Economics Society

Climate Volatility: It’s Time to Pay The Bill

One of the interesting dynamics I see in business and society in general is the slow but perceptible shift in the debate on climate change from whether we should believe it to what do we about it now that it’s here. Of course, there are still a few hold outs who think we should keep on waiting, but in general it seems that the scientific jury is in and the verdict is that human beings are guilty of having helped cause the current increase in climate volatility. (Speaking of which, climate volatility (a risk issue), not climate change (a weather issue) is what this discussion should have been about in the first place.)

Image Source: NASA
Image Source: NASA

So if we now finally agree that it’s time do to something, then that conclusion immediately brings up the cost factor as well. Kevin Bullis, writing in the MIT Technology Review, has an interesting short piece on this issue. In his piece Bullies suggests two things: first, no one really knows what it will cost to fix the problem when all is said and done but, second, it’s probably cheaper the sooner we start.

Notes Bullis:

Major reports are concluding that stabilizing greenhouse-gas emissions to avoid catastrophic climate change is possible and can be done at a relatively low cost. But the details of the reports make it clear that when you factor in real-world issues—such as delays in developing and implementing technology and policy—the cost of solving climate change gets much higher. Switching from fossil fuels to low-carbon sources of energy will cost $44 trillion between now and 2050, according to a report released this week by the International Energy Agency. That sounds like a lot of money, but the report also concludes that the switch to low-carbon technologies such as solar power—together with anticipated improvements in efficiency—will bring huge savings from reduced fossil-fuel consumption. As a result, the world actually comes out slightly ahead: the costs of switching will be paid for in fuel savings between now and 2050.

Of course, again, there are some people who will question why anyone would incur a cost today for a benefit that will really accrue to future generations. Putting aside the issue of progeny bias, there are some interesting findings on just ho much people are willing to pay today for a future benefit. As The Economist recently noted:

Unfortunately, peeling apart how people actually discount benefits centuries or more in the future is very hard. But a fascinating new NBER working paper uses a clever approach to take a crack at it.

The authors exploit an oddity in British real estate: Britons buying a home may either purchase what is known as a freehold (which means they own the land outright) or a leasehold (which means they “own” it for the duration of the leasehold). But leaseholds aren’t like your standard rental contract; they often grant ownership for periods between 80 and 999 years. The authors reckon that by finding the premium paid for freeholds relative to super-long-dated leaseholds on otherwise identical properties, they can come up with an estimate of how distant benefits are actually valued in the market.

Remarkably, they find that people pay a premium of 10%-15% less for 100-year leaseholds and 5%-8% less for leaseholds of between 125-150 years. Only for leaseholds of 700 years or more do they detect no difference in price. On the whole, they reckon, a discount rate of about 2.6% appears to apply out well beyond a century. Oddly enough, people are willing to part with real money now in exchange for benefit flows accruing well beyond any reasonable expected lifespan.

That won’t make it any easier to generate the political support for meaningful action to slow climate change. But it does make it harder to justify delay based on the fact that people simply don’t care much about the distant future.

A year or two ago, I would have thought the idea of a specific switching strategy an impossibility, given the strategic disfunction of our government’s leaders. Yet, with all the climate volatility clearly on display, and with its impact being felt everywhere from California to New Jersey to Florida, I am actually optimistic that we will start dealing with this issue sometime between now and the next presidential election.

The reality is that every day we continue without a plan for reducing climate volatility is a day we are increasing it. Indeed, a recent NASA post said it well: “The current warming trend is of particular significance because most of it is very likely human-induced and proceeding at a rate that is unprecedented in the past 1,300 years.” The bottom line is that the science is in, the impact is here, and it’s time we start running the numbers on what it’s going to take to fix this mess.


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