Wednesday, September 2, 2015

$52 trillion: That's how much denying climate change may cost the world

Charles Koch believes in the free market. His objections to government regulations are always the same: "They distort the free market". But what if the market itself is distorted? Economists call this "failure of the market".

One example of market failure is the dust bowl on the American Great Plains in the 1930s. Farmers pursued practices that destroyed the topsoil until it was blown away. This market failure happened because short-term profits (cash crops) kept farmers from using sustainable methods until the soil was ruined and people had to abandon their farms.

A similar market failure led to the collapse of the Sumerian civilization, which was based on advanced farming using irrigation. The civilization thrived until the soil became too salty to produce crops. Then the Sumerian civilizations failed, big-time.

Is this the destiny in store for us? Will our civilization, so large and impressive, be destroyed by market failure?

Climate change is the biggest failure of the market in the history of the world. It is the first one we know of that affects the entire planet. It is also the first market failure caused by polluting the atmosphere as opposed to being produced by destroying the ecosystem.

Scientists have studied the current climate change for the last 50 years. They have become aware of what is happening and why. Economists have only recently begun to study the possible effects of climate change. Since economists are well-versed in making predictions about the future, their predictions should be taken seriously, no matter how extreme they may sound to our ears. This is especially true when the economists in question work for citi, one of the Big Four banks of the US. Citi has just produced an extensive study of the economic effects of Climate Change. Their conclusions are eye-opening.

The report issued by citi economists measures the economic effects of ignoring climate change as opposed to doing something about it right away. The effects of ignoring it, as you might imagine, are horrendous. The report uses three scenarios of action. In one, the green path, the planet is able to keep the temperature from rising more than1.5 degrees Centigrade. In that case, the global GDP will be reduced by 0.7% or $20 trillion by 2060. In the worst-case scenario, the temperature will rise 4.5 degrees Centigrade and global GDP will be reduced by $72 trillion.

In brief, the citi report predicts that doing nothing would cost the world $52 trillion more than spending the money now to reduce our fossil fuel use and take other steps to reduce greenhouse gas emissions. But here again, we may run into the problem of market failure, because the people who make money by producing CO2--primarily fossil fuel producing companies--will not be the ones who will have to pay for the mess they are creating. Instead, those who pay will be our children and grandchildren.

There will be a summit meeting in Paris in December to decide what actions to take globally to avert such a catastrophe. We will all need to take action.

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