Brief on the economics of climate transition

To speak of economic analysis, wrote Schumpeter (1954), is to speak of the "intellectual research which man has carried out in order to understand economic phenomena, or, what amounts to the same thing, about the analytical and scientific aspects of economic thought" [1]. The history of economic thoughts is, thenceforth, the history of continuous refinement of the models, tools and methods, concepts and theories, rules, principles and doctrines aiming at analysing and interpreting economic phenomena. Nevertheless, it is also a continuous extension of the object that economic analysis can grasp. The history of economic analysis is the history of methods and models refinement, and of fluctuations of the object's boundaries. In that perspective, economists (all the more since climate-related issues have gained political and media exposure), have worked on the relation between economics and the environment.

We first reviewed how Godard [2] studied the evolution of the concept of nature and how the parameters of the "environment question" are dealt with in economic research; whether through the display of existing and already proven methods and conceptual tools, or through the scientific research around a new and unprecedented issue. He studied various propositions from several schools of thought. Despite a lack of common ground, he found out that three main trends structured the economics of environment: i) "the neo-classic approach, grasping the environment as a set of goods which optimal allocation depends on the utility function of rational agents" [2], hence considering the environment question under the scope of the microfoundations of general macroeconomic phenomena. This statement is drawn from evidences that "modern macroeconomic models are built on micro-foundations: households and firms are dynamic optimizers in uncertain environments who interact in markets that clear in general equilibrium. Because decision-making is intertemporal, and the future is uncertain, macroeconomic models impart an important role to households’ and firms’ expectations about future states of the economy (household behavior, individual forecast, social choices, equilibrium prices and contracts, production and consumption decisions, optimization of budget and utility functions, etc.)" [3]. Secondly, ii) an approach through "ecological economics, i.e. the study of complex interactions between human economics and the physical and biological functioning of the environment" [2]. The goal of this approach is to draw technicalities from economic science (production and consumption rates, wealth indicators, industrial organization models, trade models, etc.) and natural sciences (thermodynamics, information theory, systems biology, etc.) in order to model the interaction between both systems' variables; and lastly iii) the "socio-economic approach" which aim at identifying and assessing the causality between "institutions, cultural patterns and behavioural patterns in the use of resources and environments" [2]. Godard attest that the latter digress from economic analysis per se, as it rather suggests a common framework to understand the relation between two heterogeneous systems, i.e. economics and natural environments.
All in all, Godard argues that the neo-classical approach succeeded in framing the economic approach. He builds this conclusion on two distinct factors - first, the formalizing power of the neo-classical assumptions and concepts allow for more complex theoretical models; and second, the derivation's potency in policy design, such as the "polluter-pay principle" adopted by OECD in 1972 [2], may it be within international institutions or national administrations [2].

From a more specific climate-related perspective, Stern (2008) researched how we must establish "an appropriate way to examine the economics of climate change, given the unique scientific and economic challenges posed". He did so by looking at the scientific data linking climate change to GHG (Greenhouse Gases) emissions, and how to frame the latter so as to make it intelligible for economic analysis. He found five clear sequences - i) GHGs emissions originate from consumption and production decisions; ii) "GHGs flows accumulate into stocks in the atmosphere" [4] at a rate depending on "carbon cycle" and other absorptive capabilities of the environment; iii) GHGs stock accumulation results in the well-known greenhouse effect and global warming; iv) Climate change is a function of global warming; and v) Disaggregated climate change effects are found to impact "people, species and plants in a variety of complex ways" [4]. Then, Stern studies the the afore-mentioned sequences' dimensions such as its global origins and impacts, its long-term effects, or stochastic occurence of natural hazards. He concludes that economic modeling of climate-change mitigation derive from "i) the economic of risk and uncertainty; ii) the links between economics and ethics (in terms of intertemporal trade-offs and responsibilities and rights' allocation in policy design) iii) the role of international economic policy" [4].

BIBLIOGRAPHY

[1] Schumpeter, J.A.(1954). Histoire de l'analyse économique: l'âge des fondateurs. [Trad.1983]. Gallimard: France.

[2] Godard, O.(2004). La pensée économique face à la question de l'environnement. CECO - Laboratoire d'économétrie de l'École Polytechnique. Cahier 2004-025.

[3] Branch, W.A., MCGough, B. (2018). Chapter 1 - Heterogeneous Expectations and Micro-Foundations in Macroeconomics. Handbook of computational economics, Volume 4, 2018, Pages 3-62.

[4] Stern, N.(2008). The economics of climate change. American Economic Review: Papers & Proceedings, 98:2, –37.