When Economics Met Change
By: Rethinking Economics India Network
Tags: Rethinking Economics, Climate Action, Heterodox Economics, Climate Economics, Climate Change

Climate change is the greatest threat to human species (Parry, n.d.). It will not only cost the profits of the capitalists and infrastructure but innumerable human lives and livelihoods. The consequences will be felt by the future generations as we are compromising their welfare and growth through our actions. The present notion of economic growth can neither sustain the health of the environment nor itself because it aggravates ecological scarcity and inflicts irreversible changes upon nature.

The current pandemic has given a free pass to countries to breach their sustainable development goals. For example, as per a CNN article (Kottasová et al., 2020), some of the biggest fossil fuel-producing countries are injecting taxpayer money into propping up polluting industries. Well, though the global greenhouse gas emissions have fallen due to a slowdown in economic activities, they are still higher than what the nations promised under international agreements (Kottasová et al., 2020). That clearly signifies how grave the situation is and how much more effort we collectively have to make to reverse the damage we have done.

As many economists claim, climate change is a result of market failure. Market failure occurs when the allocations of resources in a free market do not lead to greater well-being or when individual actions do not lead to optimal outcomes for the collective. This definition clearly qualifies climate change as a result of market failure because the market and its workings have triggered destructive environmental changes that threaten our present and future, affecting our well-being. A few of the direct impacts are frequent droughts, floods, heatwaves, wildfires, extinction of animal and plant species, and poor air and water quality.

But what could be the reasons embedded in the way the markets work that we ended up neglecting the environment?

Our actions on the environment are not reflected in the market prices nor in the policy decisions. The price of the goods and services that we use does not reflect the cost of environmental degradation or the consequences of depletion of natural resources. These are the hidden costs.

Businesses do not have any incentive to protect or respond to environmental concerns. Pollution doesn’t dig into their profits whereas measures to curb it will incur costs.

Market, policy and institutional failures prevent the reflection of the economic significance of scarcity and environmental degradation (Barbier, 2011). Green growth can be expensive both for businesses and governments, but neither of them is ready to bear the transactional cost associated with this shift. However, social entrepreneurs are a silver lining amidst the looming crisis. They, too, are for-profit businesses but their primary goal is to tackle global issues like climate change, uplift marginalised communities and alleviate poverty. They are motivated to work for social good. This movement shall encourage more businesses to move towards an environment-friendly mode of operating in the market.

If we were to summarise the responses at the national and international levels to combat the environmental crisis, they are promoting development and diffusion of cleaner technology, energy efficiency, environmental taxation and subsidies, decarbonising economies and controlling the emissions of pollutants into the environment. These policy responses are based on the principles of mainstream economics which guide governments the world over and international institutions.

But the question is: Are these responses enough to combat the devastating consequences of environmental degradation and realise sustainable growth?

The main concern of these solutions is the quantity of economic growth where the quality aspect is met through ‘greening’, which is a necessary step but meets the lowest strata of the sustainability goals. Their concern is on how to produce more and with these responses, they do it in an eco-friendly manner, but the ultimate goals are increased consumption and profit, both of which do not achieve sustainability.

Why aren’t these steps enough? We have conveniently forgotten that natural capital is nonrenewable and that it cannot be substituted with human-made capital. We are endorsing growth that is far detached from development and that has promoted inequality in terms of opportunities, wealth and access to resources. With climate change, we have only scratched the surface of the ocean of consequences of disrupting the ecological order.

The limit to natural factors of production raises questions about inter-and intra-generational equity and therefore the need for a wider concept — an evolutionary approach rather than the mechanistic interpretations of mainstream economics. Ecological economics accepts the notions of limits and scale on growth and resources, unlike mainstream economics. It accepts that there are biophysical limits and, therefore, there are limits to economic growth. Economic growth must be constrained to protect biodiversity. The stationary condition of capital can coexist with societal progress, as argued by John Stuart Mill (Mill, 1965). The goal should be to pursue an equitable society and not one based on allocation.

We need a wider idea of justice, which incorporates the moral and ethical dimension of the relationship between humans and the environment for policymaking processes (Bina & La Camera, 2011). In a complex, interconnected and uncertain world, it is necessary to adopt a multidisciplinary approach to address environmental sustainability. Interdisciplinary collaboration of scientists, ecologists, economists to analyse the consequences of environmental degradation and ecological scarcity should be encouraged. Awareness about the state of the ecosystem and its impact can encourage informed choices among producers, consumers and the government. Collective action can persuade governments to change routes that have been trodden upon for centuries and prioritise well-being, climate and nature in the global economy.

References:

Devine, R. S. (2020, November 19). The ‘market’ won’t save us from climate disaster. We must rethink our system. The Guardian. https://www.theguardian.com/commentisfree/2020/nov/19/climate-crisis-markets-economic-system

Fox, M. (2016, August 8). 5 Reasons Why Social Entrepreneurship Is The New Business Model. https://www.forbes.com/sites/meimeifox/2016/08/08/5-reasons-why-social-entrepreneurship-is-the-new-business-model/?sh=425af98344ca

Kottasová, I., Gupta, S., & Regan, H. (2020, September 2). The one chance we have The pandemic gave the world a golden opportunity to fix the climate crisis. We’re about to waste it. CNN. https://edition.cnn.com/interactive/2020/09/world/climate-covid-money-intl/

Maizland, L. (November 4, 2020). Global Climate Agreements: Successes and Failures. https://www.cfr.org/backgrounder/paris-global-climate-change-agreements

Thwaites, J., & Allen, C. (2020, November 19). Australia is lagging on climate action and inequality, but the pandemic offers a chance to do better. The Conversation. https://theconversation.com/australia-is-lagging-on-climate-action-and-inequality-but-the-pandemic-offers-a-chance-to-do-better-149983

Bina, O., & La Camera, F. (2011). Promise and shortcomings of a green turn in recent policy responses to the “double crisis.” Ecological Economics, 70(12), 2308–2316. https://doi.org/10.1016/j.ecolecon.2011.06.021

Barbier, E. (2011). The policy challenges for green economy and sustainable economic development. Natural Resources Forum, 35(3), 233–245. https://doi.org/10.1111/j.1477-8947.2011.01397.x

Parry, E. J. (n.d.). The Greatest Threat To Global Security: Climate Change Is Not Merely An Environmental Problem. un.org. https://www.un.org/en/chronicle/article/greatest-threat-global-security-climate-change-not-merely-environmental-problem

Muskan is currently pursuing BA in Economics from Fergusson College and is a part of the Rethinking Economics India Network.