We tend to associate environmental economics with climate change economics, how are the two areas connected?
The climate change issue touches almost all the questions that environmental economics tries to find an answer to. It touches the question of non-renewable resources, through dealing with fossil fuels. It concerns the question of biodiversity, which is a very important topic, too. In economics, researchers tend to focus more on climate change and do not study enough biodiversity whereas in other fields of sciences, in particular, sustainability or environmental sciences, they are very focused on this issue. However, it should be important also for economists to consider biodiversity as this would certainly be highly affected by climate change effects. Through climate change economics, you also consider industrial organization questions, related to environmental economics: how to regulate a market, how to design a market, how to change the way people produce. It is a good way to summarize many different issues that are studies in environmental economics.
You mentioned biodiversity and the lack of attention by economists to this issue. Is there a reason why this happens?
There are only few people focusing on that. Mainly economists study the effect of climate change on biodiversity, but biodiversity is not only about climate change due to the expansion of urban areas or the development of big agricultural production sector in some countries. The typical example, which is also the focus of my research, is Brazil. There is a huge issue about deforestation, mainly due to expansion of agriculture and development of a specific kind of production in the forest. This is probably the biggest threat to biodiversity now, much more than climate change. There will be some impact of climate change in the future on biodiversity, but if you think in the short-run, it is more about this kind of issues that is threatening biodiversity now. While the impact of climate change on biodiversity will be more perceived in the long-run.
There is an issue for developing countries and in general for climate change for developing countries because we want them to develop but also to comply with climate policies and it is not very easy to make the two things going together.
Are developing countries more sensitive to climate and environmental policies?
Developing countries can implement new technologies more easily because they do not have old technology that has to be removed or changed. Perhaps it is easier to implement something new because they do not have capital and infrastructure of developed countries, which in turn can also be a weakness. (it is the first sentence rephrased). If you look for instance to development of solar energy in China or in African countries, they are very much opened to this because they need to have more electricity and they are more inclined towards implementation and development of new technologies because they do not need to get rid of present infrastructure, as for example, it is the case in France that already owns many power plants. But at the same time, as being developing, they are also facing increasing emissions of carbon dioxide.
How accurate is the estimation of costs of climate change?
The main issue for economists to produce accurate estimates is the high degree of uncertainty in this framework. We know how the world works with current temperature, but it is hard to imagine in an accurate way what would happen with a global warming of 2/3°C. If you look at the model that we use in economics, we have some functional form at the aggregate level of the damage function, but we only have a general expression for it and we try to make an estimation of this function, but we do estimation on very few points, which are very close to the temperature we have now, and it is very hard to disentangle effects with larger changes in temperature. So, I think that the state of knowledge is not very good but there are not many things we can do about it because we do not observe what living in a 2/3°C warmer environment means.
The functional form is mostly ad-hoc but we are not sure whether this is correct or not. Most people are aware that this is not a very accurate functional form but at the same time we do not have a clear idea of what the right model could be. What we are sure about is that it is a convex function: when temperature increase, damage increases more. But in the set of all possible convex functions, we do not know much. This is also combined with the fact that this is an aggregate function, a macro-function, and we have a lot of good estimates about some specific micro-impacts but it is very hard to merge them and have an aggregate impact to find an accurate aggregate function. The cost of climate change is not value free cost, it depends on how much weight you put in the future, which means what the loss for the future generation is, compared to the loss of the current generations, known as the “discounting issue” in climate change. However, this issue is broader than economics, and we cannot really have a scientific opinion. It is more a question of values.
You have mentioned the discounting issue, could you please give us an overview about this topic?
There is a model of total welfare across generation with a discounting factor, β, and a utility function: if you combine the two, you will obtain the discount rates. There are mainly two arguments about discount factors. On one hand, there are the supporters of a discount rate equal to zero, you should not discount at all, so that generations are treated equally, or at last you should only discount for the probability that they will exist, which would imply a very small discount rate. On the other hand, we have some kind of revealed preferences of what we think if you look at the interest rate or at the optimal policy implemented by countries, you can try to assess what β is. There are different views but there is no consensus on this topic.
You argued for negative discount rates…
I argued that in some cases there could be a negative discount rate. I would not say that it is generally true, but it might happen for instance if most of the cost in future are for poor countries, it may happen that you have a negative discount rate, but that’s the total discount rate, it is not only the β, it is also the discount rate on consumption, on costs. Regarding β, what we call the pure discount rate, there are these two views. If you go beyond economy, philosophers are more for the impartial view but there are debates about it.
What about the discount rate used by Nordhaus?
If you think of the 5% discount rate, that is the total discount rate, so it combines β with other factors, namely the growth rate and elasticity of marginal utility. The second part of this expression, which in some cases can be very high, can be estimated:, it means that if future generations are very rich, which is the case in all the models that climate change uses, we do not want to sacrifice too much for the “poor” current generations for the sake of these “rich” future generations. So it is not really because we do not want to see this cost or because we discount the cost as such, it is because this is the cost that happens to be on people that will be richer. This is more or less standard in cost-benefit analysis. I would not say that 5% discount rate is something absurd if we really believe in the assumption of growth rate and more prosperity of future generations, which are the two things I am very much doubtful about. But for sure if you buy the further assumptions, you can make sense for this discount rate.
We raised two issues, growth and inequalities. We could start by growth: could we say that the sustainable development and the current economic system, mainly based on growth, are incompatible?
Actually this question does not make me very comfortable. This is because sustainable development is not a clear concept for me [laughs]. It is very hard to have a clear answer to the question with an unclear concept! If by sustainable development you mean that we have to deal with huge externalities in the current economic system, mainly based on market, then obviously you need to implement a high degree of regulation, even higher perhaps than what currently there is, if we want to meet some goals to preserve the environment. More precisely what we are able to say about growth depends on what we are able to say about technologies and how they may develop in the future. Here again there is a lot of uncertainty, it is very difficult to have a clear answer to this question.
But for sure if you look at the public debate around climate change I would say that there are two kinds of discourses that you can hear.
There are people who are very much optimistic about the development of green technologies, that do not pollute too much and that there may even be ways to boost the current growth. But there are also people who are more skeptical about technological development and who tend to have the so-called post-growth or de-growth view of the future. If we take this into account, we have to go for a new path where we will not have high growth in the future. That would imply a radical change n the way policy is done and how we think about the future. This will have huge adverse implications, for instance, on the financial system and the banking system. They expect new return or development on growth in the future, but in de-growth scenario, there might also occur a collapse of the financial system.
Personally, I don’t know enough to take a side between these two opinions. As I work on decision theory, I would tend not to neglect any of the possibilities, but since we are a little bit uncertainty-averse, we should remain on the “safe” side. We should change our mindset imagining a low-growth rate and analyse its implications on the economic system, which would already be very significant, compared to the current framework, without falling into the post-growth or de-growth scenario.
But there can be surprise in both directions, maybe the climate problem is not as important as we think…
Can this really be a possibility?
If you think of how the climate will change, then the evidence is strong. But if you think about the impact on the economy, then it can be a possibility. The issue is that we do not know the implications of a global warming of 2/3°C in terms of how the economy and society work. There would be anyway changes in terms of climate. How much we can accommodate these changes is something we do not know very well.
And an accommodation of this change would have implications on the economic system?
Because economies are still mainly based on fossil fuels, so there must be a change in our mindset to make common knowledge that we can – and we have to – invest and make an economy that is based on renewable energies.
Well that is the issue that we have now. So what I am thinking is simply adaptation to a new climate, that can also imply and lead to other issues, such as migration. The thing is that probably for Western Europe there will be change in the climate, but perhaps not a dramatic one, but there this climate change might cause something hard to accommodate in terms of reallocation of people or economic activities. Regarding fossil fuels, I think we will have the problem anyway because this is not a renewable resource so we will have to tackle that. I do not exactly understand why, but the recent production of oil is excessively high, and we are aware that in the future this will not be sustainable. We will have to adapt to that.
How should we articulate the issue inequality and the mitigation of climate change?
There are debate among economists. You have two views. Some people think that there should be a unique price of carbon which is independent these economic inequalities and everything. There are good argument for that, which is not my position, but I don’t want to be unfair to that position because that is true that in terms of trade and competition between countries, there may be issues if you don’t have a unique price of carbon. But I think that in the real economy where we are know that we are so much in a second best world which means we cannot implement very well redistribution between countries and there are huge inequalities at the world level. Such that I think it is impossible to implement this kind of policy with a unique price of carbon everywhere. We have to accept the fact that there will be effort that will be differentiated among countries. The rich countries should do more, probably the price of carbon should be higher in these rich countries.
But actually there are even within countries inequality. The public debate in France is a very good example of that. You cannot ask to everyone participating the same way to this mitigation policy. And even in a country like France, where there is a lot of redistribution, I do not think we are in a setting where all sort of inefficiency that makes it much easier to put more the effort on the rich people than on the poor people. Therefore it means this is something we should take into account in the design of policies in an accurate way which is not the opinion of many economist.
What are the main research gap that you would suggest deepening for those who want to study environmental economics?
I think, and it is related to what I just said, that one thing that we do not know very much about in environmental policy, and in policy-making in general, concerns the implementation of the policies. That is what is called “acceptability” in the public debate, which is something related to the design of the policies. I think perhaps economists are not well armed to do this because we mainly focus on economic incentives. I think there are many other aspects of the problem that may incentivize or desensitize (are you sure desensitize?) people in terms of their preferences and changes in them… These are issue not particularly studied in economics, but which are very relevant for economic policy in that domain and make them work, which as you can see is very difficult.(Check English and sense of this sentence)
Speaking about implementation, if you had to implement one policy which would it be?
This is a very tough question! [laughs] One way to answer without answering the question is that there is not one but there must be a combination of many policies that will make the whole picture working. It has to be the case that actually there are things that we can do but that we don’t do enough that have no cost or very low cost like high performance buildings, efficient in terms energy consumption. If you do so, you will spend less in terms of electricity in the future. This means that if you analyse in the long term, this will have negative cost, you will actually gain money! From an economic point of view, it is very strange that it is not done. The main constraint is the banking system: usually people do not have access to credit to improve their buildings. There is room for having some subsidies or some specific loans that would perhaps improve the system. If you look at the recent political debate, the government is giving subsidies to those who work towards the implementation of this improvement, it is a tax reduction, like giving money to people. However, I think that it is not what is really missing. What is missing is that people can have access to a loan, helping them to pay for the investment and that the savings in electricity costs will allow them to repay. There is a kind of inexplicable market inefficiency that prevents this to happen.
Interviewed by Guglielmo Zappalà and Jean-Rémy Cano