US Treasury secretary Steven Mnuchin has often been seen as a moderating influence, even a voice of reason, inside Donald Trump’s administration. The American economy has generally performed well under his stewardship. However, his recent remarks at Davos 2020 on the economics of climate change were outside the mainstream of macroeconomic thinking.
Mr Mnuchin joked that the teenage climate activist Greta Thunberg should study economics at college before recommending that investors divest completely from fossil fuels. He added that the long-term future of the climate is so uncertain that immediate action, including higher carbon pricing, is unnecessary or damaging.
He is optimistic that improvements in climate technology will help to solve the problem and reduce the damage below the levels predicted by what US President Donald Trump calls “prophets of doom”.
These assertions are in line with the administration’s belief that the US private sector is already doing enough to protect the natural environment.
If Mr Mnuchin intended to imply that the discipline of economics widely supports his assertions, he is mistaken. Of course, some individual economists will advocate virtually any proposition, but the profession is mostly singing from the same hymn sheet on climate change.
An example of this is the statement a year ago from the Climate Leadership Council, a non-partisan collection of American economists and policymakers that includes many of the most respected professionals in the field, including many Republicans. Their opening remarks are unequivocal:
Global climate change is a serious problem calling for immediate national action. Guided by sound economic principles, we are united in the following policy recommendations. A carbon tax offers the most cost-effective lever to reduce carbon emissions at the scale and speed that is necessary.
Climate Leadership Council, Wall Street Journal, 17 January 2019
Their call for “immediate national action” contradicts the administration’s (and the Federal Reserve’s) relaxed attitude.
Economists’ concerns have been heightened in the past decade. Early studies of the economic damage from climate change tended to suggest that it would involve a one-off step down in output, far in the future, after which annual growth in gross domestic product would bounce back to its previous rate.
This led to the conclusion that the present value of the future economic costs of lost output is fairly small, especially if a high interest rate is used to discount future costs. As extremely cold regions become more temperate, this is particularly true in a northern economy like the US, which was expectedto see some gains.
Some of these conclusions still stand, but the picture has darkened. There is recent evidence that US productivity has sufferedeven from the modest increase so far of about 1 degree in global temperature. These effects remain rather small, but projected longer-term losses have increased.
Influential economic studies suggest that the long-term effects on US GDP may eventually be minus 1.5 per cent to minus 5.6 per cent, assuming global temperatures rise by 4 degrees. This may not be a one-time hit to output but may reduce the underlying growth rate, implying that output costs continue to increase.
It is true that many of these studies still indicate that the bulk of economic damage may be several decades ahead. However, that doesn’t mean we should postpone policy action to slow global warming until the doomsday clock is closer to midnight.
Greenhouse gases emitted today will remain in the atmosphere and affect the climate for centuries, unless there is a fundamental change in the technology enabling carbon capture or solar geoengineering, which deflects the sun’s energy back into space. This seems improbable.
Furthermore, climate change and the damage it causes may be non-linear, implying that costs increase much more than proportionally as global temperatures rise. Some events, such as the melting of the Antarctic and Greenland ice caps, may be speeding up.
Knowledge, whether scientific or economic, on all these subjects is sketchy. It is tempting to say the future is so uncertain that humankind should do nothing immediately, except sit back and hope for the best. Economists, however, largely disagree with this conclusion.
Ever since Martin Weitzman’s seminal article in 2009, analysts have accepted that the uncertain possibility of climate catastrophe justifies action today. The danger of “fat tails”, which make very bad outcomes more likely than under a normal probability distribution, justifies immediate insurance policies, even if they are very costly.
This raises a final question: may insurance policies — such as the carbon tax beloved by many economists — themselves damage the economy? Mr Mnuchin has argued that higher carbon taxes on “hard-working people” will damage economic growth in the near future.
But this misses a key point. Carbon taxes do not represent a burden on the overall economy. Instead, they involve an increase in the relative cost of carbon pollution, compared with other economic activities.
Higher tax revenues can be spent on measures to avoid any fiscal drag on the economy, and eliminate any worsening in income inequality. The politics of these policy changes may be extremely difficult, but the economics are not.
Economists have been wrong about many things but they are building a powerful case for urgent action today to slow global warming. Mr Mnuchin should not deny this.