Why can’t we confront climate change? Behavioural economics explains

The devastating storms in America have kept the issue of climate change firmly in the public mind.

But so far, it has proved very difficult for politicians to persuade electorates to change consumption patterns in ways which many scientists would like to see.

More expensive air travel, steeper energy bills – these are not very popular.

People are being asked to accept lower increases – or even outright reductions – in their living standards now, in exchange for escaping potentially large costs in the future.The problem is easy to state. But it raises some difficult issues in economic theory.

An obvious one is how to analyse uncertainty. Suppose, for example, you are offered odds of four to one on a horse in a particular race. You can then judge whether you think the true probability of it winning is more or less than the odds suggest.

But the uncertainty around the whole climate change issue is much trickier to deal with. It is as if you are offered these odds on a horse, but you do not know which other horses it will be running against.

A simple illustration is given by Geoff Heal of Columbia University in a paper in the latest Journal of Economic Literature. We face both scientific and socio-economic uncertainty: uncertainty about the underlying science of climate change, and about the economic and social impacts of an altered climate.

Heal points out that scientists working on climate change take it almost for granted that a rise in global temperature of two to three degrees would inflict massive costs on our societies.

However, he goes on to say that “nothing in the emerging econometric studies of the impact of climate on economic activity confirms these dramatic concerns”.

So even the different groups of experts disagree.

A second challenge is that people value benefits received and costs incurred in the present and the immediate future more than they do the same benefits and costs in the more distant future.

The Bank of England is rock solid and has never defaulted. So when it issues debt, you can be as certain as possible that you will get your money back. But the Bank still has to offer you interest – more money in the future – to persuade you to buy it now.

A key question is then: how do people discount the future? What rate of interest do they use when they think about it?

Behavioural economics has provided a large amount of evidence on this question. It is not at all good news for climate change activists. In the jargon, people often use “hyperbolic discounting”. Translated, this simply means they place far more weight on small rewards or costs which occur now than on much larger ones in the more distant future.

A non-obvious implication of this is that they make choices today that their future self would prefer not to have made, despite knowing the same information.

Economics cannot solve the problem of climate change. But it can explain why electorates are so reluctant to do anything about it.

Paul Ormerod 

As published in City AM Wednesday 13th September 2017

Image: Hurricane Irma Rescue by US Air Force is licensed under CC by 2.0

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ALEX O’BYRNE

Associate

e: aobyrne@volterra.co.uk
t: +44 020 8878 6333

Alex O’Byrne, Associate at Volterra, is an experienced economic consultant specialising in economic, health and social impact, economic strategy, project appraisal and socio-economic planning matters.

Alex has led the socio-economic and health assessments of some of the most high profile developments across the UK, including Battersea Power Station, Olympia London, London Resort, MSG Sphere and Westfield. He has significant experience inputting to EIAs and s106 discussions as well as drafting economic statements, employment and skills strategies and affordable workspace strategies.

Alex is also experienced at economic appraisal for infrastructure. He was project manager of the economic appraisal for the City Centre to Mangere Light Rail in Auckland. He also led the economic and financial appraisals of the third tranche of the Transport Access Program for Transport for New South Wales, in which Alex developed and employed innovative methodological approaches to better capture benefits for individuals with reduced mobility.

He is interested in the limitations of current appraisal methodologies and ways of improving economic and health analysis to ensure it is accessible to as many people as possible. To this end, Alex recognises the importance of transparent and simple to understand analysis and ensuring all work is supported by a robust narrative.

Alex holds a BSc (Hons) in Economics from the University of Manchester and he was a member of the first cohort of the Mayor’s Infrastructure Young Professionals Panel.

ELLIE EVANS

Senior Partner

e: eevans@volterra.co.uk
t: +44 020 8878 6333

Ellie is a partner at Volterra, specialising in the economic impact of developments and proposals, and manages many of the company’s projects on economic impact, regeneration, transport and development.

With thirteen years experience at Volterra delivering high quality projects to clients across the public and private sector, Ellie has expertise in developing methods of estimating economic impact where complex issues exist with regards to deadweight, displacement and additionality.

Ellie has significant experience in estimating the economic impact across all types of property development including residential, leisure, office and mixed use schemes.

Project management of recent high profile schemes include the luxury hotel London Peninsula, Battersea Power Station and the Nova scheme at London Victoria. Ellie has also led studies across the country estimating the economic and regeneration impact of proposed transport investments, including studies on HS2 and Crossrail.

Ellie holds a degree in Mathematics and Economics from the University of Cambridge.