Climate change is a problem that will worsen if we do not take appropriate measures and address the uncertainty surrounding the debate on how to tackle it. We are already experiencing rising levels of carbon dioxide (CO2) in the atmosphere through extreme weather events with an undeniable impact on the economies of some countries.
The absence of actions to progressively, yet with a certain sense of urgency, limit the use of fossil fuels will not only incur an increasing cost, but can also generate irreversible effects. The pressure exerted by citizens, who are increasingly aware of the magnitude of the problem, the impetus of regulation, and technological changes can trigger a drastic shift in the production model with inconceivable consequences for employment, prices, and growth.
Since the signing of the Paris Agreement in 2015, significant progress has been made to mitigate the impact of climate change and transform the production model towards patterns less harmful to the environment. Since the 2030 Agenda and the United Nations Sustainable Development Goals (SDGs) were agreed upon, progress has been made in this direction, despite the global economic environment becoming polarized: The European Union has launched an Action Plan to finance sustainable growth; central banks have united to keep climate change risks under control and prevent them from affecting financial stability; investors are emphatic in valuing the benefits of investing in sustainable projects, and the world’s leading banks have confirmed their commitment to the fight against climate change and to fulfilling the SDGs through the signing of the Principles for Responsible Banking in New York.
However, CO2 levels in the atmosphere increase every year: according to the National Oceanic and Atmospheric Administration, carbon dioxide concentration has risen from 401.4 ml/m³ in 2015 to 409 ml/m³ in 2019. Why is it so difficult to meet commitments against climate change and global warming if social awareness is growing and regulation is aligned with the cause? There are countless reasons, ranging from a lack of international coordination to the difficulty of having solid data and adequate information to make correct decisions, as well as the possible correlation between CO2 emissions and economic growth.
Part of the explanation also lies in what we know as ‘temporal discounting’ in our decision models: the more weight we give to the present at the expense of the future, the fewer incentives we have to act decisively against climate change. And this has a lot to do with the degree of international cooperation: the lower it is, the more short-term impact decisions outweigh those that could generate a benefit in the coming decades.
Similarly, when we consider climate change to be a global phenomenon, the incentives to act decisively at national, regional, or even individual levels are substantially reduced if the costs to be incurred are potentially high. Furthermore, doubts often arise about who is responsible for making decisions, as most governments and companies do not feel addressed, and the cost of increased CO2 is also unclear. In this scenario, the fight against climate change can be seen as a public good, so there will always be a group of agents (free riders) who benefit from the effort assumed by others without contributing at all to the cause.
As Vinod Thomas, former Vice President of the World Bank, points out, economists are also partly responsible for hindering the necessary awareness to address change. We should have more clearly reflected the impact of climate change in economic prediction models. Thanks to the leadership and influence of the 2018 Nobel Memorial Prize in Economic Sciences laureate William Nordhaus, an abundant literature has begun to develop in this field, but even so, we must admit that these models tend to limit or even ignore the effects of climate change. Although information is lacking and the quality of available data needs to be improved, we should recognize the importance of integrating the costs and benefits of environmental management into growth models, and consider the cost of evading the social impact of certain production processes in economic models.
However, it makes no sense to talk only about obstacles without offering possible solutions, and there are many. Economic literature tends to agree on the need to limit the use of fossil fuels through the appropriate design of incentives or through regulation. Nevertheless, the existing challenges highlight the importance of continuing to raise awareness about the severity of climate change and the need to work with reliable data to develop economic models, create scenarios, and enhance the role that the financial system must play as a catalyst for change.
Without this effort, it will be impossible to make appropriate decisions, and we will continue to be guided by our preconceived ideas to avoid having to bear the cost of the transformation caused by climate change. And so, we run the risk of advancing only in the rhetoric of change without creating the necessary impact.
Juan Carlos Delrieu, Director of Strategy and Sustainability
