Auke sits down to talk. After previous debunks (on diesel and electric cars), today he takes us through an ‘economic monstrosity’ that has been bothering him for some time. The social cost of carbon, (SCC). The SCC spells out how much the damage to society one ton of CO2 emissions causes. The method used to calculate this is very complex, but in simple terms, it works like this: you calculate what the damage is that a ton of CO₂ will cause in the future, through floods, heat waves, droughts, etc. You then calculate back how much it would be right now. Then you calculate back how much it would cost right now to prevent this damage. Governments use this to calculate, among other things, whether it makes any sense to implement specific climate measures..
Where does this calculation go wrong?
Auke closes his eyes and thinks for a moment before he begins his explanation: “It’s meant to make pollution more expensive. But it is calculated based on a social interest rate, called a discount rate. This means that the models assume that the next generation will clean up the mess. With a discount rate, you’re basically saying that this generation is worth more than the next. Nobel laureate William Nordhaus’ usual discount rate is 4.3 percent, which means we can carry on polluting now as long as the damage costs less than 25 times as much in 2100.”
Wait a minute, this is going way too fast for me….
“So you want to know how much damage is acceptable in the future. Suppose you are given €100 to prevent damage in the future. Do you invest it now or later? If you take into account that you get 4.3 percent interest on this, that €100 is worth €2900 in 2100. In other words, if the climate damage in 2100 is less than €2900, then you do something else with that $100. That’s how a new generation is being made responsible for our mess.”
“While you can also say that each generation should clean up its own pollution. So, a discount rate of 0 percent. If this happens, then suddenly coal is five times more expensive and coal- and even gas-fired power plants would immediately become uneconomical. It bugs me that economic models gloss over this simple fact.”
Then there’s the following assumption that doesn’t add up, according to Auke. “Just imagine. Two people are both affected by climate change. One is very wealthy and easily earns a million bucks a year. The other is incredibly poor and earns just enough to feed his children. Climate change causes the wealthy man to lose 10 percent of his income, the second to lose his entire income and his children are going to die. So, which is worse?”
Money more important than human lives
Cynically, he answers his own question, “The first one is really much worse. 10 percent of a million is a lot more money than the income of someone who doesn’t have much. That children are dying doesn’t count at all. Earlier, we saw that economists look at money instead of happiness. But money apparently also takes precedence over human lives.”
Auke shakes his head, the SCC is not tenable in his opinion. “If you don’t only assume that we have to clean up our own pollution, but start from the idea that it’s about human lives instead of income, then the SCC really turns into thousands of euros per ton. Burning fossil fuels for energy then becomes absolutely unaffordable!”
What’s the solution?
“Don’t listen to ‘old-fashioned’ economists anymore. We have to let go of this view of humankind and shift the focus to happiness instead of money. Fortunately, this is also happening more and more. That’s the good news. There are more and more techies, sociologists, tech-optimists and others who are disregarding economists and building fantastic solutions. You also see more and more economists who want to make economics an empirical science. But I fear it will be a very long time before we let go of the worship of the gross national product.”
In addition to the SCC’s lack of accuracy, according to Auke, we also have a false and one-sided view of humanity thanks to economists. “We need to let go of that in order to really be able to tackle climate change.”
Ever since the industrial revolution, in Auke’s opinion, we have been transforming society into the ideal factory. “The more we produce and the more that is consumed, the better. In particular, we look at the gross national product which basically says how much money is being pumped around. But at the same time, all that manufacturing and consumption does create more emissions and hence global warming.”
So we should be producing less and consuming less?
Auke sighs. “By turning down the dials in factories, you certainly start emitting less. But it doesn’t change that pattern of thinking. The degrowth movement is starting from the premise that the solution lies in lowering rather than raising the gross national product. But as far as I’m concerned, everyone should stop talking about that nonsensical gross national product. By the way, did you know that you can also raise it by enthusiastically waging war? As long as you’re pumping money around.”
Okay, back to the view of humanity. Why doesn’t that add up in economics?
“What does the amount of money we pump around say about people’s happiness or well-being? Not much, right? Martin Seligman, an American psychologist and founder of positive psychology, has described that happiness is a combination of engagement, meaning, achievement, relationships and pleasure. Of these, only pleasure is somewhat linked to income. The other aspects of happiness do not even appear in economists’ view of humankind. So, economists endeavor to get us to pump more money around, but not make us happy. I find that quite a problem.”
Read what Auke said earlier about the gross national product here: So should I go back to burning trees and eating meat?
But there is more to the economists’ models, Auke believes. According to him, they still come from the time when scientists only had pen and paper available to them. “Economists in the time of the industrial revolution wanted to be like Newton. They wanted theories that were mathematically elegant, even if they were empirically wrong. To this day, most economists still use such models based on fancy mathematical equations. But this is a simplistic representation of reality. These models turn people into emotionless and isolated buying machines. The view of humankind that economists have has been falsified in a lab, as sociologists have long said. Economists, in turn, used to say until 2008 that this made no difference. Because, in their view, they are so good at making predictions. But they have predicted practically no economic depressions at all. Even the financial crisis in 2008, which cost tens of trillions, virtually not a single economist saw it coming.”
New thinkers on the rise
But Auke remains hopeful: “New thinkers in economics who do want to work empirically and experimentally and who, like me, want to use agent-based simulations are thankfully on the rise. So I hope that we can finally make economic models based on a view of humankind that makes sense. And that we can make sure that people experience more happiness instead of just buying more.”