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How economists underestimated the benefits of action for decades

How economists underestimated the benefits of action for decades

The costs of doing nothing are far greater than the costs of decarbonising an economy that has been powered since the Industrial Revolution by fossil fuels. It may seem obvious now, with daily reminders from disasters like floods and fires about how costly it is to continue inaction on climate changes. That insight was revolutionary 15 years ago.

The 2006 Stern Review on the Economics of Climate ChangeMy senior economist role in the G7 government was to use economic analysis to make the case for urgently reducing greenhouse gases emissions. These conclusions and recommendations, a decade and half later, are still valid.

The review also revealed the limitations of conventional economic modeling to answer transformational questions. It caused economists to create their own cost presumptions in order to generate contradictory results.

This is a sign of a problem in economics. Conventional models assume that economists can predict the future costs of new technologies, preferences, and behaviour. These are the key factors that will affect the cost of any green transformation. This means that our estimates of what we are most interested are predetermined by assumptions which may not be correct.

The fact is that the technique known as “static cost benefit analysis”, the workhorse of economic modelling, was simply not designed to evaluateThe large transitions and risks involved in tackling climate changes. This is because traditional approaches have always understated the dangers of unmitigated climate changes. overstated the coststhe transition to low-carbon, which would delay policy action.

It is difficult to predict the cost of a systemic change. Adopting clean technologies early is a good idea. creativity and innovationAll the whole economyThis creates new learning opportunities and experiences.

It unleashes economies of scaleIn discoveryAnd productionAs businesses create and distribute products more efficiently and effectively, dramatically lowering costs. This makes it even more attractive to deploy new technologies, which in turn creates a virtuous circle of innovation, investment, and falling costs.

The cost of producing electricity with solar panels and its storage costs lithium-ion batteriesIt has fallen more than 80%The last decade has seen a significant increase in carbon emissions. Despite the need to decarbonise electricity, people now have access to cheaper electricity and better-performing cars than they would otherwise. It was impossible to predict and it would not have been possible if the markets were all that successful.

A line graph depicting the falling costs of different types of electricity generation, 2010-2020.

Since 2010, the costs of generating renewable electricity have dropped a lot.
Climate Change Committee/IRENA (2020) Renewable Power Generation Costs in 2019.

The result was that the renewable energy generation capacity grew. faster than anyone expectedThis is because costs for installing and running renewables dropped sharply. Because capacity grew at a faster rate than anyone expected, costs also fell sharply.

These amplifying feedbacks can cause destabilising dynamics and economic models are unable to cope with them. They also miss the cost-cutting potential that they bring. Standard economic and energy forecasting models are therefore not suitable. demonstrably wrong for decades.

A self-fulfilling prophecy

No cost benefit analysis can adequately answer the question “What will it cost to decarbonise in the long run?” The answer depends on the choices and actionsTaken today and into the future.

Once in a while tipping pointWhen this goal is achieved, the transition to new technology networks becomes self-sustaining. If people expectThey will invest in low-carbon transition because it will be cost-effective.

So, the expectation of rapid transformation is increased. self-fulfilling. This makes it crucial for investors and companies to have confidence that a low carbon future will be profitable.

See Also
A man wearing a mask and work gloves throws muddy debris into a pile next to a house.

Ambitious policies to achieve a clean energy transition might prove to be costly. After initial investment costsIt would likely generate substantial revenue. savings.

Rows of solar panel arrays in a field on a sunny day.
The economic benefits of cheap, clean energy ripple through the economy.
Kev Gregory/Shutterstock

And once again clean innovation machineIt has been turned on, and it is running, so it has the potential for being more efficient, creative, and productive that the standard alternative. Growth in new sectors will be stimulated by the low prices of disruptive technologies. positive impactProductivity growth

Instead of trying to predict the future with the wrong economic tools, it is better to try to steer and design it. The economics profession can better deal with the uncertainty and risk that this brings. We can confidently say that the risks of taking action are much lower than those of inaction, fifteen years after the Stern Review. These risks are more than that. in our gift to tame.

The global community has the power to make a more sustainable, cleaner, more secure, and more productive economy a self-fulfilling prophecy. The call to action is more urgent than ever as world leaders gather in Glasgow for UN climate summit.


COP26: the world's biggest climate talks

This story is part of The Conversation’s coverage on COP26, the Glasgow climate conference, by experts from around the world.

The Conversation is here to help you understand the climate news and stories. More.



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