The ultimate economic challenge – 05/29/2023 – Why? Economês in good Portuguese

The ultimate economic challenge – 05/29/2023 – Why?  Economês in good Portuguese


The climate crisis is the ultimate challenge for the economy. This statement is not my own, even though my professional career is entirely dedicated to the subject, but William Nordhaus’s. Among the various challenges the discipline deals with, a Nobel Prize winner in Economics highlighted tackling climate change as the most urgent, complicated and fundamental of them. Why?

To begin with, because the climate crisis poses a critical threat to humanity. The recorded increase in average global temperature is mainly caused by greenhouse gas emissions from human activities (“anthropogenic emissions” in climate parlance). This increase is associated with greater frequency and intensity of climate extremes and natural disasters, the worsening of food and water insecurity, greater economic uncertainty, the occurrence of social conflicts… The list is long and frightening.

That said, tackling the climate crisis and mitigating its negative impacts are — well, they should be — pressing and pressing goals. Achieving these goals is, however, particularly difficult because climate change is a global externality. This is where economics comes in.

Economists say that an activity generates an externality when its costs (negative externality) or benefits (positive externality) affect third parties who are not directly involved in the activity. The concept is related to the notion of public goods. There are two main attributes that characterize a public good: (i) there is no cost to extend the consumption of the good to an additional individual and (ii) it is impossible to exclude individuals from enjoying this good when it is offered.

It is easier to understand with an example. Consider street lighting poles. Once the pole is up and running, the cost of lighting the street is absolutely the same when there is one person or fifty people walking along it. Furthermore, it is impossible to direct the pole to light the street for one group of people and not for another.

If it operated freely, the equilibrium of this market would have a supply of lighting far below what is socially desirable. Each individual would be willing to pay only for lighting the stretches of streets they use. Without an intervention capable of moving this market towards a better result for the collective, a large part of the city would remain in the dark. Typically, it is the government that steps in to implement such interventions.

Now that we’ve covered the basics of externalities, let’s get back to the climate crisis. Greenhouse gas emissions are the opposite of a public good—they are a public evil! After all, the gases emitted by activities that take place in Brazilian territory accumulate in the atmosphere and contribute to the increase in the global average temperature. This affects Brazil, of course, but it also affects the rest of the planet, with no additional cost for Brazil and without being possible to exclude one or another country from its effects. A negative externality on a global scale.

Dealing with an externality of this magnitude is a tremendous challenge. Even more so considering that so many activities in our daily lives (transport, food, consumption…) emit greenhouse gases, that the gases that accumulate in the atmosphere today will have consequences for many decades and especially that, in this case, individual action does not affect the final result in any way.

Even government intervention, which manages to bring the result closer to the collective optimum there in the example of the pole, has a limited effect here. After all, even a government that manages to zero its emissions (which does not occur without incurring expressive costs) will need other nations to also act so that it does not suffer from the consequences of climate change. In good economics, the incentives are misaligned.

Nordhaus argues that the only effective way to tackle the climate crisis is through the design, implementation and enforcement of multinational cooperative policies. The world has a lot of work to do to move forward on this front, but there is also ample room for action by national governments. Public policy is a key instrument for climate action. And that is why we will dedicate many other columns to her.


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