Stefano Zamagni | PASS President

Economic Options for Transformation & Resilience

1. Introductory remarks on resilience

Every society clings to a myth by which it lives. Ours is the myth of economic growth. For the last five decades the pursuit of growth – a notion not to be confused with human integral development – has been the single most important policy goal across the world. As indicated by T. Jackson (Prosperity without growth. The transition to a sustainable economy, London, Routledge, 2011), The global economy is almost five times the size it was half a century ago. If it continues to grow at the same rate, the economy will be 80 times that size by the year 2100. This extraordinary ramping up of global economic activity has no historical precedent. It’s totally at odds with our scientific knowledge of the finite resource base and the fragile ecology on which we depend for survival. And it has already been accompanied by the degradation of an estimated 60% of the world’s ecosystems. Prosperity consists in our ability to flourish as human beings – within the ecological limits of a finite planet. The challenge for our society is to create the conditions under which this is possible. It is the most urgent task of our times.

An element of the living environment is resilient if it increases its capacity to adapt to Climate Change (CC), i.e., to limit, counteract, and reduce, with appropriate intervention, the effects of CC that may damage the environment. This resilience manifests itself in different ways, depending on the context that is considered. E.g., the resilience for a living being is its capacity for “self-repair” after damage. For an ecological system, resilience is the ability to return to its initial state after being subjected to a disturbance. For psychology, it is the ability to cope positively with traumatic events. To facilitate this adaptation to CC, resilience needs to be improved and promoted with appropriate procedures and technologies.

Two main strategies have been identified and implemented so far to cope with CC. The first is mitigation, acting on the causes of CC both by reducing Greenhouse Gas Emissions (GGE) and by reducing the use of fossil energy sources. The second is adaptation, to reduce the impacts of CC, i.e., implementing all those actions that can limit and counteract climate disruption, reduction of biodiversity, coastal fragility, etc. The mitigation strategy suggested by IPCC against CGE and their effects on CC, has not yet yielded the desired results. It is therefore necessary to focus on adaptation strategies, to immediately counter the effects of CC on the most vulnerable people and environments, by increasing their resilience through local interventions and targeted resilience actions. (M. Mammarella, G. Grandoni, “Resilience actions to counteract the effects of climate change and health emergencies in cities”, Ann. Ist. Sup. Sanità, Rome, 55, 2019).

Our entire market economy has shown a lack of resilience. We essentially built cars without spare tires – to use a popular metaphor. Just-in-time inventory systems were marvellous innovations as long as the economy faced only minor perturbations; but they were a disaster, for example, in the face of COVID-19 shutdowns, creating supply-shortage cascades. As J. Stiglitz stressed several times (Making globalization work, 2006), markets do a terrible job of pricing risk, for the same reason that they don’t price carbon dioxide emissions. Here lies the fundamental failure of neoliberalism and the policy framework it underpins. Markets on their own are short-sighted, and the financialization of the economy has made them even more so.

Precisely because markets do not account fully for key risks, there will be too little investment in resilience, and the costs to society end up being even higher. The commonly proposed solution is to “price” risk by forcing firms to bear more of the consequences of their actions. The same logic also dictates that we price negative externalities like greenhouse-gas emissions. Without a price on carbon, there will be too much pollution, too much fossil-fuel use, and too little green investment and innovation. But pricing risk is far more difficult than pricing carbon. The dire fact is that climate change represents the greatest market failure the world has seen. The year 2022 marks the 50th anniversary of the historic 1972 UN Stockholm Conference on the Environment. Yet the world has made very limited progress on the resilience issues since then.

2. Main reasons of the partial failure of the Glasgow Climate Pact

COP26 Conference (Glasgow, Nov. 2021) fell somewhat short of expectations for a plurality of reasons. One of the most relevant was the same lack of trust that has burdened global climate negotiations since COP1 (Berlin, 1995). Developing countries regard climate change as a crisis whose main responsibility falls on developed countries, which failed to honour their promise – dating back from COP15 in 2009 – to mobilize 100 BLs $ per year for fair burden sharing in favour of the weakest countries. This fund could have been financed by adopting the Global Carbon Incentive (GCI) scheme proposed by Raghuram Rajan (31 May, 2021, Project Syndicate). The proposal is simple. Every country that emits more than the global average of around five tons per capita would pay annually into a global incentive fund, with the amount calculated by multiplying the excess emissions per capita by the population and the GCI. If the GCI started at $10 per ton, the US would pay around $36 billion, and Saudi Arabia would pay $ 4.6 billion. Meanwhile countries below the global per capita average would receive a commensurate payout.

This way, every country would face an effective loss of $10 per capita for every additional ton that it emits per capita, regardless of whether it started at a high, low, or average level. There would no longer be a free-rider problem, because poor countries would have the same incentives to economize on emissions as the rich ones. The GCI would also address the fairness problem. Low emitters, which are often the poorest countries and the ones most vulnerable to climatic change they did not cause, would receive a payment with which they could help their people to adapt. Moreover, the GCI would not snuff out domestic experimentation. It recognizes that what a country does domestically is its own business. Instead of levying a politically unpopular carbon tax, one country might impose prohibitive regulations on coal, another might tax energy inputs, and a third might incentivize renewables. Each one charts its own course, while the GCI supplements whatever moral incentives are already driving action at the country level.

A second reason of the partial failure of COP26 is the disconnection between climate models and macroeconomic models. Up to now, fiscal policies have been based on the assumption that the costs of climate damages would appear in an uncertain future, and should undergo a cost-benefit type of analysis, whereas the costs of transformation are now. This brings to underestimate the damages of extreme events and also the long-run benefits of climate policies. It would have been expected that COP26 would have advanced a radical revision of the principles and models utilized up to now to direct the choices of policy-makers. This was not the case. We urgently need a “green golden rule”, whereby public investments for the transition do not contribute to the creation of so-called “bad” public debt.

Thirdly, to combat climate change, it is agreed that the most effective instrument is generalized carbon pricing. But this objective is difficult from several points of view, as the conditions of the countries participating in the COP differ both in terms of income levels and the energy mix adopted. Accordingly, COP26 should have established an International Carbon Price Floor (ICPP) to accelerate emission reductions through effective policy action, whilst curbing the growing pressure to introduce border tax adjustments. To this regard, it should be noted that a group of 3,623 American economists has recently approved a document supporting the introduction of a Carbon Border Adjustment Mechanism (CBAM) supplementing the familiar carbon tax (See ICPP should be based on two elements: a) it should be negotiated among a small number of key countries with high emissions levels; and b) the agreement should include the minimum carbon price that each of those countries commits to implement.

Fourthly, designing policy for climate change requires analyses which integrate the interrelationship between the economy and the environment. However, much of the standard economic modelling – including the celebrated Integrated Assessment Models (IAMs) – does not embody key aspects of the problem at hand. As J. Stiglitz and N. Stern (“The Social Cost of Carbon, Risk, Distribution, Market Failure: An Alternative Approach”, NBER, 28472, Feb. 2021) have indicated, there are fundamental flaws in the methodologies commonly used to assess climate policy, showing systematic biases, with costs of climate action overestimated and benefits underestimated. The consequence is that using Integrated Assessment Models, with their choice of calibration, has led policy makers to conclude that societal optimization entails accepting an increase in temperature of almost 4°C, while the upper limit was set at 2°C already at the Paris Conference (2015). The Glasgow Conference should have underlined such a serious inconsistency and should have announced the constitution of a Global Working Group charged with the task of advancing an alternative methodology to direct the choice of policy-makers. S. Dietz et al. (“Are Economists Getting Climate Dynamics Right and does it Matter?”, CESifo WP 8122, Feb. 2020) show that several of the most important economic models of climate change produce climate dynamics inconsistent with the current crop of models in climate science. These inconsistencies affect economic prescriptions to abate CO2 emissions. This is a serious problem. Hence it is urgent to bring economic models in line with the state of the art in climate change.

3. Some measures to increase resilience

The option of reducing demand for emission-intensive goods and services has by far the highest potential for emission reductions in the industrialised world and it can be implemented immediately, although some aspects, such as adapting land-use planning to reduce travel distances, may take some time. To this regard, a useful tool of analysis is given by the Environmental Engel Curves (EECs), that plot the relationship between households’ incomes and the pollution embodied in the goods and services they consume. These curves provide a basis for estimating the degree to which observed environmental improvements, which come in part from changing consumption patterns, can be attributed to income growth. These curves exhibit three characteristics. First, EECs are upward sloping: richer households are indirectly responsible for more pollution. Second, EECs are concave, with income elasticity less than one. Third, EECs have been shifting down over time: at every level of income, households are responsible for decreasing amounts of pollution. Most of this improvement is attributable to households consuming a less pollution-intensive mix of goods and services. This suggests the relevance of education and more generally of cultural investments (A. Levinson, J. O’Brien, “Environmental Engel Curves”; NBER, Jan. 2015).

A second measure to increase resilience is based on the following consideration. The costs of mitigation which are based on efficiency increases and technological change to stabilise greenhouse gas concentrations at levels corresponding to the 2°C limit will amount to less than three percent of the world-wide national product by 2030, if the concentration of greenhouse gases in the atmosphere is stabilised at a level corresponding to the 2°C limit. These costs rise significantly with every year in which action is delayed. Economic tools that encourage a market response to greenhouse gas emission reduction are urgently needed. There is an ongoing debate on the tools best suited – for example, a global trading system for emission rights or taxes on greenhouse gas emissions – but the essential point is that emission must be priced and that this price must be predictable. It is essential to keep in mind that climate change is but one symptom of the unsustainable way of life, modes of production and patterns of consumption that have evolved in the industrialised world. Reducing greenhouse emissions will not, by itself, solve the problem of sustainability and neither will geo-engineering solutions such as the suggestion of introducing sulphate aerosols into the stratosphere in order to reflect some of the solar radiation. As suggested by Pope Francis in Laudato Si’, without addressing the root problem we will sooner or later find ourselves face to face with other limits of the global ecosystem.

A further important measure to improve resilience requires us to rethink the indicators for human well-being, macroeconomic performance, and financial risks. Indicators must acknowledge human pressures causing the transgression of planetary boundaries. Macroeconomic performance indicators need to embed the deep uncertainty engrained in biosphere dynamics to ensure the preservation of natural capital. Financial institutions must recognize a wider set of planetary changes, and develop impact accounting as a core part of capital allocation decisions (V. Galaz, D. Collste eds., Economy and finance for a just future on a thriving planet, Beijer Institute Report, Stockholm, 2022).

There are those who claim that taking remedial measures on a case-by-case basis as impacts of climate change occur is economically more efficient than taking adaptation actions to stabilize the climate. In the very short term, and from a purely financial point of view, this may well be true since, due to the inertia of the climate system, the main climate benefits from mitigating and adaptive actions will not take effect within the near future. However, this approach is neither compatible with sustainable development, nor is it ethical. Lives lost in climate-induced disasters, or plant and animal species once extinct, cannot be restored whatever the amount of money made available. Even more importantly, inaction in the following years will almost certainly make it impossible to avoid crossing climate tipping points leading to, for example, changes in the monsoon dynamics in China or India; or melting of Himalayan glaciers that supply about one sixth of the global population with water; or sea level rises well above one metre. The consequent need to relocate millions of people makes monetary scales absolutely meaningless.

Inaction is unpardonable because the actions required do not demand unacceptable sacrifices by the industrialised world – on the contrary, they primarily require structural change that is affordable, and changes in social practices and habits; and these can be seen as the opportunity to return to the true values in life. Their costs in terms of money are well below the global annual expenditures on armaments. The choice therefore is not between fighting climate or poverty and illness, as is sometimes argued; on the contrary, climate protection is an essential contribution to fighting malnutrition, illness, and poverty.

4. In defence of a World Environment Organization.

After COP26, it is clearer than ever that top-down pledges and policies are not enough. What we need is an institutional transformation from the ground up. Indeed, the lack of adequate international environmental governance (IEG) is a result of a fundamental injustice in the current state of global governance: tremendous power and resources have been concentrated in international finance and trade without a corresponding legal and institutional authority for the environment, social concerns and human rights. The increase in power and influence of major international finance and trade institutions such as the World Bank and World Trade Organization (WTO) that took place over the course of the 1990s contrasts sharply with a weakening of the, already-lesser, UN environment and development programs (UNEP, UNDP).

The existence of powerful international trade and financial regimes without comparable legal and institutional structures for social and environmental standards allows the World Trade Organization (WTO) to act as the de facto arbiter on environmental issues. However, the WTO is an institution that not only lacks a core competency on environmental issues and policy, but views the environment as a commodity to be exploited rather than a global Common Good, a resource requiring management and conservation. The result is that environmental social and human rights issues, treaties and commitments are trumped by finance and trade interests. Rather, it should be the case that these considerations get prioritized ahead of finance and trade (W. Pace, V. Clarke, “The case for a World Environment Organization”, The Federalist Debate, 1, 2003). The governance of a Common Good cannot but be a common governance, in the sense of E. Ostrom.

Exactly for this reason, I believe one response for international environmental governance is to create a World Environment Organization (WEO) and to strengthen and upgrade the UN’s social and development organizations so that these institutions can act as a counterbalance to the powerful finance and trade institutions. A WEO would be a designated and empowered advocate for the environment that could serve to ensure effective policy and decision-making and provide an adequate response to environmental management. That is precisely the aim of what has been called mission-oriented innovation policy. Of course, a World Environment Organization alone will not solve the problems of international environmental governance and global governance. There also needs to be fundamental reform of the WTO and of the IMF. However, establishing a WEO would be one step towards a more balanced, effective and accountable system of global governance.

5. A final remark

A changing planetary reality poses immense challenges and risks. Yet, a shift towards a just future for all on a thriving planet is possible, provided we get rid of the most powerful obstacle on the way to a new climate regime, i.e., the inability to imagine a different economic system or even just a new balance between market and society, and between humanity and the environment. Considering change impossible is the best way to perpetuate the existing. The difficulty in setting up an effective response to climate change is linked to the difficulty of imagining another economic order in which the economy constitutes a function of society, and not vice versa, in which humans are aware of the effects caused by the counteraction of non-humans and in which the fight against consumerism should not be interpreted through the lens of poverty.

I do not wish to hide the difficulties lurking in the practical implementation of a cultural project targeted at no less than a “paradigm shift” in economic thinking and a new model of economic development. As in all human endeavours, it would be naive to imagine that certain changes do not create conflict. The differences of vision and the interests at stake are enormous. It is no accident that a kind of widespread anguish about the future is running throughout society today. Some people and certain pressure groups are exploiting this anguish as a political tool, deriving from it, depending upon the circumstances, either a market-centred Machiavellianism or a State-centred Machiavellianism. It is precisely against this neo-Machiavellian culture and its underlying ethical relativism that the participants in this Conference are putting up a fight.