The Economics of Decarbonization Are Manageable, It is the Politics that is Hard

The title of this piece I took directly from a special report on the world economy published in The Economist on October 8, 2022. The appropriateness of the statement is apparent as we watched COP27 end today in Sharm-el-Sheikh, Egypt. A missing piece of the puzzle to for those nations most directly impacted by global warming now fell into place in the last 24 hours. It is an agreement by the nations of the Global North to establish a landmark loss and damage fund for those countries of the Global South that have been impacted by climate disasters in the present. It is based on the principle that we all share the same lifeboat that is Earth.

It is also an obligatory response by the richer nations of the Global North to accept a majority share and responsibility for climate change which is now causing the atmosphere to warm and seas to rise, inflicting the most damage on those with the least resources and finances to mitigate and adapt. The Industrial Revolution of the last century-and-a-half began in the Global North. The countries on this half of the planet, as a result, have produced most of the greenhouse gas (GHG) emissions we all are now trying to reduce and reverse.

The immediate collateral damage is seen in places like Africa, South Asia, the Middle East, Central and South America, and the Caribbean, Indian and Pacific Ocean island nations. Some of the latter are likely to vanish underwater in future decades. Sea level rise will mean most of their citizens will find refuge elsewhere.

For other nations of the Global South, there are:

• Extreme weather events such as droughts (Africa and Central America), floods (Pakistan and Kenya), heat events (India and Iran) and more.
• Vector-borne diseases in more temperate and higher elevation zones.
• Reductions in the nutritional value of crops from increased atmospheric carbon dioxide.

Economists and Politicians Need to Find Common Ground

To economists, tackling climate change now rather than later makes sense. It is politicians who have been the laggards. Why do the former understand and why do the latter fail to act? Because the former see the big picture beyond the four-year election cycle that motivates so many politicians in the Global North.

For economists, it makes sense to tackle climate change immediately because spending money to transition away from fossil fuels now is cheaper than doing it in the future. The more our atmosphere warms, the more damage we need to undo and at increasingly higher costs.

Investing now on a massive scale means we replace the technologies and processes that pollute the air and raise its temperature. That means there is less need to remediate in the future, and less damage to undo. It also means we can create and invent new solutions that add economic value.

What kind of investment is needed by governments and the private sector to do the job?

The Economist report states public sector annual net-zero investments need to be between 0.05% and 0.45% of GDP. That’s a doable number for governments to take action to change processes and lifestyles within their countries. Sometimes the initial cost of a program is small. For example, putting a price on carbon as instituted in Canada has not required a big upfront investment. It uses a carrot (rebates) and stick (consumption tax) to influence consumer behaviour to:

• Get out of cars that use internal combustion engines and replace the means of transportation using alternatives like mass transit, electric vehicles, bicycles or walking.
• Install electric heat pumps to replace gas-fired furnaces where people live and work, to replace windows and insulation to reduce emissions and increase climate resilience.

Grants, subsidies and low to zero-interest loans offered by governments are a path being followed by Canada, the U.S., Australia (a Global North country located in the south), the United Kingdom, and the European Union. The recently passed U.S. Inflation Reduction Act is a good example where hundreds of billions of dollars in programs are available to carbon-emitting industries, businesses and consumers to use government money to find, purchase or develop greener solutions.

The Learning and Implementation Curves Are Steep

There is no doubt that we are on a rapid learning curve in the 2020s to speed up the green transition so that we don’t bankrupt our future by spending increasing amounts of money in the 2030s, 40s and 50s to undo the damage we have wrought.

The sense of urgency to get started now has been present at COP27. In the final draft, it states “that the impacts of climate change will be much lower at the temperature increase of 1.5 Celsius compared with 2 Celsius and resolves to pursue further efforts to limit the temperature increase.” 

The economic, social and environmental cost of that 0.5 Celsius difference measures in tens of trillions of dollars in mitigation and adaptation expenses annually compared to the conclusions coming from COP27 which state the current need to invest 4 trillion annually in renewable energy projects between now and 2030, and $4 to 6 trillion per year to transform the world to a low-carbon economy.

Ignoring the investments to be made now will come with not only an enormous increase in cost but also will mean:

• Dramatic increases in the numbers of climate-change refugees (this has already started).
• The greater likelihood of wars between and within countries in fights over diminishing resources, food and freshwater insecurity.
• An increase in extreme weather, heat events and vector-borne diseases.
• And accelerated sea level rise compromising the majority of places where humans live today, on or near coastlines.

As for the Santiago Network for Loss and Damage agreement which was a major stumbling block causing COP27 to extend its meeting beyond the Friday closing date, all 200 nations (only 100 heads of government showed up) agreed to launch operations beginning next year with funding flows starting after the next COP meeting.

What remains missing is the $100 billion annual fund pledged in 2015 in the Paris Climate Agreement to help countries with limited resources develop mitigation and adaptation programs and projects. Instead, money is coming in drips and drabs. At this COP a number of Global North governments pledged an immediate $230 million to an adaptation fund, a far cry from the dollars needed but still better than nothing.