Climate Change: Economics, Evidence, and Religiosity

Religious dogma and activism have blinded many Americans to the scientific evidence.

The modern environmental movement exhibits many of the elements of a religion. 

It has clergy members and laity members; environmental activists (and some scientists) are priests, while concerned students and citizens act as the nuns and lay brothers. 

It has its own eschatology – a belief about the ultimate destiny of humanity, including how its final demise will come to pass. 

It leverages the concept of sin, where sin is economic growth that negatively impacts the environment. 

It has an adversary, a devil: at a high level, capitalism, and at a fundamental level, the desire for profit or wealth. 

It involves evangelism, including the evangelization of children: environmental activists’ marketing to, and interactions with, children heavily resemble conservative Evangelical indoctrination, as documented in the seminal 2006 documentary, “Jesus Camp.”

As shown in the video below, the environmental movement’s rigid ideological puritanism makes nuanced moral analysis virtually impossible. Economic development is necessary to alleviate poverty, which causes a titanic amount of human suffering today (and since the beginning of time). 

The reduction in poverty since the Industrial Revolution has been inversely correlated with the growth in green house gas emissions. In 2018, for the first time in history, more people on Earth were middle class or higher than were not. ς Effective ways to combat climate change must not be motivated by religious fundamentalism. Economic development and environmental care must be balanced together, not pitted against one another.  

Unfortunately, the aggressive religiosity that the environmental movement exudes causes millions of people to reject a massive body of scientific evidence that unambiguously proves that climate change is real and a threat to humanity.

2019 Time Magazine Person of the Year: Greta Thunberg
Much like Christian Evangelicals, climate activists have gone to great lengths to indoctrinate children into their cause.
"Jesus Camp" (2006) Directed by Heidi Ewing & Rachel Grady

As illustrated in this video, the evidence for climate change is robust and undeniable.

Because economic activity is the fundamental catalyst and driver of climate change, effective remedies must leverage economic incentives to curve business firm behavior that harms the environment. As always, this mitigation must be approached through the lens of trade-offs. Halting all carbon emissions will not be a win for humanity if millions of people in third-world countries die from starvation as a result. It is true that greedy businesses and dishonest fossil fuel companies have perpetrated a fraud to the public in the same way that tobacco companies did in the 1960s: these firms knew that fossil fuel combustion is strongly correlated with climate change but instead of working to combat the problem, they engaged in a multi-billion dollar disinformation campaign to convince the public that climate change is not real. 

Unlike the activists featured in the video above, let’s discuss some actual solutions. 

Basic Economics of Climate Change

Externality

An externality is a type of market failure that occurs when the price of a good does not accurately reflect the true costs and benefits of its production. Externalities occur when parties besides those directly involved in an economic transaction are affected by the production or use of the transacted good. Externalities can be negative, such as pollution emissions, where more of an activity is conducted than is societally optimal. Conversely, externalities can be positive, such as vaccinations, hand-washing, and mask-wearing, where less of an activity is conducted than is socially optimal because the individuals committing the activity are not accounting for the benefit that the activity bestows on society.

We’ll use the most famous instance of a negative externality (and the one most relevant to climate change): a polluting firm. Fig. 1 illustrates this example. The firm will choose to emit pollutants at the quantity (Q’) where its marginal private cost (MPC) of pollution is equal to its marginal benefit (MB) of pollution. The marginal benefit of pollution can be thought of as the per-unit profit of each unit of the good that is sold. This firm only considers its cost of production, not its marginal damage (MD) to society. 

The equation in Fig. 2 illustrates the true cost curve, the marginal social cost (MSC). As shown in Fig. 3, when the polluting firm produces at the point (Q*) where the MSC curve is equal to the MB curve, it will end up emitting less pollutants: Q’>Q*. 

Figure 1: Polluter Firm in Isolation
Figure 2: Marginal Social Cost
Figure 3: Polluter Firm Who Considers True Cost of Production

So, once we calculate the true marginal social cost of a firm’s activity, how do we get firms to reduce emissions?

Emissions Fee

Figure 4: Two Polluting Firms

Let’s imagine that there are two firms polluting a river near a small town and the local government has determined that, collectively, the two firms need to reduce annual emissions by 100 tons. Before any government intervention, both firms emit 200 tons of emissions per year. Suppose the government determines that the reduction burden will be split equally between the firms: 50 tons each. Fig. 4 shows each firm’s total cost and marginal cost of reducing emissions by 50 tons. 

As shown in Fig. 4, we can see that Firm 1 is a more efficient producer (in terms of emissions per unit produced) than Firm 2. The blue area underneath each firm’s marginal cost curve represents the total cost of reducing 50 tons worth of emissions. Clearly, the total cost of emissions reduction for firm 1 (TC1) is less than for firm 2 (TC2). As a result, splitting the emission reduction burden down the middle is an inefficient way to reduce total emissions and doesn’t adequately reward Firm 1 for its production efficiency. 

How can the burden of reduction be allocated more efficiently?

One of the most common tools to accomplish this is an emissions fee, which is a tax levied on each unit (in this case, a ton) of pollution emitted. The emissions fee should be set at the point where Firm 1’s marginal cost curve (MC1) is equal to Firm 2’s marginal cost curve (MC2). We see this in Fig. 5, where Firm 2’s MC2 has been reflected across the Y-axis so that Firm 1’s emissions reduction level increases from left to right and Firm 2’s emissions reduction level increases from right to left.  The marginal cost curves are equal when Firm 1 reduces its emissions by 75 tons and Firm 2 reduces its emissions by 25 tons. 

Figure 5: MC1=MC2
Figure 6: Emissions Fee

Fig. 6 shows the two firms, along with the emissions fee (f*), which is set to ensure a total annual reduction of 100 tons of emissions. If Firm 1 reduces less than 75, the emissions fee will be greater than the marginal cost of emissions reduction, so it will continue to reduce until it reduces by 75 tons. Similarly, if Firm 2 reduces less than 25 tons, the emissions fee will be greater than the marginal cost of emissions reduction. Firm 1 is rewarded for its greater efficiency and ends paying much less in emissions fees than Firm 2: 

Cap-and-trade (Emissions trading)

Another method of reducing pollution is a cap-and-trade system. Imagine that Firm 2 is tasked with reducing ALL 100 tons of emissions (as shown in Fig. 7). The marginal cost of Firm 2 DECREASING 1 ton’s worth of emissions reduction (thereby moving from 100 tons to 99 tons) is equal to y2. Meanwhile, the marginal cost of Firm 1 INCREASING 1 ton’s worth of emissions reduction (thereby moving from 0 to 1 ton) is equal to y1. Firm 1 will be willing to increase reduction for compensation and Firm 2 will be willing to compensate Firm 1 in exchange for avoiding the cost of reducing emissions. Firm 2 is willing to pay anything less than y2 and Firm 1 is willing to accept anything greater than y1. Clearly, y2 is much greater than y1. Thus, they will make a deal. 

Figure 7: Marginal Willingness to Pay for Pollution Reduction Relief

The Cap-and-Trade system actually ensures that each firm will reduce pollution levels by the same amount as an emissions fee. With this system, the government issues a set number of permits to pollute, where each permit allows for one unit of pollution (a ton of emissions in this case). In our example, both firms were initially polluting 200 tons of emissions per year, leading to a total annual level of 400 tons. So, if emission levels needed to be reduced by 100 tons, the government would issue 300 permits.

Suppose Firm 2 has more political clout and lobbies the government to issue 200 permits to Firm 2, but only 100 permits to Firm 1. Once again, both firms will ultimately opt for quantities (of emissions reduction) where each of their marginal costs are equal. In this case, the split occurs again where Firm 1 reduces pollution by 75 tons and Firm 2 reduces pollution by 25 tons (as shown in Fig. 5). The cost of the last permit traded is equal to f*, the minimum price of a permit. 

One of the major benefits of a cap-and-trade system, relative to an emissions fee, is that it is immune to changing cost structures and inflation. Unlike an emissions fee, a cap-and-trade system will ALWAYS automatically lead to the optimal outcome because pollution reduction levels are determined by the equalization of the firms’ marginal costs. If the government opted for an emissions fee, the cost structure of each firm would need to be reanalyzed on a regular basis to ensure that each firm’s documented marginal cost is accurate. As shown in Fig. 8, if Firm 2’s marginal cost curve increased, the f* value would no longer be accurate, and simply reducing Firm 2’s quantity of reduction from e2 to e2’ would also not fulfill the optimal condition of equalized marginal costs. Additionally, there is no inflation indexing necessary for a cap-and-trade system as inflation is built into the price of permits. This is not the case with an emissions fee.

Figure 5: MC1=MC2
Figure 7: Permit Trading
Fig. 8: Firm 2's Augmented Cost Structure

As a result of Firm 2’s cost increase, Firm 2 will do less pollution reduction and Firm 1 will end up doing more. The cost of permits will rise, which will reward Firm 1 for not having a cost increase; Firm 1 is compensated for its relative efficiency, in comparison to Firm 2, and Firm 2 is penalized. The cap-and-trade system leverages market behavior while still allowing for changes in firms’ cost structures.

Religiosity is Hurting the Fight Against Climate Change

Ironically, most environmental activists are quite hostile towards traditional religious institutions (many utter the perplexing “I hate organized religion, but I’m spiritual” phrase), yet they display a religious zeal that rivals that of the most fervent “traditional” believers on the planet. This religiosity is counterproductive. Environmental activists engage in naïve, all-or-nothing emotional reasoning that erroneously ignores the suffering of millions of impoverished people in order to “stick it” to the greedy titans of industry. They demand that nuclear power, the only source of clean energy that can meet the titanic energy demands of the twenty-first century. Ironically, there are financial incentives for this dubious position. Ξ Climate change is an urgent problem that needs to be solved by scientists, economists, and other critical policy architects. The environmental clergy are hurting, not helping this worthy cause. 

References

ς Kharas, Homi., Hamel, Kristofer. (2018). “A global tipping point: Half the world is now middle class or wealthier.” The Brookings Institution. https://www.brookings.edu/blog/future-development/2018/09/27/a-global-tipping-point-half-the-world-is-now-middle-class-or-wealthier/

Ξ Bryce, Robert. (2018). “Environmentalists Foolishly Go to War Against Nuclear Power.” The Manhattan Institute.  https://www.manhattan-institute.org/html/environmentalists-foolishly-go-war-against-nuclear-power-11292.html

 

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