Sacred Headwaters #38: On ‘the appallingly bad neoclassical economics of climate change’
How misguided and misleading economic analysis has worked to undermine climate action for four decades.
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Issue #38: On ‘the appallingly bad neoclassical economics of climate change’
the primary role of mainstream economics in our society is to provide an apologetics for a criminally oppressive, unsustainable, and unjust social order.
No, I didn’t write that, nor did some left wing activist. A senior economist at the US Federal Reserve wrote it just last week. It’s a footnote from Jeremy Rudd’s recent working paper, “Why Do We Think That Inflation Expectations Matter for Inflation? (And Should We?).” The core argument of his paper is interesting (you can read a lighter summary here), but in this issue, we’re going to focus on how economics as a profession has both inadvertently and intentionally worked to downplay the climate crisis and delay climate action through its influence with policymakers, on public opinion, and at the IPCC.
We’ve touched on the economics profession a few times in this newsletter. Issues 2 (Doughnut Economics), 7 (Degrowth), 27 (Modern Monetary Theory), and 28 (Money, Debt, and Society) all spoke to some of the flaws of neoclassical economics and to the growing gap between even mainstream modern macroeconomic consensus and the neoclassical tradition that still seems to guide policymakers, and if you haven’t read Stephanie Kelton’s The Deficit Myth or Kate Raworth’s Doughnut Economics, I’d definitely recommend both. In this issue, we’re going to look specifically at how this neoclassical tradition has engaged with climate change, framed policy discussions at the highest level, and generated oil-industry funded economic propaganda designed to prevent or delay climate action.
At this point, it’s becoming increasingly apparent to a growing number of people that climate change will have dramatic impacts on our everyday lives, and as a result, on global GDP. In issue 6 (New Climate Economy), we read a report suggesting that the costs of not adapting to climate change vastly outweigh those required for an energy transition; in many ways, this seems like common sense, but as I write this, US Senator Joe Manchin is opposing Biden’s climate legislation saying, “What is the urgency?” and suggesting that the climate provisions are “too expensive.” Manchin may seem like a right-wing outlier in this context (he is, after all, a coal baron endorsed by the NRA), he is just the latest manifestation of a much longer and more deliberate pattern.
In 2018, William Nordhaus won the Nobel Prize in Economic Sciences for his work on climate macroeconomics. (It’s worth noting that the Nobel Prize in Economic Sciences is not actually a Nobel Prize; it was created much later, by a different organization, as a political tool to legitimize and propagate market fundamentalism and neoliberal ideology).
In his acceptance speech — again, in 2018 — Nordhaus showed a slide claiming that 4 degrees of warming would be “optimal” for global GDP. In this issue, we’ll read about how and why he arrived at such a problematic conclusion and about how that conclusion has been entrenched, reproduced, and embedded into IPCC climate modelling over the decades since he first made this case. We will also read about how the American Petroleum Institute and other industry associations funded economic analysis that inflated the costs of climate action and dismissed the costs of inaction, then used that analysis to run propaganda and lobbying campaigns to kill climate legislation.
We’ve read about this pattern before: the fossil fuel industry has funded scientific research that cast doubt on climate science and created numerous disinformation campaigns to muddle public opinion about the scientific consensus on climate. I want to be clear about why I think it’s important to learn more about this, because anger only gets us so far.
First: anger is important. One of the key victories of the divestment movement has been to cast the fossil fuel industry as an adversary — directly contradicting the industry’s own work to frame themselves as partners in climate action. The industry has demonstrated for decades that they are not partners, and the fundamental logics of capitalism make it clear why, but the world fell into their trap anyway. Building anger against the fossil fuel industry helps build the counterpower needed to overcome their political influence and reduce emissions.
Second, though, and perhaps more importantly, we must understand this history so that we don’t fall for it again. Many of those arguing against Biden’s climate legislation are making the same arguments they’ve made for decades, citing — remarkably enough — some of the same bought-and-paid-for economic analysis that has been used throughout. We need to understand both how methodologically flawed this analysis is and how industry groups and politicians leverage it as a political tool if we hope to be able to fight its ongoing effects.
So — get angry. Maybe we’ll even be able to hold the industry accountable for its deliberate deception someday. But most urgently, we need to stop it from continuing by recognizing this manipulation for what it is and holding politicians and the media accountable for reproducing it.
Note: both of the readings included in this issue are academic papers, but they are easier to read than most.
The appallingly bad neoclassical economics of climate change (40 minutes)
Steve Keen, Globalizations, 2020
This paper focuses on the methodological problems with the majority of neoclassical economic research on climate change. It looks primarily on the work of William Nordhaus and a group of other authors who have cited and reproduced his work over the last three decades. Perhaps the scariest piece of this analysis is how embedded within the IPCC this work is: Nordhaus produced an Integrated Assessment Model (IAM) called DICE that has been a core component of efforts to model potential policy pathways and climate outcomes, Richard Tol was a lead author for an IPCC report as recently as 2014, and that 2014 Fifth Assessment Report explicitly reproduced the outrageous claim that, “Other economic activities, such as manufacturing and services, largely take place in controlled environments and are not really exposed to climate change.”
Keen goes through this research tradition in detail and points to a handful of flawed assumptions that are responsible for these findings. The whole paper is fascinating, but these two assumptions stuck out:
Because most economic activity occurs indoors, it will be unaffected by climate change. (As noted, this assumption was included explicitly in the 2014 IPCC report).
Historically observed relationships between regional temperature and GDP will remain the same as the entire world warms and thus can be used to predict future GDP as the climate changes. This line of thinking has actually been used on more than one occasion to argue that GDP will increase because of climate change. Just last week, the New York Times printed a problematic op-ed about geoengineering that uncritically repeated this logic, saying, “A year that’s a degree warmer than normal will see economic growth in India reduced by about 17 percent, while Sweden will see growth increased by about 22 percent.”
Keen focuses on debunking the research, but he also touches on why it’s so important: this research has shaped climate policy both by embedding itself within consensus mechanisms like the IPCC and by providing ammunition for right-wing organizations, industry associations, and lobbyists to drive public opinion and policy-making.
Here is a much shorter critique of Nordhaus’s work and its impact by Jason Hickel, though I’d recommend reading Keen’s paper if you have time.
Weaponizing economics: Big Oil, economic consultants, and climate policy delay (35 minutes)
Ben Franta, Environmental Politics, 2021
This remarkable paper by Ben Franta, published in August, exposes how the American Petroleum Institute (API) and other oil industry groups have paid consultants and funded academics to produce economic research that inflates the costs of climate mitigation and downplays the costs of global warming. It also situates this quid pro quo relationship within the context of US climate policy-making, linking studies commissioned by the API and produced by groups like Charles River Associates directly with Congressional efforts to block climate policy ranging from the Kyoto Protocol to the 2003 bipartisan McCain-Lieberman bill to Obama’s cap-and-trade legislation. Every time the US considered climate legislation between 1991 and today, the fossil fuel industry commissioned reports from economic consultants that invariably concluded the costs of climate action were too high. And virtually every time, Congresspeople like Senator James Inhofe (of snowball fame) would cite these studies to shoot down any meaningful mitigation measures — just like Senator Manchin is doing today.
Franta also makes a point of exposing the complicity of major US media institutions: the New York Times, the Washington Post, and the Wall Street Journal all regularly published opinion pieces written by industry operatives and executives citing this research and continue to this day to publish advertorials for the fossil fuel industry. (Activists recently launched #AdsNotFit2Print, a campaign demanding that the New York Times stop publishing fossil fuel advertisements).
Franta’s paper opens with a quote from a handbook “written for regulated industries” in 1978 called “Coopt the Experts” that is worth thinking about in its own right and helps to draw the connections between the fossil fuel industry’s deception and the broader problems of market fundamentalism:
Regulatory policy is increasingly made with the participation of experts, especially academics. A regulated firm or industry should be prepared whenever possible to coopt these experts. This is most effectively done by identifying the leading experts in each relevant field and hiring them as consultants or advisors, or giving them research grants and the like. This activity requires a modicum of finesse; it must not be too blatant, for the experts themselves must not recognize that they have lost their objectivity and freedom of action. At a minimum, a program of this kind reduces the threat that the leading experts will be available to testify or write against the interests of the regulated firms. AT&T has made a major investment, for instance, in very high grade economic talent over the past decade. It is not entirely accidental that this group of economists has produced a formidable new theory of multiproduct natural monopoly that may serve as a powerful argument in favor of barriers to entry and the exclusion of competitors in AT&T markets.
This quote makes something very clear that I try to point out in as many contexts as I can: the rules of markets are defined by politics. As a result, the most successful business strategy under capitalism is not productivity, it’s political capture. This is why we have an opioid crisis, it’s why we have tech monopolies that profit from spreading disinformation, it’s why we have vaccine apartheid, and, of course, it’s why we have a climate crisis.
Franta has also produced a short talk about the history of the fossil fuel industry’s climate deception that is well worth a listen.
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