created by the reduction in emissions — which has to be set against the benefits of reduced pollution.

In other words, the only cost to society is the Harberger's Triangle, the inefficiencies.

Pricing carbon mostly just shifts the benefits of markets, rather than putting a burden on them.

3) The size of the economic loss represented by Harberger's Triangle is a subject of some debate, but is not huge: all of the credible estimates of that cost are at most a few percentage points of GDP, with some variation depending on how many greenhouse gas emissions you want to cut and how quickly (the Congressional Budget Office, for instance, puts U.S. economic losses under the Waxman-Markey climate bill at 0.2-0.7 percent of GDP in 2020, 1.1 to 3.4 percent in 2050).

The economic burden caused by pricing carbon is pretty small.

4) What these costs do not measure is the value of not destroying the climate and ecosystems upon which we depend. The value of the planet's living systems is incredibly difficult to measure accurately, but it is vast in economic terms: we simply cannot afford to replace nature's free services (from creating oxygen and blocking radiation from outer space to growing topsoil and pollination). The economy is a wholly-owned subsidiary of the planet's ecology (as the saying goes). The economic damage being caused by business as usual far outweighs the cost of preventing those damages: past certain tipping points, increasing economic damages caused by collapsing ecosystems could outweigh the entire economy. (Just as one example, the annual cost of lost ecosystem services was recently estimated as already being $2-5,000,000,000,000 a year.)

The economic costs of emitting carbon are high and becoming monumental: the value of the risk reduction benefits of climate action far, far outweigh the costs.

5) Some strategies for climate action produce additional economic benefits by simultaneously solving for other externalities and creating new markets. Whole new industries will be created in clean energy, green technology and sustainable design. (In fact, if you want a quick primer on the growth potential of a low-carbon economy, check out this LSE speech (mp3) by former World Bank Chief Economist Lord Nicholas Stern on green growth.)

But the potential upsides of climate action go far beyond new industry creation. There are also real, sometimes massive, benefits to be had in not just doing things differently, but also doing different things. For instance, one of the best strategies for reducing U.S. emissions is growing bright green, compact cities. These cities reduce emissions in all sorts of ways, e.g., by reducing the distance people drive, making infrastructure more efficient, making it possible to live wealthier lives in smaller spaces, and helping people to substitute services for products. But cities offer other economic benefits. Just as one example, people who live in walkable neighborhoods are healthier and safer than most Americans are today, meaning that this emissions reduction strategy also returns enormous economic benefits in health, longevity and emotional well-being. These sorts of benefits are almost never brought in to the economics debate about climate change. That doesn't make the money they save us and earn us any less bankable.

Climate change action will spawn new industries and produce other economic benefits that would appear to, again, far outweigh the costs of that action.

6) Economic growth and the growth of energy and material inputs into the economy are not the same thing. The application of intelligence to materials can make them more and more valuable without increasing their volume: we don't price oil paintings by the number of tubes of paint that went into them. We're not yet sure about the limits of this "decoupling" of economic growth from material consumption, but it is -- at least in theory -- possible that we could have an economy that grows in value indefinitely while using a steady, sustainable amount of energy and materials. In fact, I strongly suspect that a sane respect for the limits of our planet imposes no meaningful limits on our potential, at all.

We're a long way from being able to complete decoupling our economy from our ecological impact, but we could, today, adopt practices, technologies and designs that slashed our demand for materials and energy while delivering just as much prosperity -- often at a large profit.

Emitting less carbon may actually make us richer.

(An aside: I think there are two reasons these last three points are so rarely discussed:

A) Economic models, like all other models of reality, often get their clarity by leaving certain things out. In this case, much of the value of the most fundamental economic creation processes on Earth (like the production of oxygen) have been left out of economics.

B) Economists often assume that the way things are today is the the result of the market's perfect functioning to date, leaving out the massive political interventions in the economy that actually created the status quo. So, for instance, when discussing real estate and suburban sprawl in the U.S., it is not at all uncommon to hear economists refer to sprawl as a product of market preferences -- completely leaving aside the well-documented history of government intervention for suburban development, from building the highway system, to implementing policies that paid for new infrastructure on the fringe with urban taxpayers' money, to implementing a mortgage deduction that supported home ownership in suburbs while in effect penalizing urban renters, to anti-competitive practices like the intentional destruction of urban streetcar systems, to support for redlining and the "devolution" of responsibility for social services in such a way that cities ended up with a wildly disproportionate share of metropolitan regions' poverty and social service costs. None of these things were market choices: they were all policy choices. Sprawl is a government program. Yet you'll rarely hear an economist discuss it that way.

The result is that economists tend to regard the status quo as already somewhat optimized, and any deviation from that status quo as a departure from optimization. In other words, many economists assume that the way things are is the way the economy wants to structure them, rather than the way certain players arranged them. These economists, blinkered by ideology, therefore miss all the many, many ways in which our current system is, well, pretty insane: unsustainable and massively wasteful.

I suspect that in the future, economic historians will look back on America in the second half of the 20th century and regard it as the story of how powerful special interests took over the government and leached the value out of the greatest economy the world had ever seen through the building of completely irrational, and incredibly lucrative, suburban sprawl. But that, my friends, is another story altogether.)

So, anyways, it seems to me that these concepts strongly imply that climate action not only won't hurt the economy much, it might even accelerate economic growth. What do you think?

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I give you great credit for a concise organized analysis. A cap and trade tax is just as fearful as a national sales tax, maybe the producer of similar economic times as these. The hardship falls on the unemployed but that is where the government could act if they would to close the loop for a sustainable society.

Posted by: Dennis Nowotny on 29 Sep 09

Actually, I'd take issue with your (and Krugman's) first point.

The Harberger's Triangle represents the deadweight loss from intervention in a PERFECT MARKET - that is, a market with no externalities, perfect information among agents, etc.

But, as we all know, a market that is suffocating the atmosphere with unaccounted carbon pollution is anything but perfect.

So if anything, our economy is dealing with the deadweight losses of a Harberger's Triangle already, with the status quo of no carbon policy. It's as though the government is telling us, "we're going to tax all the the globe's households that are susceptible to climate change, and dedicate the proceeds for a Fossil Fuel Corporate Welfare Fund."

Carbon pricing is a chance to repeal that wealth-transfer and save society from a really huge Harberger's Triangle.

Posted by: C Neal on 29 Sep 09

This was what The German Marshall Fund study found too
All the scary cap and trade fearmongering is wrong

Posted by: Mary S on 29 Sep 09

Here's the bloody heart of all this: "Pricing carbon mostly just shifts the benefits of markets, rather than putting a burden on them."

All of the deliberate disinformation on climate economics has come from those on the losing side of this transfer. Future industries and beneficiaries have limited political power - comparatively zero. As I said on WC last year, "The annual estimated value of carbon permits in the first year of a nationwide cap and trade program is $300 billion. We have seen nothing yet… and I see that we are unprepared for that fight." These industries know what's at stake and they'll fight dirty, and they'll fight to the death.

To the closing point, it's worth wrapping in the accepted economic concept of creative destruction. Times of change and innovation always leave some players in the dust, while new economies rise. This is an opportunity to encourage that process.

Posted by: justus on 29 Sep 09

Alex... are you Pro-Growth? Resigned to the belief that the only way we can sell a cap on fossil fuels is to sell it as Pro-Growth? If we solve climate change can we no longer worry about growing population, an explosion of consumer goods, increased water use, an increasing gap between the rich and the poor?

I know that you know that our issues are far broader than just climate, BUT I am increasingly wary of the word "growth" and its connotations. As long as we refer to it as a goal of our economy the longer we avoid the hard work of looking at the root issues of ecosystem degredation, our cultures belief in growth solving our problems.

Posted by: Bill Reiswig on 29 Sep 09

Well, sorry to not have fully read what you wrote, but here's the crux of it:

We're not yet sure about the limits of this "decoupling" of economic growth from material consumption, but it is -- at least in theory -- possible that we could have an economy that grows in value indefinitely while using a steady, sustainable amount of energy and materials.

Frankly, I don't really understand this fully. I certainly think that the earth cant withstand 6 billion plus people for multiple decades. Whatever level of resource and energy use you are describing in the above passage, its got to be a hell of lot less that what we have now.

I'm agnostic as to what continual growth looks decoupled from low resource use and energy use. It would certainly be a new historical precedent from homo sapiens.

Posted by: Bill reiswig on 29 Sep 09

"Whatever level of resource and energy use you are describing in the above passage, its got to be a hell of lot less that what we have now."

Well, yes. Probably trending towards zero waste, extreme energy efficiency (Factor 20, anyone?), zero net emissions, completely nontoxic and/or closed loop processes... within our lifetimes.

I personally believe we're going to head that way one way or another: collapses will force us to if we delay; but we'll be much better off if we do it by choice...

Posted by: Alex Steffen on 29 Sep 09

Well, this analysis is far from thorough, and Paul Krugman does not sum it up by far.
First of all an product is created that was not here before (carbon emission rights). In order to allow for its purchasing this product needs a supply of money in order to be purchased. If this money is not printed it will have to be drawn from the purchase of other products, whom as a result will get purchased less (or will remain being purchased in the same amounts but at a lower price). This is however not the most important point and over time the economy will find a new balance.

However, the money that is collected on carbon emissions flows to the goverment. And what exactly does the government do?

It buys and uses wapons, it builds roads and bridges, and it supports car makers and banks that in turn support oil companies. So were exactly is the win?

Basically the emission tax flows from emitters to the government, that in turn recycles it back to the very same emitters. And by trading those emission rights, banks make huge profits as they do on all trading.

Now ask yourself who will pay for all this.

Posted by: Martijn on 30 Sep 09

Our love affair with the automobile has brought about remarkable new ways to sharply reduce the need for fossil fuel. Regardless of belief about climate change, almost everyone can agree on the economic benefits that make it important to move beyond oil.

Revolutionary new technology will make possible electric cars that need no recharge - as well as hybrid engines that might need to be fueled with only one gallon of water for each thousand miles of driving.

Little known breakthroughs promise to lead to cars and trucks that need no fossil fuel or recharge. Later, advanced versions can become power plants when parked, wirelessly selling electricity to the local utility. Such cars would pay for themselves over time. They also can replace any need to build new power plants.

The science is new, and will understandably be greeted with widespread disbelief and skepticism.

However, independent laboratory validation of one extraordinary breakthrough has taken place at Rowan University. It produced more heat than can be explained by textbooks, clearly suggesting a new source of energy is involved. The experiments can and should be widely reproduced.

They suggest one barrel of water will replace 200 barrels of oil!

For additional information: 4 Steps to Revive the Auto industry and the Economy

Radically new technologies can let the love affair with vehicles change much of what is currently believed about energy.

The key question would seem to be: How best to accelerate the process?

Posted by: Mark Goldes on 30 Sep 09

National economics is not the same as natural economics in many cases, especially where the environment has been ignored to the detriment of the planet.

One can say that Katrina brought a lot of work and activity to New Orleans, but that does not completely state the case.

Or that a 7 year old who gets in his dad's car, starts it, and drives off is going to produce work for body shops and doctors; but again that does not completely state the case.

If we state the case of global climate change completely, the sale of anti-depressant drugs will most likely sky rocket.

But then again, that will not solve the problem either.

Posted by: Dredd on 3 Oct 09

Moving to low carbon urban transport policies isn't just about reducing CO2 emmissions and reducing oil dependency. There are also huge health gains from encouraging more people to walk and cycle, and even if you just get people walking to and from bus stops, instead of getting straight into their cars, there is a small net health gain there too. And then there's the whole usage of time argument for going by train rather than driving - so many plusses for enlightened journeymakers!

Posted by: James Avery on 6 Oct 09

The carbon tax will also affect food production - at least, the carbon intensive food production that is so prevalent. Also, the taxes could be levied on the state and local levels as well, in case it's too uniform at the national level. These taxes could go in a restricted pool dedicated for remediating the hit to lower income or otherwise distressed populations, subsidizing insulation, local food and manufacturing, improved public transport - including freight services and R&D, global debt reduction and all the other good things we love to read about on World Changing

Posted by: Henry Lowengard on 7 Oct 09

Nice analysis. Thanks Steffen and Kudos for the clear language.
There are a few significant benefits I think you left out:
1) The US is sending Billions of dollars overseas to buy fossil fuels. When we produce energy in the country, that creates jobs here. It may mean less stuff for the wealthiest americans, but it could potentially be a huge redistribution of wealth from Oil Execs to solar panel installers, for example. Through the ripple effect, those jobs create (well, sustain is more likely) other jobs.
2) The US actually spends a significant amount of money subsidizing the fossil fuel industry. Reducing those subsidies means a more efficient economy.
3) Asthma. There a many other harms from burning fossil fuels. I am not sure to what extent the Stern Report calculated it, but not all of the environmental benefits are just esoteric ecosystem services - many have hard dollar costs in terms of worker productivity, health care, etc.

It would be really interesting to convert this article to some sort of wiki where readers could post articles and information in order to document the ideas.

Posted by: Bill S on 8 Oct 09

Back to point #1... and more reason to try to document what is known...
My sense was that the loss to society was that the act of reducing carbon emissions means that the substitutes will be used which are more expensive. My prius definitely costs more than a corolla does even after the fuel efficiency gains. Coal is clearer the cheapest energy source sans accounting for environmental impacts.
I suppose the really interesting question for me is: Are fossil fuels really that much cheaper to use (financially, i.e. sans environmental impacts) than alternatives if the economy did not have such a strong structural bias towards their use?

Posted by: Bill S on 8 Oct 09

Absolutely true! You hit the nail on the head with things I've been thinking and saying for some time. Congratulations for making the connection between how the policies rooted in favoring the "safe" suburbs favored by the rich, ruined the opportunity for cities to live green a lot sooner.

Posted by: Janet Palma on 12 Oct 09

I share Mr. Reiswig's concerns about unending economic growth and the Neoclassical notion that a growing GDP is the only meaningful measure of societal well-being. Reasonably adjusted values of GDP -- accounting for externalized costs and segregating bads from goods -- indicate that its growth has been "uneconomic" since the early 70's.

We aren't likely to find reasonable economic solutions until we transcend the limits of Neoclassical economics. One way to do this is to read recent articles by Herman Daly or his classics "For the Common Good" and "Beyond Growth".

I certainly agree with you when you say: "Well, yes. Probably trending towards zero waste, extreme energy efficiency (Factor 20, anyone?), zero net emissions, completely nontoxic and/or closed loop processes... within our lifetimes." That is certainly our goal. However, I suspect the economy that has those properties will look nothing like the growth-manic economy our political and business leaders see as essential for our well-being.

It also never hurts, when talking about economics transcending the physical world (the dematerialized economy) to make a study of the second law of thermodynamics. It's a sobering (and yet to be violated) law of the universe.

Posted by: John Faust on 13 Oct 09

In regard to the notion of entropy and thermodynamics, this is a misunderstood principle that has been taken to become a societal "story" in the same way that "rugged individualism" and socialism being equated to fascism in the US.

At any rate, I've wondering about whether there was another force that counteracts entropy, and after years of searching and thinking, I am convinced that Life itself is that force. Life is Creativity, and it is a force that defies the degradation that we can see with other systems.

The challenge in the 21st century, therefore, is to adopt an economics, and perhaps more importantly an ethic that is life affirming, rather than death producing, and stewarding a flow of resources, rather than extracting them and turning them into waste.

Posted by: Derek Hoshiko on 13 Oct 09

The comments point toward the deeper dilemma: The adequacy of current economic models/theories/ideologies/stories to give us the economic system we need in our current global situation.

Imagine I built a house in an imaginary world that only knew summer. Winter was not part of this world's consciousness. Then suddenly winter happened. The house would be completely inadequate for the "unprecedented season."

Our current economic models are an old house in another season.

New economic models are emerging in response to the unprecedented season of climate change that are generally referred to as the "new economies of well-being," or "for benefit" economies. Also "real wealth." Also simply "the new economy."

What these emerging economic models/theories are trying to do is best described as "solve for pattern," Wendell Berry's model of authentic change which states one must identify the catalyst (driver) of a system and change it, not fiddle with changes at the margins/edges. The emerging economies are attempting to make well-being the catalyst/driver of our economic system, replacing "for profit/growth" driver with "for benefit/flourishing in life."

My big question is how this revolution in economic theory will play out. Whether we will go through the crash of the system that we built in another season on Earth that no longer exists, and all the suffering and hardship economic breakdown will bring, or if we can finesse change by "just doing" the new economy, as the bumper sticker might say.

Toward that end, a national -- international??? -- teach-in on the new economy that disseminates the core principles to the people and then facilitates collaborative co-creation of new business models that serve the mutual vitality and flourishing of people and planet, persons and places, humans and habitats -- could be the trick to a velvet economic revolution.

Posted by: MimiK on 14 Oct 09

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