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The problem with Greta

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23 January 2020

 

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In Davos US Treasury Secretary Mnuchin told Greta to go and learn economics. At the personal level, it is deeply shocking to see a powerful grownup male looking down on a young female and dismissing her with paternalistic advice. After all, Davos is a media show. Ask people around the world who is Mnuchin and who is Greta and I bet that vastly more people around the world, and probably in the US as well, have heard about Greta than about Mnuchin. On the Davos scale, she ranks much higher than he does. Mnuchin ought to show respect.

 

Yet, he gave her and her fellow activists an interesting piece of advice. Thanks in part to Greta’s actions, most people have finally understood that climate change is a disaster of enormous proportions. That had been known for a long time but ignored by most people. This has allowed politicians, prompted by deep-pocket lobbyists, to do nothing. The game is now over. Politicians have to choose between voters and lobbies. Predictably, they will do what politicians always do when squeezed between opposite requests, they will balance their own electoral interests. The will do what they need to do to keep enough voters on their sides while making sure that the lobbies provide enough money for election campaigns. Here comes Greta who says that it’s not good enough: you must act now and immediately start stopping carbon emissions. The problem with Greta is that it is bad economics.

 

This is a general problem with climate change activists, and it comes in two parts. First, urgently trying to stop carbon emissions is going to be costly. It will cut economic growth, it will create unemployment and it will hurt the poor much more than the rich. Maybe, over time, technological advances – which Greta offhandedly dismiss – will create growth and jobs and could benefit the poor but, initially, it will be an adverse shock. There will be winners, and there will be losers, but the losses will outweigh the gains. A very simple thing that Greta could learn if she were to study economics is that it is highly desirable for society as a whole to spread such shocks out, as much as possible. This almost sounds as a recipe to do nothing, but it is not. Indeed, the other thing that she would learn is that the best outcome arises when you balance costs (emission reduction) and benefits (less of a climate change). When she learns more, she will also discover that this trade-off between costs and benefits changes over time, so that the efforts to cut carbon emissions should also vary over time. All in all, it means that an immediate stop is sure to be far from desirable. It does mean that immediate action is not required, far to the contrary, but it must be carefully though through, both in terms of what is to be done and how to spread it out over time.

 

Then there is the question of what to do. In Davos, Greta wanted to immediately halt fossil fuel development by stopping investment. That sounds right, even modest in view of many other proposals by activists, but it is not. It means fossil fuel production will start declining soon. Yet, everywhere, the need for energy is rising and substitution with clean energy will not pick up soon enough. With excess demand, the price of fossil fuel will rise, ensuring higher profits in the industry and more lobbying power. At a time when growth is crippled, this is a recipe for a policy reversal. In addition, all fuels are not born equal. Coal is disastrous, oil is pretty bad, and gas is cleaner. The solution that reasonable people defend is cut coal production first, then oil, the gas. What about other sources of carbon emission? And then there is the question is how you do it. Greta seems to believe that you just issue orders.

 

Economists seem to be (nearly, as always) in agreement that the right solution is impose a carbon tax, on everything that contains tax and to use the proceeds to compensate the poorer people and to finance research and production of alternative sources of energy. The reasoning is not self-evident, it can be found in the statement by 27 Nobel laureates and many other luminaries. The tax is meant to start relatively low (to avoid a shock) and to inexorably rise until carbon use has been reduced as desired, thus progressively discouraging consumption, investment, production and its financing while alternatives fill the void. No money for producers, all of it goes to good causes.

 

A carbon tax is so unpopular, we are told, that it is politically impossible to put in place (in fact it is in place in four Canadian provinces). This is where Greta’s help is badly needed. Her next challenge is to use her impressive talents to make the carbon tax highly popular. If she studies economics, she will soon discover why economists know that it is the only tool needed. The theory, developed for all sorts of pollution cases, is relatively simple and a great many experiments show that it works (if correctly implemented).

 

Finally, I find it difficult not to hold a grudge about Greta, in spite of her amazing achievement so far. She always talks about the importance of listening to “science”. Presumably, like me, she trusts the UN’s Intergovernmental Panel on Climate Change (IPCC). Presumably, like many others, she does not think that economics is “science”. Too many disagreements, too much imprecision. True, but I suspect that the same applies to the young science of climate change. The IPCC is meant to bring highly competent people together and to ask them to form a consensus, which they did. Why not do the same about the design of solutions, which falls squarely in the field of economics? The appeal of the Nobel laureates suggests that it will not take much time for a Panel to reach a consensus and to draw on sizeable existing research to come with specific policy proposals.

 

In the end, Greta does not need to study economics. She only needs to trust science, including economics science. And, by the way, so should Secretary Mnuchin and his boss, President Trump.