As Iâ€™ve mentioned before, the drama of the financial crisis has tended to distract attention from the bigger long-term problem of climate change. But is there more than that? How will the crisis affect the economics of a response to climate change? Iâ€™ve been asked by GetUp to do a guest post on this.
Most obviously, given the likelihood of a global recession, there will be a modest slowdown in economic growth which will have an impact on emissions of carbon dioxide (other greenhouse gases like methane wonâ€™t be much affected). But this effect is too small to count as even modest consolation. As a first approximation, a general decline in economic output will have a proportional effect on emissions. That is, a severe recession, with a 5 per cent reduction in global output, would reduce emissions by around 5 per cent. In fact, the impact is likely to be smaller, because the supply of oil in particular is now constrained by declining reserves. An economic slowdown will reduce the price of oil but wonâ€™t do much to change consumption.
Comparing this marginal impact to the size of the reductions that we need (at least 30 per cent over the next decade relative to business as usual), it is obvious that the way to get there is not to reduce total output and income but to shift to a less emissions-intensive pattern of economic activity. As a string of economic studies have shown, we could reduce emissions greatly (60-90 per cent by 2050) at a cost of reducing total consumption by a few per cent. Unsurprisingly, as with most claims about spin-off effects, the way to reduce CO2 emissions is not to reduce economic activity or to target any other indirectly related variable. The best way to reduce CO2 emissions is with policies designed for that purpose.
The big question is whether, in the light of the financial crisis, we need to reconsider policies designed to stabilise climate, such as emissions trading schemes, carbon taxes and direct interventions to promote energy efficiency and renewable energy. In general, the answer is â€œNoâ€?. Most of these policies are either neutral or stimulatory in their impact on economic activity. In the case of emissions trading, for example, all existing proposals call for revenue to be returned either to households or to affected industries. So, there should be little net effect on aggregate demand.
Policies encouraging investment in more sustainable infrastructure will be more desirable in a situation where private investment in general is likely to be depressed for some time. The Rudd government has already announced that its infrastructure program will be brought forward, and that is obviously sensible.
The main implication of the crisis is that more attention needs to be paid to the employment effects of policy changes. While these will be positive on balance, since renewable energy tends to be more labour-intensive than fossil fuel industries, and energy efficiency and offset programs more labour-intensive again, the need for adjustment assistance for those who lose out (workers in coal-fired power stations and communities based on those industries) will be greater than before. This should include not only cash payments but support for the development of new sources of employment.
Finally, as regards the politics, the short-run effect has undoubtedly been a shift of public attention away from the environment. But many of the long-term effects of the crisis will be favorable for the environment. These include the collapse of ideological objections to government intervention (ludicrous now that the Masters of the Universe are begging for partial nationalisation), and a rejection of the culture of excessive and ostentatious consumption that has characterized the boom. More conservative virtues of thrift and caution are likely to come to the fore, and these are virtues exemplified more by the conservation movement (which derives its name from the same source) than by those commonly described as political â€˜conservativesâ€™.