Less science. More economics.

Now more than ever, the economics of climate solutions should be as familiar as the science behind global warming.

Photo by Julia Taubitz on Unsplash

The first battle in the war against climate change — recognising that climate change is a real problem — has been won. Despite noisy and depressingly familiar voices of denial in some quarters, science has emerged largely victorious in public opinion. But public understanding of the economics of climate solutions is woefully, dangerously low. It is economics that’s going to make the crucial difference in accelerating the technologies and policies that will enable us to ultimately solve the crisis the world faces.

From Germany’s Greens achieving mainstream political visibility in the 1980s, to the popularity of Al Gore’s 2006 documentary “An Inconvenient Truth,” to recent figures like Greta Thunberg, generations of activists have succeeded in pushing the science of climate change into the mainstream. A survey[1] in late 2023 revealed that more than nine out of 10 people across 14 developed and developing countries now agree that climate change poses a serious and imminent threat to the planet. Half of those respondents said that they didn’t always think so but had come to believe so over time.

Their worries aren’t abstract: 72% of the survey’s respondents said they worry climate change will make life extremely difficult and unpleasant for themselves and their families. Meanwhile new confirmation comes seemingly every day, as the headlines yield a quickening drumbeat of record-breaking weather events like January’s LA wildfires and new temperature records broken.

The science of climate change isn’t limited to measuring the deepening crisis. It has sexy climate solutions too. Renewables have made huge strides, although the intermittency problem—what happens when the sun doesn’t shine or the wind doesn’t blow—is not yet solved. Thanks to advances in battery technology, electric vehicles now outsell petrol-fueled cars in China, the world’s fastest-growing major auto market. Carbon removal and small, modular nuclear reactor technologies are among the latest developments with enormous promise.

But science isn’t enough. Science can’t tell us how to reduce carbon consumption without reducing standards of living. And science can’t determine who should pay to make the changes needed to accomplish that.

For that, we need economics. Understanding the economic solutions to climate change requires understanding first how economists define the problem. To economists, climate change is a classic case of market failure — what they call a negative externality. Free markets, whether for energy, investment, or consumer goods, are incapable of factoring in the “external” costs of the pollution that carbon emissions cause. Pollution is a textbook example of market failure, although it’s by no means the only one.

There are three broad economic approaches to solving pollution, all of which rely on the state to do what free markets can’t. One is to regulate what’s allowed and what’s not. The second is to subsidize cleaner options, making them more affordable than the polluting alternative. The third is to make polluters pay for the damage they cause, forcing them to raise prices until demand for polluting products falls accordingly.

As for the carbon emissions that cause global warming, it’s easy to see how the same three approaches might work. Many climate activists would like to see governments “just stop oil.” Others call for draconian restrictions on fossil fuel companies. Most realists, however, recognise that, despite the progress renewable energy has made, the world remains too dependent on fossil fuels to go “cold turkey” and still maintain economic growth, as well as preserve current levels of prosperity and standards of living.

Subsidies also have a place in addressing the challenge. Europe’s renewables market has developed as quickly as it has in part because of the subsidies the European Union has created for wind and solar power. The Biden Administration’s Inflation Reduction Act includes what is to date possibly the biggest single raft of subsidies targeting climate change. Yet subsidies are imperfect: prone to inefficiently allocate resources and vulnerable to capture by special interests.

The third approach – making polluters pay by increasing the price of carbon – promises to dissuade consumption of carbon and make cleaner alternatives more competitive. Whether through a cap-and-trade permit systems or carbon taxes, carbon pricing is the most powerful approach because it helps correct the fundamental market failure at the heart of climate change.

What’s more, carbon pricing has been proven effective: in a recent study by researchers from the universities of Oxford and Potsdam of more than 1,500 real-world implementations of different climate policies around the world, carbon pricing was found to be the most effective in developed economies.

The kicker is that carbon pricing can help advance the science and technology needed to beat climate change, too. By making carbon-intensive energy and products less competitive, carbon pricing can accelerate investment in cleaner technologies.

Tackling the economics of climate change is thus vital to solving it. Yet outside of economists, academics, and policy wonks, the economics of climate change are not talked about enough. Why? Partly because it’s complicated. Partly because raising prices for consumer products, in particular by taxing them, is not an obvious vote-winner.

Just how should carbon be priced? That’s something we’ll need to debate—vigorously—to determine not just how to compensate the people and countries hit disproportionately as carbon prices rise, but how to use the proceeds pricier carbon generates. Any carbon-pricing system will need to address concerns about fairness and feasibility. But those discussions must break through into the mainstream if this incredibly powerful policy tool is to gain wide public support.

Readers who have studied economics will undoubtedly be rolling their eyes by now at my over-simplified explanation of the economics behind the climate crisis. But keep in mind: most people haven’t studied economics. You don’t have to be a climate scientist to grasp the basics of the greenhouse effect; similarly, you shouldn’t have to be an economist to understand why economics is the key to any solution.

The climate debate already features plenty of science. It doesn’t embrace nearly enough economics. Those of us advocating for solutions to the climate crisis need to do a much better job of understanding and communicating the crucial role economics must play.

[1] Edelman 2023 Special report on Trust and Climate Change