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You are one of seven billion people on Earth. Whatever you or I do personally―eat tofu in a Hummer or hamburgers in a Prius―the planet doesn't notice. In our confrontation with climate change, species preservation, and a planet going off the cliff, it is what several billion people do that makes a difference. The solution? It isn't science, politics, or activism. It's smarter economics.
The hope of mankind, and indeed of every living thing on the planet, is now in the hands of the dismal science. Fortunately, we've been there before. Economists helped crack the acid rain problem in the 1990's (admittedly with a strong assist from a phalanx of lawyers and activists). Economists have helped get lead out of our gas, and they can explain why lobsters haven't disappeared off the coast of New England but tuna is on the verge of extinction. More disquietingly, they can take the lessons of the financial crisis and model with greater accuracy than anyone else the likelihood of environmental catastrophe, and they can help save us from global warming, if only we let them.
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Gernot Wagner is an economist at the Environmental Defense Fund. He teaches at Columbia and graduated from both Harvard and Stanford. He doesn't eat meat, doesn't drive, and knows full well the futility of his personal choices.
1
CUE THE ECONOMISTS
ECONOMICS 101
Ask around what caused the financial crisis, and the answer, absent expletives, will be some version of “wrong incentives.” The road signs guiding market forces pointed in the wrong direction. Wall Street wasn’t doing what was in everyone’s best interests. What’s good for Goldman Sachs turned out not to be all that good for America.
Shift your focus on what ails the planet, and the answer will be very much the same. “Wrong incentives” are as important here as they were in the financial crisis. Replace “Goldman” with “Exxon,” and you have everyone’s favorite environmental villain. They ravage the planet for their own gains, without regard for anyone else around them. Greedy bastards.
There is something to this idea, as knee-jerk as it might be. By now, “privatizing profits and socializing losses” has its own Wikipedia page. On Wall Street, that translates into “too big to fail.” If my bets pay off, I will get the fat year-end bonus. If they don’t, I will be on a one-way (business-class) flight back from the craps table in Vegas, and everyone else—you, government, society—is left with cleaning up the mess. Heads I win, tails you lose; or, the dirty underside of capitalism for the masses, and the gentle safety net of socialism for the corporate echelons.
The environment is in the same situation, caused by the same misguided incentives. Exxon, BP, and the like rake in record profits while enjoying dubious tax loopholes and special subsidies.1 When an oil platform in the Gulf explodes and entire fishing grounds go belly-up, everyone faces the consequences. And that says nothing about global warming, where literally everyone—all seven billion of us—is affected, the poor and disenfranchised most of all.
The risk calculus that capitalism was supposed to force risk takers to make, it turned out, was a hoax. It became instead a one-way street where those who controlled the wealth stood to make the gains, and those who carried the liability side of the planet’s balance sheet were expected to clean up after them.
Waiting in the hope that corporate executives will be shamed or enlightened into giving up loopholes, forgoing subsidies, and turning corporations into charities is a fool’s game. Greed—capitalism—is not the problem, and vilifying any company that turns a profit is ludicrous. That’s its appointed purpose, and, like it or not, it’s the single most effective organizing principle of modern society. I am not saying capitalists are doing God’s work; they just work to feed their families and bank accounts, like the rest of us.
You and I are rich and can enjoy the pleasures of reading and writing books because of it. If you read this in any kind of electronic form, or aren’t afraid of losing loved ones to typhoid, cholera, or the plague, or have ever sat in a car, train, or plane, you will certainly appreciate the fact that capitalism didn’t stop its ascendancy around the time Gutenberg printed his first Bibles. We don’t want to stop market forces, even if we could. We want to work with—not against—them.
The solution is clear: put the right incentives in place. Or, if you care for more sophisticated academic parlance: internalize the externalities.
Measure how much damage each and every action does, put a dollar value on it, and set the appropriate price. Don’t like trillions of dollars being sent around the globe every day at the stroke of a button? Introduce financial transaction taxes.2 Don’t like treating the atmosphere like a free sewer? Put a price on carbon.
That’s a wrap, people. Two problems solved at once. Future financial crises averted; environmental crises gone. I’ll save myself the trouble of writing the rest of the book, and you can get back to worrying about whatever occupied you before the recession and an increasingly unstable planet crowded those worries out. We even save a few trees or iPad charges in the process. Win-win-win.
If only it were that simple.
POLITICAL ECONOMICS 101
In 1990, Congress, in its finite wisdom, capped total economic damage payments for any one offshore oil spill at $75 million.3 This despite the fact that no one in either chamber apparently knew what it meant to link these kinds of limits to ever-rising prices—a.k.a. inflation—or that $75 million wasn’t all that much even then. Worse, perhaps they all did and still voted for the final bill 99–0 in the Senate and 360–0 in the House. Talk about a slam dunk. When it comes to contradicting Economics 101, bipartisanship, apparently, is all the rage.
It’s not hard to concoct conspiracy theories on how Big Oil controls the political machine. Yes, politicians do what voters want them to do. If not, they get voted out of office. That would be Democracy 101. But vested interests clearly have a stake in the status quo, and it doesn’t get much bigger than Big Oil, which comprises some of the most profitable companies in history.
Surprise, political “leaders” aren’t always driven by deeply held convictions. Reaching the masses requires having a megaphone, and megaphones cost money. Lots of it. By now, U.S. national and even some state-level elections run in the hundreds of millions of dollars. Little wonder politicians say what big donors want them to say. Money speaks and votes. Politics 101.
During the 2008–10 congressional fight to enact a comprehensive climate law, Big Oil, King Coal, and climate deniers of all stripes spent around $500 million against sensible climate action, outspending environmental campaigners, renewable-energy interests, and the like to the tune of ten to one. Never mind that there is some reason to believe that even the United States may have a “climate majority.”4 Careful polling unearths three-quarters of Americans who say that the climate is changing and that humans are the cause of it. Over 85 percent say they want limits on how much air pollution businesses are allowed to emit. Still, recent poll results show clear trends toward increased polarization and politicization of century-old scientific facts. When Al Gore says global warming is happening, you no longer care what basic physics and chemistry say. You care about whether or not you would vote for Gore for other reasons. One key factor in all of this is money. Those who have it can sway the malleable masses. Those who don’t can’t. By the time the Senate all but killed climate legislation in the summer of 2010, dirty money had prevailed.
Amazingly, that’s not always the case. The same Congress that voted 99–0 and 360–0 to cap damages for offshore oil spills also voted 89–10 and 401–25 to cap sulfur dioxide pollutants that cause acid rain. That’s small potatoes compared with capping carbon dioxide emissions, but it has shown how unusual coalitions between environmental activists and business interests can form to pass a strong market-based law. More recently, in 2010, venture capitalists and others with stakes in a greener future outspent and out-campaigned opponents of a comprehensive climate bill in California to the tune of three to one. Thirty million dollars for keeping a climate bill on the books; $10 million to suspend it.5 In the end proponents of the bill prevailed. It’s not the first time that Sacramento showed Washington the way on environmental issues. Perhaps there’s some hope after all.
There are other ways to change minds. How about a global campaign to right the wrongs? Let’s put “Internalize Externalities” on bumper stickers. Stage teach-ins at the local parish. Organize the Million Internalizers March on Washington. I can see Madonna lining up for the London concert and Nepalese Sherpas spelling out those two all-important words on the dwindling snows of the Himalayas, in biodegradable paint. Activism 101.
That’s clearly a crucial component: raise awareness, start a movement. Convince everyone around you to eat locally grown food—slowly—and quickly plant a million trees in the Sahel. Concerts help, too. Madonna even wrote a new song for Live Earth in 2007. And we have seen Sherpas in action as well. A group of them joined thousands of others in holding up “350” signs all over the world as part of a campaign to limit greenhouse gas concentrations to 350 parts per million in the atmosphere, what’s required to stabilize the climate and stop sea levels from rising too far. (We are now at above 390 and counting.)
Activism is important—I’m in one of those “350” pictures—and lots of crucial things are happening on the ground: from American teens being miles ahead of their parents in their awareness of how they are changing the planet, to a new generation of Indian youth leaders realizing that environment and development ought to go hand in hand. There’s hope, lots of it. Sadly, we don’t have another decade or two until those young leaders come of age. And even once they do, and this is the crucial point, the solution will be very much the same as what we have on deck.
That answer is clear: get comfortable with the idea that we ought to be using markets and market forces, and use the very people—you, me, all of us—whose greed and everyday behavior got us into the mess in the first place to get us out of it. It’s time to substitute the right incentives for the wrong ones and set a new default path for the planet.
ACCOUNTING 101
Sadly, we have known about this fundamental problem of misguided incentives at least since Madonna was dancing circles around her fellow third graders—and the problem didn’t just appear in obscure academic writings. Robert F. Kennedy lamented on March 18, 1968, in the first major speech of his presidential campaign, tha...
CUE THE ECONOMISTS
ECONOMICS 101
Ask around what caused the financial crisis, and the answer, absent expletives, will be some version of “wrong incentives.” The road signs guiding market forces pointed in the wrong direction. Wall Street wasn’t doing what was in everyone’s best interests. What’s good for Goldman Sachs turned out not to be all that good for America.
Shift your focus on what ails the planet, and the answer will be very much the same. “Wrong incentives” are as important here as they were in the financial crisis. Replace “Goldman” with “Exxon,” and you have everyone’s favorite environmental villain. They ravage the planet for their own gains, without regard for anyone else around them. Greedy bastards.
There is something to this idea, as knee-jerk as it might be. By now, “privatizing profits and socializing losses” has its own Wikipedia page. On Wall Street, that translates into “too big to fail.” If my bets pay off, I will get the fat year-end bonus. If they don’t, I will be on a one-way (business-class) flight back from the craps table in Vegas, and everyone else—you, government, society—is left with cleaning up the mess. Heads I win, tails you lose; or, the dirty underside of capitalism for the masses, and the gentle safety net of socialism for the corporate echelons.
The environment is in the same situation, caused by the same misguided incentives. Exxon, BP, and the like rake in record profits while enjoying dubious tax loopholes and special subsidies.1 When an oil platform in the Gulf explodes and entire fishing grounds go belly-up, everyone faces the consequences. And that says nothing about global warming, where literally everyone—all seven billion of us—is affected, the poor and disenfranchised most of all.
The risk calculus that capitalism was supposed to force risk takers to make, it turned out, was a hoax. It became instead a one-way street where those who controlled the wealth stood to make the gains, and those who carried the liability side of the planet’s balance sheet were expected to clean up after them.
Waiting in the hope that corporate executives will be shamed or enlightened into giving up loopholes, forgoing subsidies, and turning corporations into charities is a fool’s game. Greed—capitalism—is not the problem, and vilifying any company that turns a profit is ludicrous. That’s its appointed purpose, and, like it or not, it’s the single most effective organizing principle of modern society. I am not saying capitalists are doing God’s work; they just work to feed their families and bank accounts, like the rest of us.
You and I are rich and can enjoy the pleasures of reading and writing books because of it. If you read this in any kind of electronic form, or aren’t afraid of losing loved ones to typhoid, cholera, or the plague, or have ever sat in a car, train, or plane, you will certainly appreciate the fact that capitalism didn’t stop its ascendancy around the time Gutenberg printed his first Bibles. We don’t want to stop market forces, even if we could. We want to work with—not against—them.
The solution is clear: put the right incentives in place. Or, if you care for more sophisticated academic parlance: internalize the externalities.
Measure how much damage each and every action does, put a dollar value on it, and set the appropriate price. Don’t like trillions of dollars being sent around the globe every day at the stroke of a button? Introduce financial transaction taxes.2 Don’t like treating the atmosphere like a free sewer? Put a price on carbon.
That’s a wrap, people. Two problems solved at once. Future financial crises averted; environmental crises gone. I’ll save myself the trouble of writing the rest of the book, and you can get back to worrying about whatever occupied you before the recession and an increasingly unstable planet crowded those worries out. We even save a few trees or iPad charges in the process. Win-win-win.
If only it were that simple.
POLITICAL ECONOMICS 101
In 1990, Congress, in its finite wisdom, capped total economic damage payments for any one offshore oil spill at $75 million.3 This despite the fact that no one in either chamber apparently knew what it meant to link these kinds of limits to ever-rising prices—a.k.a. inflation—or that $75 million wasn’t all that much even then. Worse, perhaps they all did and still voted for the final bill 99–0 in the Senate and 360–0 in the House. Talk about a slam dunk. When it comes to contradicting Economics 101, bipartisanship, apparently, is all the rage.
It’s not hard to concoct conspiracy theories on how Big Oil controls the political machine. Yes, politicians do what voters want them to do. If not, they get voted out of office. That would be Democracy 101. But vested interests clearly have a stake in the status quo, and it doesn’t get much bigger than Big Oil, which comprises some of the most profitable companies in history.
Surprise, political “leaders” aren’t always driven by deeply held convictions. Reaching the masses requires having a megaphone, and megaphones cost money. Lots of it. By now, U.S. national and even some state-level elections run in the hundreds of millions of dollars. Little wonder politicians say what big donors want them to say. Money speaks and votes. Politics 101.
During the 2008–10 congressional fight to enact a comprehensive climate law, Big Oil, King Coal, and climate deniers of all stripes spent around $500 million against sensible climate action, outspending environmental campaigners, renewable-energy interests, and the like to the tune of ten to one. Never mind that there is some reason to believe that even the United States may have a “climate majority.”4 Careful polling unearths three-quarters of Americans who say that the climate is changing and that humans are the cause of it. Over 85 percent say they want limits on how much air pollution businesses are allowed to emit. Still, recent poll results show clear trends toward increased polarization and politicization of century-old scientific facts. When Al Gore says global warming is happening, you no longer care what basic physics and chemistry say. You care about whether or not you would vote for Gore for other reasons. One key factor in all of this is money. Those who have it can sway the malleable masses. Those who don’t can’t. By the time the Senate all but killed climate legislation in the summer of 2010, dirty money had prevailed.
Amazingly, that’s not always the case. The same Congress that voted 99–0 and 360–0 to cap damages for offshore oil spills also voted 89–10 and 401–25 to cap sulfur dioxide pollutants that cause acid rain. That’s small potatoes compared with capping carbon dioxide emissions, but it has shown how unusual coalitions between environmental activists and business interests can form to pass a strong market-based law. More recently, in 2010, venture capitalists and others with stakes in a greener future outspent and out-campaigned opponents of a comprehensive climate bill in California to the tune of three to one. Thirty million dollars for keeping a climate bill on the books; $10 million to suspend it.5 In the end proponents of the bill prevailed. It’s not the first time that Sacramento showed Washington the way on environmental issues. Perhaps there’s some hope after all.
There are other ways to change minds. How about a global campaign to right the wrongs? Let’s put “Internalize Externalities” on bumper stickers. Stage teach-ins at the local parish. Organize the Million Internalizers March on Washington. I can see Madonna lining up for the London concert and Nepalese Sherpas spelling out those two all-important words on the dwindling snows of the Himalayas, in biodegradable paint. Activism 101.
That’s clearly a crucial component: raise awareness, start a movement. Convince everyone around you to eat locally grown food—slowly—and quickly plant a million trees in the Sahel. Concerts help, too. Madonna even wrote a new song for Live Earth in 2007. And we have seen Sherpas in action as well. A group of them joined thousands of others in holding up “350” signs all over the world as part of a campaign to limit greenhouse gas concentrations to 350 parts per million in the atmosphere, what’s required to stabilize the climate and stop sea levels from rising too far. (We are now at above 390 and counting.)
Activism is important—I’m in one of those “350” pictures—and lots of crucial things are happening on the ground: from American teens being miles ahead of their parents in their awareness of how they are changing the planet, to a new generation of Indian youth leaders realizing that environment and development ought to go hand in hand. There’s hope, lots of it. Sadly, we don’t have another decade or two until those young leaders come of age. And even once they do, and this is the crucial point, the solution will be very much the same as what we have on deck.
That answer is clear: get comfortable with the idea that we ought to be using markets and market forces, and use the very people—you, me, all of us—whose greed and everyday behavior got us into the mess in the first place to get us out of it. It’s time to substitute the right incentives for the wrong ones and set a new default path for the planet.
ACCOUNTING 101
Sadly, we have known about this fundamental problem of misguided incentives at least since Madonna was dancing circles around her fellow third graders—and the problem didn’t just appear in obscure academic writings. Robert F. Kennedy lamented on March 18, 1968, in the first major speech of his presidential campaign, tha...
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