Over the course of the last few years there has been an increase in the number of natural disasters wreaking havoc for people all across the world. Both economical and social costs resulting from the damages caused by these events have been rising rapidly, which begs the question what they will amount to in the future (Jay L. Zagorsky, “Are catastrophic disasters striking more often?”, The Conversation). In a rather bleak report published in Elsevier, it is stated that with the current outlook, we could expect to see between 150 and 300 million climate refugees by 2050, and as evidenced by disasters of the likes of Harvey, it is not just a problem for poor emerging market countries, but for all. The aim of this report is to discuss these costs and investigate if investment in environmentally friendly policies/technology now can help decrease total damages caused by climate phenomenons in the future.
Most countries seek to maximize long and short run real GDP growth using the resources they have at hand. The path to that goal and the relative successes of countries however differ wildly. Overall it is a reasonable approach to take if you want improve the standard of living of your population, but it is also a measure that is flawed, leaving many externalities unaccounted for. The one most relevant to this discussion is the environmental impact of different sections of the economy. The classical example of this is that you have a factory using to humans and the environment damaging chemicals as inputs in its production of, let’s say clothes. The company then dumps all the leftover chemicals from production into the river that provides drinking water to the people living in villages downstream. As a result of the poor water quality, they become sick, die earlier and hence are less productive. The humanitarian losses of this are of course unacceptable, but it might also be true that the economic damages incurred by the populus are greater than the value that is added to the economy by the factory. Yet when just using GDP as a measurement, the value added to the economy will be positive, even though the real value added is negative (Laura Centemeri, “Environmental Damage as Negative Externality: Uncertainty, Moral Complexity and the Limits of the Market”, Open Edition). This suggests that using a measurement similar to green GDP, which attempts to account for these types of situations, would provide a better index to optimize against than just real GDP.
Relating the discussion back to increased costs as a result to environmental damages, optimizing in line with a model of the likes of green GDP could potentially lead to less costs as a whole over specified time period. For example emissions of CO2 leads to an increase in the average world and sea temperature (NASA Earth Observatory, “The Impact of Climate Change on Natural Disasters”, NASA Earth Observatory). This in turn leads to increased social and economic costs which could have been avoided or decreased if CO2 levels in the atmosphere had been lower. It makes economic sense for countries to invest in R&D to minimize these damages, if the cost for the R&D are lower than the resulting costs of the environmental damages. So is this the case in the real world? As it turns out, there have been a number of empirical studies
whose results suggest that it indeed would be more cost effective to invest now to prevent further environmental damage than to just accept the future climate costs (Hannah Ritchie “How much will it cost to mitigate climate change?”, Our World in Data). So if it makes economic sense to invest in better environmental technology and policies, why is it not always done to a rational extent? Taking China as an example, the people have become used to rapid increases in standards of living over the last couple of decades and the government is hard pressed to continue on that trend. Losing growth and economic resources short term for a long term economic gain might not be politically viable. This is especially true if your country loses a competitive edge against other less responsible countries, who are not willing to pay the prices need not to incur future environmental costs. So what can be done?
In order to overcome problems like those just mentioned, most countries in the world signed the paris accord, which seeks to limit the increase in average temperatures on Earth to 2 degrees celsius or lower by 2030. Since everyone have agreed to attempt to decrease emissions, the moral hazard of enjoying the benefits from other countries decreasing their emissions without paying for it yourself is decreased. A number of market initiatives like tradable emissions rights (which grant you the right to release a certain amount of CO2 equivalents), have also been introduce in an attempt to internalize the negative externalities discussed earlier. Green bonds, ESG assets and other environmentally oriented financial assets have also been introduced to fund the investments required to fulfill the Paris accord. Will this be enough to reverse the trend of increasing environmental damages? Probably not, and it seems highly likely that more investments are needed to reach the optimal level of environmental cost optimization. Hopefully wider acceptance for measures like green GDP and more internalized externalities will contribute to more positive future outlook, but as of right now there is a lot left to be done to minimize the inevitable damages resulting from climate change.
Jay L. Zagorsky, “Are catastrophic disasters striking more often?”, The Conversation, 2017
https://theconversation.com/are-catastrophic-disasters-striking-more-often-83599 (23-11-18)
John Barnett and more, “Global Environmental Change, Human and Policy Dimensions”, Elsevier, 2018
https://www.sciencedirect.com/journal/global-environmental-change (23-11-18)
Laura Centemeri, “Environmental Damage as Negative Externality: Uncertainty, Moral Complexity and the Limits of the Market”, Open Edition, 2009
https://journals.openedition.org/eces/266 (23-11-18)
NASA Earth Observatory, “The Impact of Climate Change on Natural Disasters”, NASA Earth Observatory, 2005
https://earthobservatory.nasa.gov/features/RisingCost/rising_cost5.php (23-11-18)
Hannah Ritchie “How much will it cost to mitigate climate change?”, Our World in Data, 2017
https://ourworldindata.org/how-much-will-it-cost-to-mitigate-climate-change#note-8 (23-11-18)
