GREEN ECONOMICS: A SUSTAINABLE RESOLUTION TO CLIMATE CHANGE? – I

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  Picture Credit: – climate.mit.edu

Introduction

In the month of May 2021 alone, two cyclones, Tauktae and Yaas, hit India.[i] This was in continuation to the three cyclones that had made landfall in the country in 2020, one of which was the super-cyclone Amphan that caused damages to the tune of ₹1.02 lakh crore[ii] in the state of West Bengal alone. Thus, it was rightly deemed the ‘costliest tropical cyclone’. Scientists and researchers have attributed these increasingly common and devastating disasters to be an outcome of global warming[iii] and climate change. Additionally, heavy rainfalls, droughts, and heat waves that are wreaking havoc all over the world are believed to have the same source. There is growing research attributing these phenomena to human activities ranging from deforestation to burning fossil fuels and use of chlorofluorocarbons (CFCs).[iv]

As much of a buzz-word as it might be, the ubiquity and relevance of ‘climate change’ as a phenomenon cannot be overestimated. Climate change refers to the gradual yet long-term change of weather patterns over the globe. As an issue to be resolved, it stands at a unique intersection of economics, politics, natural science and social science.

Further, the issue, when addressed, requires both immediate actions along with a sustainable long-term plan to combat it at local, national, and global levels. Despite the controversy and contention surrounding the discourse on the subject, it is hard to miss the signs these days. But even if one does acknowledge climate change as a reality, what is the best way to address the matter? Some reports believe that the aspiration to reduce environmental impact through greener production methods might lead to inflation in the medium run, owing to higher costs. On the other hand, is the proposition that the damages incurred in the future, if the transition to greener alternatives fails, will far outweigh the costs incurred to ensure its success.[v]

Moreover, marginalised communities are likely to face the brunt of all damages caused by climate change in their daily lives. This post aims to give a detailed account of these conflicting propositions through contemporary research from the field of law and economics, in order to give greater context to the events surrounding climate change and the various measures taken to combat it.

The Economics of Climate Change

Perhaps the most fundamental and well-known principle of economics is that resources are scarce.[vi] Fossil fuels, the source for the world’s growing energy needs is a scarce resource. Thus, even if demand and supply have an important role in determining the price, the scarcity of a commodity like fossil fuels prevents the law of demand and supply from functioning in a regular manner. Even if subsidies are granted or usage is taxed, it can in no way yield the resources once they are exhausted. Therefore, to ensure our ability to meet future needs and reduce our ecological footprint, it is imperative to find and adopt alternatives. While it is neither easy nor cheap for firms dealing with natural resources to adapt to the changed environment, failure to act now will only make this transition tougher and more expensive with the passage of time.

Climate change is also detrimental to the productivity of operations for businesses. Fossil fuels create pollution that harms the human body causing a variety of illnesses for workers and non-workers. Not only does this harm the productivity of the firm, but in light of the legislations worldwide to curb pollution, it exposes the businesses to the risk of various fines and sanctions. Climate change is also believed to have altered the predictability of the weather while also causing several calamities, which adds to the uncertainty of agricultural output and construction activities in particular, these being the economic base of a significant chunk of countries. Therefore, if companies and countries do not buckle up to transition into a greener world, they might not be able to survive in the coming years.

While the report by ‘Network for Greening the Financial System’ to uncover the costs and risks involved shows that a consistent effort to reduce and limit climate change to 1.5 degree Celsius (as the maximum temperature rise) will involve the least transition risk while adequately controlling CO₂ emissions.[vii] However, there is debate over what should be our goals and metrics in this transition. How do we make this transition in an ‘economically viable’ way?

The discipline of Economics has been criticised before for being heavily focused on the financial aspects without accounting for the actual impact on the ground level. For instance, gross domestic product or GDP, the most common measurement tool for quantifying economics, does not account for the cost of growth it espouses or account for equitable distribution of resultant benefits. While neglecting losses due to pollution, it also does not provide a reference to the amount of resources utilised to achieve said growth i.e., is the use efficient and sustainable or not?

A measurement in this regard is decoupling which compares the rate of use of resources with the rate of growth of the GDP,[viii] with the aim of ensuring sustainable growth. According to the London School of Economics, it is impossible to achieve decoupling while fostering economic growth. This is because the hope for future reduction in use of materials and better technology was pinned on the global economy transitioning from manufacturing-oriented growth to services-oriented growth, leading to less resource-intensive development. However, this has not been the case since the share of services sector increased in the 21^st century, so did use of resources marked by diminishing relative decoupling. Under such circumstances, absolute decoupling seems like a distant dream.[ix] This is an indicator that it might already be too late. Yet, there is also no better time to act than now.

It is equally important to rethink economics. The purpose of the distribution of resources is to ensure a standard of living for all. While GDP as a metric is unequipped to address these concerns, economists have developed other less widely accepted indicators under Green Economics. One such indicator is the Genuine Progress Index that accounts for environmental and social indicators along with the economic indicators. Unfortunately, it has been falling while the GDP has been rising.[x] Although the need for stable macroeconomic indicators for a functioning economy cannot be denied, it is also important to consider what ‘material prosperity’ sets out to achieve in the context of the problems posed by climate change.

Corporate responsibility too is an important factor to consider in this regard. Is profit maximisation the only objective of businesses? What do businesses owe to the people they impact? Do they have no accountability, especially considering the long-term existence of the planet? For the longest time, the outcome of business operations was only looked at in terms of tangible costs, revenue and profit without accounting for externalities and indirect costs incurred as a result of their operations. This is changing. Frameworks like the Common Good economy encourage companies to view their ‘success’ in terms of their ultimate impact and contribution to the society and its components, rather than just profit.

It is also important to note that the offset is in the time we take to respond. The longer it takes to accept and execute policies for sustainable change, the more concentrated, dire, and rapid, execution will have to be, thereby, increasing the risk of unsuccessful transition.

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[i] Anjali Marar, “Cyclones Tauktae and Yaas leave exceptionally wet trail in May across India: IMD”, THE INDIAN EXPRESS, Pune, Saturday, May 29, 2021.

[ii] Shiv Sahay Singh, “Bengal pegs cyclone Amphan damage at ₹1.02 lakh crore”, THE HINDU, Kolkata, Monday, June 07, 2021.

[iii] Richa Sharma, “Why are cyclones more frequent in India this year?”, THE INDIAN EXPRESS, New Delhi, Tuesday, May 25, 2021.

[iv] Causes of Climate Change, European Commission https://ec.europa.eu/clima/change/causes_en, (Visited on Sept. 23, 2021).

[v] Rachel Morrison, “The Climate-Change Fight Is Adding to the Global Inflation Scare”, BLOOMBERG QUINT, London, June 18, 2021.

[vi] Peter Shizgal, “Scarce Means with Alternative Uses: Robbins’ Definition of Economics and Its Extension to the Behavioral and Neurobiological Study of Animal Decision Making”, FRONTIERS IN NEUROSCIENCE, Vol No. 6, 2012, p. 16.

[vii] Antoine Boirard, et al., “Climate Scenarios for central banks and supervisors”, NGFS publications, June 2021.

[viii] Tim Jackson, PROSPERITY WITHOUT GROWTH, 2^nd ed., 2017, p. 21.

[ix] Jason Hickel and Giorgos Kallis, “Is Green Growth Possible?” NEW POLITICAL ECONOMY, Vol. 25 No. 4, 2019.

[x] Robert Costanza et al., “Development: Time to leave GDP behind”, NATURE, Vol. 505 No. 7482, 2014