By Alberta Robinson-Welsh
Illustration by Keo Morakod Ung
Throughout mainstream economics, climate change has always been treated as a “negative externality”, a cost imposed on society that needs to be internalised into the market. It is simply seen as another market failure that can easily be fixed by introducing a tax on carbon dioxide emissions in the hopes that producers being forced to pay for the full marginal social cost of the pollution they create, will automatically correct the market.
However, this type of economic thinking is fundamentally flawed. Traditional economic models assume that the economic damage caused by climate change increases in a linear fashion. For instance, if the environment gets twice as warm, then the damage will merely be twice as bad. Yet our planet works in far more complicated ways. These models fail to account for tipping points, such as deforestation triggering irreversible changes in the Amazon Rainforest. In addition, positive feedback loops are neglected. For example, the thawing of permafrost in the Arctic exposes more dark surfaces that absorb more heat (the albedo effect), which acts as a catalyst for further ice melt. This eventually results in an accelerated, rather than linear, rate of climate change, contrary to what these models assume.
Mainstream environmental economics also relies heavily on the price mechanism which plays a crucial role in regulating markets. As a good becomes scarce, its price will rise – a process also known as the rationing function – which, in turn, lowers its demand. However, this is not the case for public goods or common pool resources, including biodiversity or ecosystems, where no natural market mechanism exists. The atmosphere, for example, has no built-in pricing system. Therefore, policies such as carbon taxes or the EU Emissions Trading Scheme (ETS) must be implemented to create economic incentives for firms to reduce their carbon footprint. Yet again mainstream economics continues to rely on the same solution: internalising the externality into the price of carbon – an erroneous approach as will be discussed later.
On the other hand, ecological economics offers an alternative to environmental economics. It endeavours to study everything that is both inside and outside of the market and bring the two together. This creates a much more profound understanding of the relationship between economic development and resource allocation as well as (and most importantly) the environment, which is constantly emphasised as being a subsystem of our biosphere instead.
This distinction is crucial to the way each school of thought approaches the environment in relation to the economy. For example, ecological economics embraces methodological pluralism. This is where a range of factors such as macroeconomic scale, ecological footprint, long-term sustainability and ecological complexity are analysed to better comprehend the dynamic interaction between the economy and the environment.
In contrast, in environmental economics, a natural resource is only assigned an economic value if it is considered “relatively scarce” and generates some form of utility for individuals. This is not the case in ecological economics, as all resources are seen as important, regardless of whether they are scarce or not, and if they improve individual welfare or not. Ecology is viewed as an integral part of the ecosystem and therefore is deserving of equal rights for its own survival. This difference in perspective is why ecological economics provides a stronger foundation for future education on the relationship between the economy and the environment.
Moreover, ecological economics recognises that the world’s economy cannot continue to expand exponentially, similar to how things in nature do not grow forever. This ideology strongly emphasises a transition from our current growth phase to a steady state, a term coined by the “founding father of ecological economics”, Herman Daly, whereby an economy has both a constant population and stock of capital. This involves a shift away from capitalism’s ruthless levels of competition, to seeing more cooperation occur between countries. Additionally, the ‘degrowth’ model is a central tenant of this philosophy, emphasising the need for sustainable consumption and a reduction in working hours to achieve this.
This is a concept that has been studied further by economist Kate Raworth, the creator of the Doughnut Economics model. The inner doughnut ring represents the basic human needs that we all require, including water, food, income, etc., whereas the outer ring includes elements like climate change and biodiversity loss, boundaries that we humans must not exceed in order to be sustainable. The circular shape, therefore, signifies the need to achieve harmony between the ‘social foundation’ and the ‘ecological ceiling’ of our planet. She reinforces the idea of giving up the relentless pursuit of GDP growth and instead striving to create a circular, not linear, economy, whereby economies are designed to be more distributive of value to those who help generate it.
Image taken from https://www.kateraworth.com/doughnut/.
Doughnut economics has already been adopted into national policies worldwide. For example, Amsterdam was the first city to target 100% reuse of raw materials by 2050, helping to lower waste levels. Project Regen Melbourne, in Australia, aimed to transform the Yarra River from a polluted river to one that is swimmable by 2030, back in 2020, hence significantly reducing the risk of biodiversity loss.
These national and regional policies inspired by ecological economics are arguably superior to those informed by environmental economics. By tackling the root causes of climate change, like landfill waste, long-term resilience is built, allowing for lasting sustainable solutions for reducing anthropogenic emissions.
Whilst carbon taxes and cap-and-trade schemes do reduce emissions to an extent as well, by putting a price on CO2, they often fail to bring enduring environmental change. The issue lies with these policies assuming that emissions becoming more expensive will immediately make firms cut back on pollution, resolving the problem, as mentioned before. In reality, it can take a long time for firms to transition to greener alternatives such as renewables. Assigning a monetary value to carbon is also highly subjective, as it depends on one’s perception of the urgency of climate change. Therefore, stakeholders like governments, firms or individuals all place different levels of importance on climate action, creating policies that have opposing estimates of the true social cost of CO2 to society.
Lastly, structural issues responsible for amplifying climate change such as fossil fuel dependency, overconsumption and economies built on endless growth are not addressed when designing these policies.
Therefore, what is needed most is a shift in how economics is taught – moving from an environmental approach that treats nature as separate from the economy to an ecological one that sees it as the foundation of everything. Reforming economic education to reflect this would allow economies to move beyond temporary market measures and develop much-needed, long-term sustainable solutions to combat climate change.
Further reading
https://www.climatechangenews.com/2023/08/08/economics-climate-threat-models/
https://www.sciencedirect.com/science/article/pii/S2214804323001842
https://insights.som.yale.edu/insights/what-is-ecological-economics
https://www.sciencedirect.com/science/article/pii/S0921800906002874
https://pg-online.leeds.ac.uk/blogs/what-is-doughnut-economics/
UCL Rethinking Economics 