Economics Of The Environment Lecture 2

Figure 16.10 A No-Growth Scenario for the Canadian Economy Source: Victor, Peter. 2019. Managing Without Growth, Slower by Design, not Disaster. Edward Elgar: Northampton, MA. Victor’s model for the Canadian economy shows that GDP per capita stabilizes after 2052, and the environmental burden index (which includes variables such as GHG emissions) decreases by 14 percent by the year 2067. Reduced working hours play a key role in preventing increases in unemployment. A range of government policies, including more spending on health care and education, is predicted to reduce the level of inequality by 56 percent by the year 2067. The ‘Sustainable Prosperity Index’, combining various economic, environmental and social variables, is predicted to rise by 35 percent by 2067. Discussion Questions 1. What is the principle of the environmental Kuznets curve (EKC)? In what areas does it seem applicable, and in what ways could it be inaccurate or misleading? What are some policy implications that can be drawn from an analysis of the evidence reading the EKC? 2. The promotion of economic growth is often seen as a major policy goal. What do you think is the feasibility of a model that stresses alternative goals such as ecological sustainability and well-being? How would you compare the Green Economy and steady-state economy concepts? 5. POLICIES FOR SUSTAINABLE DEVELOPMENT Regardless of whether we favor “green” growth or no growth, policy changes will be needed to achieve a more sustainable economy. In this section, we explore some of the environmental policies advocated by economists. But first we need to define sustainability more precisely. DRAFT 21 5.1 DEFINING SUSTAINABILITY While nearly everyone agrees that we should transition to a more sustainable economy, what exactly does this mean? Economists studying the environment have proposed two definitions of sustainability. One definition, referred to as weak sustainability, assumes that natural capital and other types of capital (produced, human, or social) are substitutes. Thus, weak sustainability asserts that natural capital depreciation is justified as long as it is compensated for with adequate increases in other types of capital. So, for example, the destruction of a wetland in order to construct a new highway could be justified if the economic and social benefits of the highway exceeded the lost ecological value of the wetland. Strong sustainability takes the perspective that sustainability should be defined solely in terms of natural capital. Under strong sustainability, natural and other types of capital are not substitutes. Strong sustainability doesn’t mean that natural capital can never be degraded, but it requires that any degradation of a particular type of natural capital (such as the cutting of a forest for timber) be compensated for with appropriate natural capital restoration (such as replanting trees or restoring a wetland). weak sustainability: an analytical perspective suggesting that natural capital depreciation is justified as long as it is compensated for with adequate increases in other types of capital strong sustainability: an analytical perspective suggesting that natural capital depreciation is justified only if it is compensated for with adequate restoration of other natural capital Strong sustainability isn’t necessarily “better” than weak sustainability, but it changes the metrics we would use to determine whether an economy is sustainable. For weak sustainability, we could use a metric such as the Genuine Progress Indicator or the Better Life Index (discussed in Chapter 8) which combine economic, social, and environmental components. The value of both of these indicators could theoretically increase even if overall environmental quality declines, as long as other components increase sufficiently. Meanwhile, if we wished to pursue strong sustainability, then we would only need data on natural capital. We could keep satellite accounts on all important natural capital variables, such as fishery stocks, forest area, greenhouse gas emissions, and mineral reserves. Satellite accounts can be maintained in physical units, such as tons of fish, board-feet of timber, and so on, or in monetary units. If the accounts are measured in physical units, then comparisons across different categories are difficult. For example, what would we conclude about natural capital overall if we lose 50 acres of wetlands and deplete fish stocks by 100 tons, but gain 80 acres of forest? Measuring accounts in monetary units allows for direct comparisons, but converting all variables to monetary units is not straightforward and requires many assumptions. The Sarkozy Commission (mentioned in Chapter 8) recommended a “dashboard” approach to assessing environmental sustainability, relying on disaggregated physical indicators with a particular emphasis on monitoring variables related to climate change. The ecological footprint measure, discussed in Chapter 4, provides another perspective on sustainability. Recall that, according to the ecological footprint results, humanity is already in a situation of unsustainable “overshoot.” The most recent data suggest that humanity’s global environmental impacts are equivalent to using 1.7 earths, considering all the resources we use and the wastes we generate. Disaggregating the global ecological footprint provides some insight into how we can reach a sustainable level of impacts. In Figure 16.11 we see that about 60 percent of humanity’s ecological footprint is attributed to its carbon emissions. In order to bring our overall impacts down to a sustainable level, global carbon emissions would need to decline by at least 70 percent, as strongly recommended by the vast majority of climate scientists. Of course this DRAFT 22 doesn’t necessarily mean we shouldn’t reduce other negative impacts, such as deforestation and overfishing. But once again we conclude that addressing climate change is our most critical environmental challenge. Figure 16.11 Global Ecological Footprint, by Impact Type, 1961-2016 Source: Global Footprint Network, NFA 2019 National Footprint and Biocapacity Accounts dataset 5.2 GREEN TAXES AND SUBSIDY REFORM As we’ve already seen, Pigovian taxes are justified by widely-accepted economic theory. The policy implications of expanding environmental taxes are extensive. Virtually every product produced in modern markets results in some pollution and waste generation. Given that a Pigovian tax increases economic efficiency, should we tax every product based on its environmental impacts? Few economists would support placing an environmental tax on every product. The first reason is that we must consider the administrative costs of collecting Pigovian taxes. For some products with relatively minor environmental impacts, the tax benefits are probably not worth the administrative costs. Second, the task of estimating the environmental damage of every product sold, in dollars, is clearly excessive. Some economists have thus suggested a broad system of upstream taxes on the most environmentally damaging products, particularly on fossil fuels (coal, oil, and natural gas), as well as important minerals and key renewable resources. An upstream tax is placed as close as possible to the point where raw materials are extracted. In the case of coal, for example, an upstream tax might be instituted on each ton of coal extracted from coal mines. Upstream taxes on a handful of products are easier to implement than taxes on numerous final consumer goods. Of course the upstream taxes would ultimately lead to higher prices on final goods, such as gasoline, air travel, and electricity. In many countries these cost increases would fall most heavily on lower-income people. In order to avoid an overall increase in economic inequality, complementary policies would be needed such as increased funding for public transportation or direct rebates to lower-income households. upstream taxes: taxes instituted as close as possible in a production process to the extraction DRAFT 23 of raw materials. The main barrier to implementing Pigovian taxes is that few politicians are willing to support higher taxes. However, environmental taxes can be revenue-neutral if any tax increases are offset by lowering other taxes so that the total taxes on an average household remain unchanged. Given that environmental taxes tend to be regressive, revenue neutrality could be achieved by reducing a regressive tax, such as social insurance taxes. revenue-neutral (taxes): offsetting any tax increases with decreases in other taxes such that overall tax collections remain constant. In addition to higher economic efficiency, a broad shift away from taxes on income and toward taxes on negative externalities provides people with more options to reduce their tax burden. If environmental taxes constituted a large portion of someone’s total tax burden, he or she could reduce this burden by using more efficient vehicles and appliances, relying more on public transportation, reducing energy use, and numerous other options (some of which, however, depend on whether social goods, such as public transportation, are actually available). Again, we would need to consider how such policies would affect people at different income levels. Higher-income households may be able to afford efficient appliances, electric vehicles, and other environmentally-friendly products. But lower-income households will have fewer options for avoiding the impact of Pigovian taxes. As stated above, complementary policies would be necessary to avoid exacerbating existing inequalities. As we saw earlier in the chapter, subsidies can be used to encourage people to purchase products that generate positive externalities, such as solar panels and electric vehicles. For example, Norway has the most extensive subsidies for electric vehicles. About one-third of all new vehicles sold in Norway were pure electric vehicles, compared to only about 1 percent of all new vehicles sold globally being battery-powered.46 Unfortunately, subsidies currently in place in many countries instead encourage environmentally-damaging behaviors. Agricultural and energy subsidies encourage the overuse of electricity, gasoline, fertilizer, pesticides, and irrigation water. Reducing or eliminating these subsidies would reduce government expenditures, and the money saved could be used to lower taxes or to promote more sustainable practices. The fossil fuel industry receives the largest share of these perverse subsidies. This mispricing of goods and services effectively permits producers to transfer the costs of environmental damage onto society. (See Box 16.3.) BOX 16.3 FOSSIL FUEL SUBSIDIES Fossil fuels are subsidized by governments around the world in numerous explicit and implicit ways. Beyond reducing suppliers’ production costs through direct subsidies, implicit subsidies include the failure to institute appropriate Pigovian taxes on fossil fuels for air pollution and climate change damages. According to a comprehensive 2017 journal article, global fossil fuel subsidies were $5.3 trillion in 2015, equal to 6.5 percent of global GDP.47 About half of total subsidies were attributed to a failure to internalize the externalities associated with local air pollution. Another 22 percent of subsidies were related to global climate change externalities. The analysis found that coal subsidies were larger than oil and natural gas subsidies combined. Among countries, China’s annual subsidy was the largest at nearly $2 trillion, while the United States had the second largest subsidy, around $0.6 trillion. The authors conclude that the economic and environmental benefits of eliminating DRAFT 24 perverse fossil fuel subsidies are significant: The gains for subsidy reform are substantial and diverse: getting energy prices right (i.e., replacing current energy prices with prices fully reflecting supply and environmental costs) would have reduced global carbon emissions in 2013 by 21% and fuel-related air pollution deaths by 55%, while raising extra revenue of 4% of global GDP and raising social welfare by 2.2% of global GDP.48 5.3 GREEN MACROECONOMIC POLICIES Designing macroeconomic policies that are compatible with sustainability requires some fundamental rethinking about economic goals. The macroeconomic models we developed in earlier chapters have implicitly assumed that more employment, and thus more income, is better. There is no doubt that employment contributes to people’s well-being. People’s satisfaction with their jobs is an important predictor of their overall life satisfaction.49 Thus, maintaining employment levels is important, but people also benefit from time that they spend away from paid employment to do unpaid work, including family care, and to pursue leisure activities. Several European countries have instituted labor policies that mandate comparatively short working weeks for most employees. Both France and Germany have instituted a standard 35-hour working week. According to one study policies to reduce annual work hours by just 0.5 percent per year could mitigate one-quarter to one-half of future global warming.50 As discussed in previous chapters, Keynesian economics focuses on using monetary and fiscal policy to spur aggregate demand during economic downturns. In response to the global financial crisis of 2007–2008, some economists proposed implementing Keynesian macroeconomic policies to both promote an economic recovery and meet sustainability objectives. In fact, stimulus packages passed in several countries in response to the crisis included significant public investment in green projects. For example, over 10 percent of the 2009 stimulus package passed in the U.S. (the American Recovery and Reinvestment Act) was directed toward investment in energy efficiency, renewable energy, and other green spending. Green stimulus government spending in China was even higher, at over $200 billion.51 Some critics have argued that there is a contradiction between the “green Keynesian” goals of economic growth and environmental protection.52 But it is possible to direct policies toward different kinds of growth. Instead of just thinking of consumption (C), investment (I), and government spending (G), we can divide each of these terms into environmentally harmful and environmentally positive impacts. Thus, it should be possible to achieve growth in employment and well-being while reducing throughput—the flow of inputs into the economy and outputs of wastes and pollution. According to one “green Keynesian” analysis: we can distinguish between those macroeconomic aggregates that should be strictly limited—resource-intensive consumption and investment, and energyintensive infrastructure—and those that can expand over time without negative environmental consequences. The latter would include large areas of health, education, cultural activity, and resource- and energy-conserving investment. . . there is plenty of scope for growth in economic activity concentrated in these categories, without growth in resource throughput, and with a significant decline in the most damaging throughput, that of carbon-intensive fuels.53 DRAFT 25 throughput: the flow of raw materials and energy through the economy, leading to outputs of waste Discussion Questions 1. What specific economic incentives and policies would you recommend for promoting sustainability? Have you heard of any policy examples from the news recently that you think were good ideas? 2. Can you identify areas in which “green Keynesian” economic growth would be desirable, and areas in which economic growth is more destructive to the environment? In what ways would a “green” economy look different from our current economy? 6. CLIMATE CHANGE: ECONOMICS AND POLICY Climate change is widely considered our greatest environmental challenge. Further, climate change ties together many of the issues we have discussed in this chapter, and throughout the text. Emissions of greenhouse gases are clearly a negative externality. The earth’s atmosphere is a global common property resource that is suffering from a tragedy of the commons problem. Critics of aggressive climate policies suggest that such policies would hamper economic growth and result in job losses. Climate change raises important economic and human development questions. Will addressing climate change limit the economic aspirations of developing countries? How should the cost of climate policies be split between developed and developing countries? In this final section, we explore insights from economics about climate change. 6.1 ECONOMIC ANALYSIS OF CLIMATE CHANGE Carbon dioxide emissions are clearly a negative externality, and thus the standard economic response is to tax them. This tax, reflecting the current and future environmental damages from emitting CO2 (normally 1 ton), is referred to as the social cost of carbon. As far back as the 1990s economists have widely recommended instituting carbon pricing as a policy response to climate change.54 However, estimates of the social cost of carbon have varied considerably. A relatively low social cost of carbon would imply a modest policy response to climate change. A high social cost of carbon would mean that climate change demands more aggressive policies. social cost of carbon: a monetary estimate of the discounted long-term damages from emitting a ton of CO2 in a given year Most initial estimates of the social cost of carbon were quite low. For example, in 1992 William Nordhaus (who received the 2018 Nobel Memorial Prize in economics for his climate change analyses) estimated that social cost of carbon should start at around $1 per ton of CO2 and gradually rise to $5/ton in 2100.55 For context, a carbon tax of $1/ton of CO2 would raise the price of a gallon of gasoline by only about 1 cent and obviously have very little impact on the quantity of gas demanded or carbon emissions. While Nordhaus has adjusted his social cost of carbon upward over time—in a 2017 paper he calculated a value of $31/ton of CO256– other economists conclude that the social cost of carbon should be even higher. The 2006 Stern Review of the Economics of Climate Change, written by economist Nicholas Stern, estimated a social cost of carbon of $85 per ton of CO2. A 2015 paper by researchers at Stanford University concluded that the social cost of carbon DRAFT 26 should be $220/ton57, and a 2018 journal article obtained an even higher value of $417/ton58. What accounts for these differences in the social cost of carbon? One important factor in calculating the social cost of carbon is how to value future damages. Carbon emitted into the atmosphere persists for decades, so we need to economically value damages that will occur in the future. Economists do this by applying a discount rate to any future impact. A discount rate is expressed as a percentage, indicating how much future impacts are reduced for each year into the future that they occur. So, for example, if a damage of $100 million occurs 50 years into the future, using a discount rate of 3 percent we would value that future damage today at only about $23 million [$100 million / (1.03)50]. Thus in this scenario economists would recommend not spending more than $23 million today in order to avoid $100 million in damages 50 years from now. Future damages are discounted more the higher the discount rate and the longer the time period. discount rate: the annual percentage rate at which future impacts are discounted relative to the present Economists justify discounting for a couple of reasons. First, assuming real rates of economic growth remain positive, future generations will be richer than we are today. So, expressed as a percentage of total income, $100 million in damages in 50 years is not as significant as a $100 million damage today. Second, discounting reflects the general tendency for people to devalue the future relative to today. Young people frequently save very little for retirement because they simply don’t concern themselves much about their future selves. From a policy perspective, discounting means that we place less weight on future generations relative to our present needs. The discount rate used in an economic analysis of climate change can significantly influence the social cost of carbon and, consequently, the policy recommendations. William Nordhaus’s models have used a discount rate of around 3 percent, concluding that relatively modest policies are needed (he has gradually reduced his discount rate over time). Meanwhile, Nicholas Stern’s rate of 1.4 percent produces a recommendation for more aggressive climate policies. Stern makes an argument for a lower discount rate primarily based on an ethical argument—that future generations will clearly not consider themselves any less “valuable” than us today. Under the Obama Administration in 2017 the U.S. Environmental Protection Agency estimated the social cost of carbon at around $40/ton using a discount rate of 3 percent.59 In reviewing Obama-era climate policies the Trump Administration has lowered the social cost of carbon to as little as $1/ton by only considering damages that occur in the United States, but not elsewhere in the world. Even with a relatively modest social cost of carbon of $30-$40 per ton, economic analyses conclude that a stronger policy response to climate change is warranted. While the costs of adequately addressing climate change are generally considered about 1-2 percent of the global economy, we must compare these to the costs of inaction. The Stern Review estimated the most severe effects of climate change could be avoided at a cost of approximately 1 percent of gross world product (GWP). However, without such policies Stern found that the damages from climate change in the twenty-first century would range from 5 to 20 percent of GWP. Thus, the report concludes that the benefits of immediate action to minimize climate change significantly exceed the costs, and would prevent severe social and economic impacts: Our actions over the coming few decades could create risks of major disruption to economic and social activity, later in this century and in the next, on a scale similar to those associated with the great wars and the economic depression of DRAFT 27 the first half of the twentieth century. And it will be difficult or impossible to reverse these changes. Tackling climate change is the pro-growth strategy for the longer term, and it can be done in a way that does not cap the aspirations for growth of rich or poor countries.60 Thus with few exceptions, economists recommend stronger climate policies than those currently in place. A 2015 study revealed that economists are much more concerned about the impacts of climate change than the American public.61 For example, half of the surveyed economists indicated that “immediate and drastic action is necessary” compared to just 23 percent of the American public. The survey also found that a majority of economists (about 78 percent) feel that climate change will have significant negative effects on the economy. About 77 percent of the surveyed economists also indicated that the United States should commit to reducing its greenhouse gas emissions regardless of the actions of other countries. 6.2 CLIMATE CHANGE POLICY Carbon Taxes vs. Cap-and-Trade As mentioned above, one economic policy to address climate change is to tax carbon emissions. A carbon tax would charge large emitters of CO2, such as electricity producers, gasoline refineries, and factories, a per-ton fee, effectively internalizing the externality. The individual emitters would choose their pollution level by comparing the tax against the cost of actions to reduce emissions. As long as it was cheaper to reduce emissions than pay the tax, companies would reduce their emissions. The tax would then, to some extent, get passed on to consumers in terms of higher prices. Revenues raised by such a tax could be used to fund the transition to renewable energy, or to lower other taxes as part of a revenue-neutral tax shift as discussed above. Note that the extent to which a carbon tax would lower emissions depends on how businesses and households respond to higher prices for products such as gasoline, electricity, and air travel. Thus predicting how much emissions would decline requires information about the price elasticities of demand for these products. Unfortunately, estimates of elasticity can vary significantly, leading to uncertainty about how much emissions will decline. For example, the U.S. Department of Energy has estimated the elasticity of demand for gasoline to be as low as -0.0262, suggesting very little change in quantity demanded with higher gas prices, while other research finds the elasticity to be around -0.30.63 If a carbon tax ends up not reducing emissions as much as expected, it may need to be significantly adjusted. The main alternative to a carbon tax is a cap-and-trade approach. With this system, the government requires large CO2 emitters to obtain permits for each ton they desired to emit, with the government capping total emissions by controlling the number of permits. These permits would either be auctioned to the highest bidders or freely distributed according to some criterion, such as historical emissions. Permits could then be traded among firms, with firms holding unneeded permits offering those for sale to other companies that find they need additional permits, with the permit price fluctuating based on market forces. Permits would create many of the same incentives as taxes—encouraging businesses and consumers to shift away from fossil fuels, fostering investment in renewable energy, and even raising government revenue if the permits are auctioned. The main advantage of permits is that the government directly controls the overall level of emissions. However, a permit system creates uncertainty about the permit price, which may make it difficult for firms and households to determine whether energy efficiency investments will prove worthwhile. With a carbon tax, such long-term investment planning is more clear. Another advantage of a cap-andtrade approach is that it avoids using the politically unpopular word “tax,” even though the DRAFT 28 ultimate impact on businesses and consumers is essentially the same. National and Regional Climate Policies Both carbon taxes and permit systems have been used by a number of countries. Carbon taxes have been implemented in India, Japan, South Africa, Costa Rica, and in Quebec and British Columbia in Canada. India, the world’s third-largest carbon emitter behind China and the United States, instituted a carbon tax in 2010. The tax is currently equivalent to about $6 per ton of CO2, and generates $1 billion in revenues per year.64 However, India also provides over $2 billion annually in subsidies to the coal industry, showing that carbon pricing needs to be combined with subsidy reform to be truly effective.65 The most extensive permit system is the European Union’s Emissions Trading System, which has been in place since 2005. The system covers about 11,000 power stations and manufacturing plants, covering nearly half of all greenhouse gas emissions in the EU.66 The price of permits in the EU system has varied significantly, ranging from more than €30/ton to less than €1/ton, depending on economic conditions and the allocation of permits. California has also instituted a carbon trading system, and has partnered with Canadian provinces to expand the system. South Korea implemented a cap-and-trade system in 2015, initially freely allocating all permits but gradually increasing the share of permits that are auctioned.67 In 2017 China initiated a nationwide carbon permit system, effectively doubling the proportion of the world’s carbon that is subject to pricing.68 International Climate Policy As climate change is a global problem, international cooperation is critical in mounting an adequate response. The first international treaty to address climate change, the 1997 Kyoto Protocol, specified emissions targets only for richer nations, with penalties planned for those that failed to meet their targets. When the treaty expired in 2012, some countries achieved their targets while others did not (the United States never ratified the treaty), but no penalties were ever enforced. In order to bring nearly all nations into the process, the 2015 Paris Climate Agreement let each country set their own targets on a voluntary basis, referred to as Nationally Determined Contributions (NDCs), without enforceable penalties. It is left to each country what national policies they will enact in order to meet their NDC, whether these policies be taxes, permits, or other regulations. As mentioned earlier, the goal of the Paris Climate Agreement is to limit warming to “well below” an increase of 2°C above pre-industrial levels, and to pursue efforts to limit warming further to no more than a 1.5°C increase. As of 2019, 186 nations have ratified the treaty, out of 195 countries that signed it. While the United States announced its intention to withdraw from the agreement in June 2017, it cannot officially leave the agreement until November 2020.69 An overall evaluation of the Paris Climate Agreement is shown in Figure 16.12. Given scientific and policy uncertainties, each scenario is graphed showing a range of expected annual global emissions. We see that without the agreement, national policies in place prior to the Paris Agreement would have resulted in global greenhouse gas emissions continuing to rise until at least the middle of the twenty-first century, and an eventual temperature increase of 3.1 to 3.5°C relative to pre-industrial levels. The Paris NDCs collectively reduce the expected temperature increase to 2.7 to 3.0°C—still failing to meet the goal of limiting warming and allowing global emissions to increase for at least a couple of decades. In order to achieve the 2°C target, emissions need to begin declining essentially immediately, and rapidly fall to around zero by thabout e end of the century. In order to achieve the more ambitious 1.5°C target, emissions need to decline even more quickly and actually become negative by the end DRAFT 29 of the century. Note that negative emissions can be achieved by more than offsetting any remaining emissions with efforts to draw carbon out of the atmosphere by expanding forests, changing the management of agricultural and grass lands, and protecting wetlands. Withdrawal of carbon from the atmosphere and storing it in plants and soils is increasingly recognized as an important companion to reducing emissions—not only in the future, but right now. The dangers of climate change are sufficiently real that it is necessary to use both approaches: emit less, and store more. Figure 16.12 Global Greenhouse Gas Emissions under Alternative Scenarios The Paris Climate Agreement resulted in nearly all nations committing to regulate their greenhouse gas emissions, and a slight reduction in the expected degree of warming. But Figure 16.12 illustrates that a large gap still exists between projected emissions and the pathways needed to meet global climate targets. The organization Climate Action Tracker, which presents independent scientific analysis on climate issues, rated the NDCs of 30 nations and the European Union. They determined that only seven countries presented NDCs that were compatible with the 2°C target or better. Meanwhile, the NDCs of 14 countries were rated as either “highly insufficient” or “critically insufficient,” including China, Russia, and the United States.70 Under the agreement, participating nations will convene every five years to review progress and hopefully offer more ambitious NDCs. As with our discussion of various environmental issues in Section 1 of this chapter, the data on climate change reflect a mixture of good and bad news. While global CO2 emissions were essentially constant from 2014-2016, global emissions rose by 1.6 percent in 2017 and 2.7 percent in 2018.71 In the United States, greenhouse gas emissions fell by a total of 12 percent over 2007-2017, mainly as electricity production switched from coal to natural gas.72 However, a preliminary analysis indicates that emissions in the United States also rose in 2018, by a significant 3.4 percent.73 Despite these recent increases in emissions, there are still several reasons for optimism: 1. Analysis of countries’ actions since the Paris Agreement finds that several countries are DRAFT 30 “taking significant steps in the right direction,” including Argentina, India, Costa Rica, and the European Union, and that if such progress is “extended and scaled, these combined efforts could begin to bend the global emissions curve.”74 2. In recent years energy investment has significantly shifted toward renewable sources. In 2017 global investment in renewables was $333 billion, compared to only $144 billion invested in fossil fuels and nuclear energy.75 3. Over the last decade the cost of renewable energy has declined dramatically, with wind energy costs down 69 percent and solar costs down 88 percent. In fact, renewable energy costs have declined so much that as of 2018, the two cheapest sources to generate electricity, considering global average costs, were wind turbines and photovoltaic solar panels, even without including subsidies.76 4. Economic analysis demonstrates that a global transition to 100% renewable energy is both technically and economically feasible. According to a 2017 study, a complete transition to renewables by 2050 would increase net global employment, reduce total energy costs, increase access to energy in developing countries, avoid over 3 million annual deaths from air pollution, and allow the ambitious 1.5°C Paris climate target to be met.77 Discussion Questions 1. What do you think should be done by the United States and other countries in response to global climate change? Can you think of specific policies that would reduce carbon emissions without resulting in significant economic disruption or that might be helpful economically? 2. The 2015 Paris Climate Agreement allows each country to set its own targets on a voluntary basis. One consequence of this has been that many countries have not done enough to meet the goals of limiting global warming to “well below” an increase of 2°C above pre-industrial levels. What are some of the challenges associated with imposing more strict conditions on all countries? Can you think of ways in which international agreements that require participation by countries facing different kinds of development challenges can be made more effective? 7. FINAL THOUGHTS We started this book by saying that economics is essentially about improving people’s wellbeing. Our contextual approach to economics has recognized that well-being is fundamentally multidimensional, as we saw in Chapter 0. In this book we have addressed standard economic issues such as markets, consumer and business decisions, economic fluctuations, and global trade. But we have also shown that economic “success” means creating societies that provide fair opportunities for everyone, support quality-of-life goals, and are environmentally sustainable. In many ways, insights from economics have clearly improved the well-being of billions of people over the last couple of centuries. More people than ever are able to develop their capabilities and achieve a comfortable living standard, although unacceptable levels of inequality, poverty, and discrimination persist and must be rectified. Society’s economic goals are increasingly expanding beyond traditional goals such as fostering markets and increasing income and employment, toward broader well-being goals such as human empowerment and DRAFT 31 environmental sustainability. As social goals transform, economics must also adapt and respond. The idea that economics must evolve as conditions change is not new. During the Great Depression in the 1930s the famous economist John Maynard Keynes looked into the future and tried to imagine a world of relative affluence, where humanity’s true long-term problem might be to determine how to live “wisely and agreeably and well.” (See Box 16.4.) An economy that is stable, equitable, and sustainable is possible. As we have seen throughout this book, economists have developed numerous policy recommendations that can help us achieve our goals. Some of these ideas have been tested and proven effective, some haven’t worked as expected, and others remain to be tried. We hope this book has helped you think more deeply about what policies are best in your various roles in life: as a consumer, as an employee or business owner, as a family member, and as a voter. We can’t promise that economic decisions are always easy, but we hope the information from this book will help you approach these choices with an informed and open mind. BOX 16.4 ECONOMIC POSSIBILITIES FOR OUR GRANDCHILDREN Looking beyond the dire conditions during the Great Depression, John Maynard Keynes imagined what the world, and economics, might be like 100 years into the future (in 2030).78 Considering what would be the “economic possibilities for our grandchildren”, Keynes’s main conclusion was that as people’s needs and goals changed with further affluence, so should economics. Writing in 1930, Keynes suggested that: … a point may soon be reached, much sooner perhaps than we are all of us aware of, when [basic] needs are satisfied in the sense that we prefer to devote our further energies to non-economic purposes . . . . I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not—if we look into the future—the permanent problem of the human race. Thus, for the first time since his creation man will be faced with his real, his permanent problem—how to use his freedom from pressing economic cares, how to occupy the leisure, which science and compound interest will have won for him, to live wisely and agreeably and well. Keynes recognized that economics has been of critical importance in helping people meet their basic needs. But as people increasingly shift their energies to “non-economic purposes,” our views on both policy issues and even morals must also shift: When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. . . . The love of money as a possession—as distinguished from the love of money as a means to the enjoyments and realities of life—will be recognized for what it is, a somewhat disgusting morbidity, one of those semi-criminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. All kinds of social customs and economic practices, affecting the distribution of wealth and of economic rewards and penalties, which we now maintain at all costs, however distasteful and unjust they may be in themselves, because they are tremendously useful in promoting the DRAFT 32 accumulation of capital, we shall then be free, at last, to discard. Of course there will still be many people with intense, unsatisfied purposiveness who will blindly pursue wealth—unless they can find some plausible substitute. But the rest of us will no longer be under any obligation to applaud and encourage them. Discussion Questions 1. How can we reconcile the need for global economic development with the problems of environmental limits? In what ways will established models of economic development have to be modified to deal with new realities? 2. Do you agree with Keynes’s belief that industrialized countries can reach a point where needs will be “satisfied in the sense that we prefer to devote our further energies to noneconomic purposes”? Do you think that we are any closer to this point than in 1930, when Keynes wrote his essay? Do you see any evidence that this is starting to occur? REVIEW QUESTIONS 1. Summarize some of the key trends in environmental and well-being indicators since the 1960s. 2. Are we currently in danger of running out of key nonrenewable resources? 3. How do air pollution levels differ in developed versus developing countries? 4. What temperature targets were set under the 2015 Paris Climate Agreement? 5. What is a negative externality? 6. How can we represent a negative externality in a supply-and-demand graph? 7. What is a Pigovian tax, and why do economists recommend this policy to respond to a negative externality? 8. What is a positive externality, and how can it be represented in a supply-and-demand graph? 9. What policy do economists recommend in the case of a positive externality? Why? 10. What two characteristics define a common property resource? 11. What two characteristics define a public good? 12. Why is an unregulated common property resource likely to be exploited? How can we represent this graphically? 13. How can a common property resource be regulated to achieve the socially efficient outcome? 14. Why are public goods not provided by private markets? 15. What is the environmental Kuznets curve hypothesis? Do the data tend to support it? 16. What is the consensus among economists about the relationship between environmental protection and the economy and jobs? 17. What are the different views among economists regarding the transition to a sustainable economy (i.e., green growth versus no growth)? 18. What is the difference between weak and strong sustainability? 19. What are the implications from the data on humanity’s ecological footprint? 20. Why do economists tend to prefer Pigovian taxes that are upstream and revenue neutral? 21. What are some green macroeconomic policies? 22. What is a discount rate? Why is it important in determining the social cost of carbon? 23. What are the advantages and disadvantages of carbon taxes? 24. What are the advantages and disadvantages of a cap-and-trade system to regulate DRAFT 33 carbon? 25. Are the collective Nationally Determined Contributions under the Paris Climate Agreement sufficient to achieve stated temperature targets? EXERCISES 1. Issues of environmental sustainability can sometimes be a bit abstract. This exercise is designed to bring them to an individual level. Start at https://www.footprintnetwork.org/ and familiarize yourself with the notion of “ecological footprints,” then take the quiz to discover what your personal footprint looks like. What did you learn that was new information to you? What specifically can you do about this new information? 2. Go to https://data.footprintnetwork.org/ and access data for a number of different countries. For each country answer the following questions: a. What was the per capita ecological footprint of consumption? b. What was the per capita biocapacity? c. Explain the meaning of the two numbers you just located. What are the implications? 3. Match each concept in Column A with a definition or example in Column B: Column A a. “Green” taxes b. Tradable permit systems c. Strong sustainability d. Throughput e. Social discount rate f. Environmental Kuznets curve g. Steady-state economy Column B 1. The perspective that natural capital depreciation should be compensated for with restoration of other natural capital 2. An inverted U-shaped relationship between economic development and environmental damages 3. A situation where population and the use of raw materials and energy have stabilized 4. Based on the principle that a process of pollution reduction may be most efficiently achieved if businesses have choices 5. Designed to discourage pollution and natural resource depletion by making them more expensive 6. Reflects social rather than market valuation of future costs and benefits; 7. 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