{"id":71449,"date":"2023-08-22T08:12:58","date_gmt":"2023-08-22T07:12:58","guid":{"rendered":"https:\/\/www.taxresearch.org.uk\/Blog\/?p=71449"},"modified":"2023-08-22T08:12:58","modified_gmt":"2023-08-22T07:12:58","slug":"neoclassical-economists-are-the-last-people-to-listen-to-on-climate-change","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2023\/08\/22\/neoclassical-economists-are-the-last-people-to-listen-to-on-climate-change\/","title":{"rendered":"Neoclassical economists are the last people to listen to on climate change"},"content":{"rendered":"

I read this post<\/a> by my Green New Deal colleague, and friend, Ann Pettifor, yesterday, and with her permission, I share it here because it is so good. I recommend subscribing to Ann's blog on Substack.\u00a0<\/a>We don't always agree with each other, but she always has useful things to say:<\/em><\/p>\n

\n

The Financial Times's Lex column is legendary.<\/p>\n

The editor, Jonathan Guthrie,\u00a0argues\u00a0<\/a>that it is \u201cthe oldest and arguably most influential column of its kind\u201d having first appeared in 1945. Lex is written by a collective - there are no author bylines because that would be inaccurate, writes Guthrie. The name is \u201ca riff on the Latin phrase for \u2018Law of the Markets\u2019\u201d and the column is for \u201canyone interested in the story of global capital viewed through the prism of corporate news.\u201d<\/p>\n

In other words, Lex is for the very serious people.<\/p>\n

So it was with some interest my attention was drawn to the latest \u2018Lex in depth article\u2019<\/a>, titled \u2018how investors are underpricing climate risks\u201d<\/em>- an unusual intervention for this conservative and mainstream column.<\/p>\n

The Lex collective, it appears, is uneasy. Not surprising given cascading news reports of global climate upheaval; killer wildfires that destroy whole towns and populations; the record-breaking boreal fires that Scientific American warns may be\u00a0a climate \u2018time-bomb\u2019<\/a>; warming oceans; melting permafrost; and murderous floods.<\/p>\n

Despite these events, Lex columnists are not panicking. Just warning investors against \u201cunderpricing climate risks\u201d. They tentatively suggest that asset values may need \u201crecalibrating\u201d. The word \u201cunsustainable\u201d is deployed several times. The future \u201cunderperformance\u201d of hypothetical portfolios is discussed. \u201cClimate induced sovereign downgrades could happen as early as 2030\u201d the column warns - ignoring current calamities and leaving plenty of time to adjust a bond portfolio.<\/p>\n

\u201cSkilful adaptation\u201d suggests Lex phlegmatically, \u201cwould soften the blow from climate change.\u201d<\/p>\n

The Lex collective\u00a0does<\/em>\u00a0express concern about the future of tourism - singling out Greece as an example - but tongue-in-cheek suggests all may not be lost because destinations such as Belgium would become more popular.<\/p>\n

The closest the column comes to expressing angst is when the authors warn<\/p>\n

that existing models may be providing a false sense of security.<\/p><\/blockquote>\n

The column notes that the UK Pensions Regulator has already raised concerns over scenario impacts that<\/p>\n

seem relatively benign and appear to be at odds with established science<\/p><\/blockquote>\n

and reminds readers that last November the little-known\u00a0Financial Stability Board warned\u00a0<\/a>that scenarios used to assess risks to the financial system may\u00a0understate\u00a0<\/em>climate vulnerability.<\/p>\n

An undertone of genuine angst begins to emerge when the collective warns of a \u201ccavernous gap\u201d between theory and reality. A gap<\/p>\n

... between \u2026 cataclysmic forecasts and the modest impacts anticipated by pension funds and listed companies in their climate risk reporting.<\/p><\/blockquote>\n

A gap that signals devastating financial detonators for the system.<\/p>\n

Regrettably, the column\u2019s truth-telling comes a little too late. For even while signalling grave concern, Lex columnists are careful not to challenge mainstream economics - particularly those led by a Nobel Prize winner in economics, William Nordhaus and his disciples inside the Financial Times.<\/p>\n

The Lex collective treat Nordhaus with undeserved respect, ignoring his catastrophic errors, citing his Nobel Prize and noting approvingly that he began modelling climate change as far back as 1975.<\/p>\n

Why, given his Nobel Prize, is that respect undeserved?<\/p>\n

Bear with me as I lean heavily on years of research by Prof. Steve Keen on Nordhaus\u2019s contribution to climate \u2018economics\u2019 and take you through just a few of his fundamental errors; his harmful impact on the economics profession and on UN climate scientists; on prominent FT journalists; and on the ultra-conservative central bank of Sweden, the Sveriges Riksbank - issuer of the so-called \u2018Nobel Prize\u2019 in economics.<\/p>\n

Above all, the baleful impact of Nordhaus\u2019s \u2018theories\u2019 on corporate, governmental and the UN\u2019s inter-governmental policy-making (the IPCC process).<\/p>\n

But first a bias alert: Steve Keen is a good friend and long-standing colleague. We discovered each other\u2019s work when in the early 2000s we both began predicting the Great Financial Crisis of 2007-9. Keen is a rigorous, insightful Australian economist who has not been considered for the Nobel Prize, despite\u00a0his foresight in predicting the Global Financial Crisis<\/a>. He has long studied and understood Nordhaus\u2019s work - and repeatedly recorded its profound and dire influence on the UN\u2019s IPPCC process.<\/p>\n

The angst in the Lex column was triggered (in my view) by Keen\u2019s latest humdinger of a report with Carbon Tracker:\u00a0Loading the Dice Against Pensions.\u00a0<\/a>(<\/em>To read Steve\u2019s work in full, click through to Carbon Tracker\u2019s\u00a0\u2018Supporting Document - How did we get here?<\/a>)<\/em><\/p>\n

Keen\u2019s critique of Nordhaus and the economics profession - and the implications for future pension payouts to millions of the world\u2019s savers - begins with the economic discipline\u2019s \u2018peer review\u2019 process.<\/p>\n

It turns out that<\/p>\n

papers that should have been rejected for their obvious lack of understanding of the science of climate change were passed by referees who, as economists rather than climate scientists, also lacked a scientific understanding of climate change.<\/p><\/blockquote>\n

Because so few economists were, or are interested in climate change, the cohort writing about the impact of climate change is small, and therefore subject to \u2018groupthink\u2019 argues Keen. And the leader of this group is William Nordhaus - an economist so ignorant of climate science that he makes the elementary error of confusing weather with climate as\u00a0Keen explains:<\/a><\/p>\n

Nordhaus\u2019s 1991 paper \u201cTo Slow or Not to Slow: The Economics of The Greenhouse Effect<\/em>\u201d, published in the prestigious Economic Journal\u2014one of only 9 papers that this journal has ever published on climate change \u2014 kicked off the practice of economists estimating the economic effects of climate change.<\/p>\n

In it, Nordhaus assumed that 87% of America\u2019s GDP\u2014 manufacturing, mining, utilities, retail and wholesale services, government, and finance\u2014would be \u201cnegligibly affected by climate change\u201d, because these activities take place in \u201ccarefully controlled environments that will not be directly affected by climate change\u201d (Nordhaus 1991, p. 930).<\/p><\/blockquote>\n

Keen explains that:<\/p>\n

The only thing these industries have in common is that they occur under cover (if one ignores, as Nordhaus evidently did in 1991, open-cast mining), and therefore are not directly exposed to the weather. The industries he said would be \u201cpotentially severely impacted\u201d\u2014farming, forestry and fishing\u2014are affected by the weather.<\/p>\n

Nordhaus therefore effectively equated being exposed to climate change to being exposed to the weather.<\/p>\n

In keeping with the groupthink problem noted earlier, the assumption that indoor activities are sheltered from climate change has been replicated by all subsequent studies.\u00a0The 2014 IPCC Report repeated Nordhaus\u2019s assertion that indoor activities will be unaffected<\/em>. The only change between Nordhaus in 1991 and the IPCC Report 23 years later was that it no longer lumped mining in the \u201cnot really exposed to climate change\u201d bracket. (Steve\u2019s emphasis)<\/p><\/blockquote>\n

It gets worse. In that same 1991 paper Nordhaus writes:<\/p>\n

We estimate that the net economic damage from a 3\u2103 warming is likely to be around \u00bc% of national income \u2026 We might raise the number to around 1% of total global income to allow for these unmeasured and unquantifiable factors, although such an adjustment is purely ad hoc.<\/p>\n

\u2026\u00a0my hunch<\/em>\u00a0is that the overall impact upon human activity is unlikely to be larger than 2% of total output. (Nordhaus 1991, pp. 932-3. Emphasis added).<\/p><\/blockquote>\n

\u201cMy hunch\u201d.<\/p>\n

Keen explains how this \u201chunch\u201d has influenced the UN\u2019s Intergovernmental Panel on Climate Change (IPCC).<\/p>\n

Three decades later, (in 2022) after about 50 more studies of the total economic costs of climate change had been undertaken (Tol 2022), the economics chapter of the IPCC\u2019s\u00a0Sixth Assessment Report,<\/em>\u00a0\u201cKey Risks across Sectors and Regions\u201d<\/em>, predicted a 10-23% fall in GDP from 4\u00b0C of warming by 2100:<\/p>\n

With historically observed levels of adaptation, warming of ~4\u00b0C may cause a 10\u201323% decline in annual global GDP by 2100 relative to global GDP without warming, due to temperature impacts alone. (IPCC 2022, p. 2459)<\/p>\n

Since economists also assumed that economic growth would continue\u00a0<\/em>over this 80-year period, this 10-23% decline would still result in a per capita GDP of the order\u00a0of four times higher than today. (<\/em>Emphasis added)<\/em><\/p><\/blockquote>\n

To forecast that over an 80 year period of expected climate, biodiversity and civilisational collapse, society could confidently expect a rise in per capita GDP (income) four times higher than today is delusional, blind to the science of\u00a0planetary boundaries<\/a>.<\/p>\n

Nordhaus\u2019s unscientific \u201chunch\u201d has had, and continues to have deleterious consequences for the planet, for human society, for policy-makers, the economic and scientific community, investors and pensioners. Largely because his lackadaisical approach to climate science, his prominence as a Nobel Prize-winning economist has induced a sort of coma in governments and policy-makers - when - as the climate scientist and physicist\u00a0Prof. Kevin Anderson\u00a0<\/a>warns on Twitter:<\/p>\n

We are heading towards 3 to 4\u00b0C of warming across this century, an absolute climate catastrophe for all species including our own. And all we are doing so far is giving rhetoric and optimism and greenwash.<\/p><\/blockquote>\n

Some may doubt the power and influence of economists in bringing us to this pass. They would be wrong. Nordhaus\u2019s \u2018economics\u2019 suit the interests of the Fossil Sector. They suit the interests of the 1% - who even now are planning to evacuate the planet before their wealth is put at risk. Above all, economists like Nordhaus have influenced media commentary, including that of Stuart Kirk, once HSBC Asset Management's head of responsible investment, and now a weekly FT columnist.<\/p>\n

On Kirk\u2019s\u00a0Linked-in page<\/a>\u00a0he proudly parades the following summary of\u00a0his starring role\u00a0<\/a>in the climate denial debate triggered, he claims, by a speech he made in May, 2022. A speech that led to the cultural and political wars that now rage over ESG (Environmental, Social, and Corporate Governance) policies and caused the ESG \u201cpendulum to swing the other way\u201d in far right Republican circles:<\/p>\n

At a Financial Times Moral Money conference, he (Kirk) suggested - perhaps not choosing his words terribly well - that the risk to investment returns from climate change was over-hyped, Miami becoming Amsterdam was nothing to worry about, and central bank doom-mongers were \u201cnut-jobs\u201d.<\/p>\n

The speech went viral and is now considered the moment when ESG\u2019s pendulum began to swing the other way. What one prominent journalist calls \u201cthe most watched PowerPoint presentation ever\u201d is approaching 200,000 on You Tube. Twitter went mental. Overnight Stuart was a major general in the culture wars, generating acres of newspaper copy, hours of television debate, and a zillion Tweets. Even US senators weighed in.<\/p>\n

Like all overnight sensations, Stuart has had a global audience for almost two decades.<\/p><\/blockquote>\n

Posting that summary on his own Linked-in page takes some chutzpa. Especially as he is an ex-editor of \u201cthe oldest and arguably most influential column of its kind\u201d - the FT\u2019s Lex column.<\/p>\n

But Kirk is not just another clown. He is an exemplar of the power and influence of economic theories that have transformed human society and the ecosystem.<\/p>\n

Theories that have caused human societies and economic activity to exceed safe planetary boundaries and thereby undermine\u00a0critical life-support systems;<\/a>\u00a0but that have also generated\u00a0obscene levels of inequality worldwide.<\/a><\/p>\n

Theories that have led to the rise of Silicon Valley\u2019s platform economy and the neo-feudalist approach to democracy and accountability by capitalists like Elon Musk and Peter Thiel.<\/p>\n

Economic theories that have led to government by markets, fuelling financial and other shocks, and the rise of authoritarian, and even neo-fascist regimes promising citizens \u2018protection\u2019 from \u2018globalised\u2019 markets.<\/p>\n

Theories that are man-made. And that can be re-made. That will be the theme of my book.<\/p>\n","protected":false},"excerpt":{"rendered":"

I read this post by my Green New Deal colleague, and friend, Ann Pettifor, yesterday, and with her permission, I share it here because it
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