Economic advice on climate change needs to change

In our fight to avoid dangerous climate change, we need to rethink our efforts, to act fast enough to stay safe. A new set of tools for understanding and managing change in the economy is emerging, based on the science of complex systems.
Economic advice on climate change needs to change
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The UK’s most striking success so far in the low carbon transition was achieved not by following the dominant economic advice, but by ignoring it. Offshore wind, according to The Economist magazine in 2014, was ‘among the most expensive ways of marginally reducing carbon emissions known to man’.  Only six years later, contracts were being signed to provide offshore wind power at less than the market price. Instead of receiving subsidies, the industry is now subsidising the government. At the same time, it has created over 30,000 jobs, mostly in poorer parts of the country. 

There were understandable grounds for the economists’ doubts. In the early years, offshore wind produced electricity at several times the UK market price. The mistake was to assume that the goal of policy was ‘marginal change’ – slightly reducing emissions without changing the structure of the economy. In fact, the goal was, and is, structural change: as the Intergovernmental Panel on Climate Change has described it, ‘rapid and far-reaching system transitions’ in each of the greenhouse gas-emitting sectors of the economy. 

Also on the Forum Network: Can Multilateralism Contribute to Solving the Climate Crisis? by

Michael Cannon and Michael Bechtel explain how despite the history of global climate negotiations being a history of policy failure, multilateral approaches to climate policy could still be an important tool for addressing climate change, war, hunger and poverty, economic meltdowns, and public threats.

The same mistake – assuming the economy is static, when the goal is structural change – has led to governments being given misleading advice about how each of the main levers of policy can be used to accelerate low carbon transitions.

The more something is made, the better it gets, the cheaper it gets, the more it is desired, and the more it is made. 

Subsidies for clean technologies, governments have been told, are inefficient – a poor second-best to carbon pricing. But it is targeted investments that have driven down the cost of solar photovoltaics by a factor of ten thousand in the last half-century, and that have driven similarly rapid progress in wind power and highly-efficient lighting. This should be no surprise: direct investments in new technologies yield increasing returns, because they strengthen self-reinforcing feedback loops. The more something is made, the better it gets, the cheaper it gets, the more it is desired, and the more it is made. In contrast, taxing an incumbent technology before a replacement is readily available creates no such dynamic; instead, it will often only make the incumbent system function more efficiently.

Regulation, similarly, has been seen as a burden, something to be minimised so that innovation can flourish, and costs can be lowered. But as former US energy secretary Steven Chu discovered, tough energy efficiency standards have actually accelerated the fall in costs of appliances such as washing machines, fridges, and air conditioners. Again, from an evolutionary perspective, this is understandable: regulation can make a product or technology less fit for its environment, forcing firms to invest more in innovation to find better alternatives. 

When it comes to tax, the traditional advice has been to price carbon at a level equal to the damage done by climate change due to each ton of emissions. But the world’s fastest transitions to clean power and zero-emission vehicles each involved tax being used in a different way: to cross tipping points where one technology becomes cheaper than another. When structural change is the aim, absolute pricing levels are irrelevant; it is relative prices that matter. 

Looking back on the global financial crisis of 2008-2009, Jean-Claude Trichet, the then President of the European Central Bank, said that in the face of the crisis, policymakers like himself had ‘felt abandoned by conventional tools’. Models that assumed a static economy had been unable to give useful advice for managing a situation of disruptive change. 

Not only must rapid technological change be made to happen, but disruptive changes that the low carbon transition may bring to labour and financial markets must be anticipated and managed. 

Now, in the face of the global climate crisis, there is a risk that policymakers again feel abandoned by conventional economic tools. Not only must rapid technological change be made to happen, but disruptive changes that the low carbon transition may bring to labour and financial markets must be anticipated and managed. 

Economics can and should do better this time. A new set of tools for understanding and managing change in the economy is emerging, based on the science of complex systems. This can help governments focus their political and financial capital on points of leverage for structural change towards a net zero economy, instead of wasting effort on marginal changes to the fossil fueled system. 

The OECD is widely respected as a source of best practice on economics and policy. It should be at the forefront of developing these new tools and promoting them globally. The politics of action on climate change are difficult enough. After slow progress over the last two decades, we now need to decarbonise the global economy five times faster this decade, to meet climate goals. Economics should at least be pointing us in the right direction.




Find out more about Simon's book: Five Times Faster: Rethinking the Science, Economics, and Diplomacy of Climate Change

In our fight to avoid dangerous climate change, science is pulling its punches, diplomacy is picking the wrong battles, and economics has been fighting for the other side.

To learn more, check out the OECD work on Climate Change

The existential threat of climate change, and the interlinked biodiversity crisis and the multiple impacts of both, including on people, must be addressed as a core economic challenge. This requires broader whole-of-government strategies to achieve strong, sustainable, fair and resilient growth. In doing so, governments will have to manage a complex political economy of reform and pursue a transformation that creates opportunity for all.

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Go to the profile of Peter Kraneveld
8 months ago

During the Austro-Prussian war of 1866, both sides promoted the use of potatoes as alternative food. The Austrians met with heavy resistance  from their population and military and largely failed. The Prussians planted potatoes on government-owned land and had them guarded by armed soldiers, but in daytime only. The potatoes were stolen at night, considered valuable, farmers planted them, people considered them a luxury food since the king had posted guards in the fields. Prussia won the war.

The lesson: work also on consumer appreciation and disrupt habits to change consumption habits. Examples: separate license plates for low and non-petrol cars, preferably with silver and gold coloured lettering. Diplomas for long distance train travel.