Fairy Tales About Climate Change

As Guy Routh explained forty years ago in his magisterial book, The Origin of Economic Ideas, economics has preposterous origins. Since the time of Adam Smith, the new academic discipline was linked through the emerging class of merchants and manufacturers to the rich and powerful in general, and fulfilled the ideological role of presenting the emerging capitalist system as the best of all possible worlds. If there were any economic problems, the solution was to enhance conditions for the working of markets. The free enterprise system itself, guided by an invisible hand, would solve every problem in the most efficient way. Conscious social intervention was unneeded. Two centuries later, despite the many honest economists who try to contribute knowledge about how the world works and how it might be improved, the ideological function of economics still seems to be its major role. Economists continue to tell fairy tales that justify the world as it is and reject any criticism or project that conflicts with the social and economic foundations of capitalism, our cherished free enterprise system. Nothing illustrates this better than a recent publication on climate change by economists of the International Monetary Fund.

Climate change is, together with nuclear war, the major risk for the near future of humanity. But while nuclear war may or may not happen in, say, the 21st century, climate change is already here in the form of global warming and increasing frequency of extreme weather events. In 2018 hundreds of people in California, Greece, Portugal, and Australia were killed by wildfires that, according to the scientific evidence, are very likely caused by climate change. The worldwide death total attributed to climate change, composed by the victims of heat waves, storms, droughts, wildfires, flooding, and other consequences of global warming, has reached close to a million per year (out of a total of some 70 million annual deaths), and can be expected to rise in the coming decades to many millions.

As scientific reports have shown many times, the more fossil fuels we use, the faster global temperatures will rise and the more the frequency of extreme weather events will increase. Consequently, the more fossil fuels we burn, the faster the annual count of deaths caused by global warming will rise. In 2018, reports by the Intergovernmental Panel on Climate Change, and by agencies of the US government indicated that climate change is advancing by big jumps and that the prospects for the next decades are now increasingly bleak. Despite this, most economists and politicians are oblivious to the problem. Or, as Barack Obama did in the journal Science in 2017, they tell us not to worry, as the problem is on the way to being solved.

If anything, economists and politicians presently worry about international trade, or the prospects for economic growth. Like the World Bank, the International Monetary Fund, the rich and beautiful who meet annually for the World Economic Forum at Davos, and governments worldwide, economists and politicians are glad and joyful that the world economy in the period 2012 – 2017 grew at rates between 2% and 3% per year and that, according to preliminary reports, it grew at even faster rates in 2017 and 2018. However, some economists are worried about a forthcoming recession. For instance, Larry Summers, former Treasury Secretary and Harvard president, ruminates that the economic expansion since the Great Recession ended in 2009 has been too long for business-cycle standards and that both China and the US economy have recently shown weaknesses, posing the ominous issue of another downturn that could reverse to zero or negative rates the growth of the global economy.

The two problems, climate change and the likelihood of another global recession, are usually discussed as if they had nothing to do with each other. In reality, they are intimately connected. This can be easily understood by any person who knows two facts: first, that climate  change is linked to CO2; second, that basically every economic activity implies emissions of this gas, so that the total amount of CO2 emitted each year is strongly linked to the global amount of economic activity. That amount is quantified in money units by a number called gross domestic product, GDP. Thus, substantial growth of GDP, which for most economists, politicians, and businessmen is a blessing, is a disaster in terms of climate change, as it represents a big increase in CO2 emissions and a further rise of the atmospheric concentration of CO2, which is making our Earth increasingly warm and unfriendly for all living beings. Inversely, a recession of the world economy, which in the usual public discourse is a catastrophe to be avoided at all costs, would be a blessing from the point of view of climate change as it would represent an important reduction of the speed of the runaway train that is carrying us toward the cliff.

Easily accessible data show with crystal clarity the strong statistical link between the size of the economy and the volume of emissions. But that, together with what we know about how CO2 is produced, is evidence for a causal link between economic growth and climate change. For instance, Figure 1 shows how—considering the world economy at large, or just the US economy—the annual change in CO2 emissions closely follows the annual change in GDP. The two graphs illustrate how the recessions of the mid-1970s and the early 1980s caused major declines in worldwide emissions, which also occurred in the early 1990s when the Soviet Union and the Soviet bloc melted down, and Eastern Europe sank into major disarray for several years during which industrial activity basically ceased. Of course, the graphs also show the strong impact of the Great Recession at the end of the past decade on US and global emissions. What is obvious for the world economy and for the economy of the United States can be shown however for other countries—basically for all of them. Figure 2 presents the same variables, emissions growth and GDP growth, for Argentina, Mexico, and Spain. In these three countries the drop in emissions caused by the Great Recession ten years ago is obvious, but the graphs also illustrate the emission effects of local economic crises, for instance the Mexican tequilazo in 1995, and the Argentinian corralito in 2001 – 2002. In both crises, emissions plummeted. In Spain, the economic crisis that started in 2008 was particularly deep and long, as shown in the bottom panel of Figure 3 by negative GDP growth in 2009, 2011, 2012, and 2013; emissions in that country, obedient to the condition of the economy, continued to decline for several years and only started growing again in 2014.

Now, in spite of the fact that this causal link between GDP growth and CO2 emissions is quite obvious, mainstream economists and politicians never say a word about it. Why? It seems to me that a plausible explanation is that this causal link undermines what is perhaps the basic tenet of economics, the idea that economic growth is essential not only to maintain economic and political stability, but also to solve any social problem. For the economics profession, economic growth is what the Holy Grail was for the Knights of the Round Table. To assert the existence of a causal link between economic growth and climate change is like claiming that the Holy Grail contains poison.

One of the ways economists have denied the causal link between economic growth and environmental damage, including climate change, has been to claim that pollutants in general, including CO2, increase in the early stages of economic growth, but then reach a plateau and decrease overall, following a curve shaped as an inverted U. If that inverted U pattern exists, economic growth itself will take care of the need to reduce emissions. Thus economic growth would “decouple” or delink itself from emissions. It would be something like the invisible hand of Adam Smith operating at a new level. How perfect the market system is!

Since the 1990s the economic literature has been filled with articles, chapters, and books demonstrating the reality of this inverted U curve that, for reasons irrelevant here, economists call the EKC. In 2002 an economist working in this field asserted that the idea that pollutants increase and then decrease with economic development had become widely accepted among economists.

However, the existence of the inverted U EKC curve for pollutants in general and for CO2 emissions in particular is not at all obvious. Indeed, since some economists began talking about it in the 1980s, there were discordant voices that doubted that such a pattern can be found in the data. Papers arose from these differences of opinion; as a result, the economic literature over the past 30 years came to include plenty of increasingly complicated models to demonstrate the existence of the EKC, generating what one of the participants in the controversy referred to as “a thicket of mathematics and econometrics.” But the graphs shown here in Figures 1 and 2 are very straightforward, they can be produced basically for any country, and they show clearly that emissions and GDP increase and decrease together, which any rational person would interpret as quite strong evidence that one is causing the other. In economic jargon, it appears obvious that CO2 emissions are procyclical, meaning that they increase during expansions of the business cycle and decrease during economic recessions—like prices, employment, sales of gasoline, and consumption of electricity. Figure 1, presenting data for more than half a century, does not suggest at all that the link between emissions and economic growth is less solid, say, in 1990 – 2015 than in 1960 – 1990. If there is any “decoupling,” it is not apparent at all.

Now enter some brainy economists associated with the International Monetary Fund and led by Gail Cohen, who is Executive Director of the Board on Science, Technology, and Economic Policy of the National Academies of Sciences, Engineering, and Medicine of the United States. Formerly, she was at the Congressional Joint Economic Committee, where she performed as Deputy Democratic Staff Director, Chief Economist, and Senior Economist. In a recent paper published by the IMF, Cohen and her coauthors tell us and show us that a first look at the data on emissions and real GDP “yields little evidence of decoupling,” but immediately add that “this first crack at the data” is misleading. Why? Because in general, “cyclical developments can often obscure the trend relationship.” This is a mathematical thicket created for the consumption of fellow economists, not the general public. To put it in plain words, what Cohen et al. say is that while higher GDP growth indeed appears to be associated with higher emissions, so that emissions usually grow during economic expansions and decrease when there is a recession, if we look at the long-term trends of emissions and GDP in different countries the pattern is not always one of simultaneous growth of emissions and GDP because in some high-income countries, emissions have been decreasing while GDP increased. This idea of Gail Cohen is very well illustrated by the top panels of Figure 3, where annual emissions during the years 1960 – 2015 for France, Britain, Germany, and the USA are plotted against GDP. In the cases of the UK and Germany, it is obvious that greater GDP levels are associated with lower emissions, while for the USA and France the picture is more complicated. At any rate, with a little bit of imagination and a lot of good will we can see the inverted U EKC in the graphs for the UK and Germany, and at least in the left portion of the graphs for the US and France. The experience of these countries, along with some econometric prestidigitations that Cohen and her coauthors carry out in their paper, convince them that decoupling of emissions and incomes is happening there, so that the richest nations of the world have basically delinked CO2 emissions from economic growth.

How fallacious this idea is can be illustrated by the fact that emissions, which had been declining for years in Germany, the United States, and other countries, have recently increased, coinciding with the economic recovery after the Great Recession. The supposed long-run decoupling does not apply in the short run.

Besides looking at a relation between trends, which is always a doubtful statistical exercise, what Cohen and her coauthors have done is something that has long been described with a pejorative term: cherry picking. It is true that some countries like France and the UK increased their GDP at the same time that they had a decline in emissions, but there were specific reasons for that: nuclearization in France and deindustrialization in both countries. Deindustrialization in particular, and not any specific effects of some “clean technology” triggered by economic growth, is the main reason that explains lower emissions in the handful of countries where emissions have declined in recent decades. Many other countries of the world, indeed most of them, show precisely the opposite experience, long-run increasing CO2 emissions associated with long-run GDP growth. The bottom panels of Figure 3, in fact, show this for the largest emitter of CO2, China, and for two other emerging economies increasingly important as CO2 emitters, India and Brazil. In all of them the long-term link between CO2 emissions and GDP is obvious, as both grow simultaneously. Indeed, the last panel in the figure shows the link between the world economy as a whole, quantified in terms of world GDP, and global emissions of CO2. These are directly related: the greater is world GDP, the greater are emissions, something also shown in Figure 1.

The obnoxious insistence of many intellectuals, politicians, and economists on preaching the virtues of economic growth is one of the notions that should be included in the list, first proposed by Bertrand Russell’s essay of ideas that have harmed mankind. By action (as in the case of Gail Cohen) or omission (as in that of most economists, who have never discussed the question) economists are guilty of hiding from researchers in other fields, including many climatologists and geoscientists, the obvious fact that climate change is directly linked with economic growth and that climate catastrophe cannot be avoided or limited without major changes in our ever-expanding way of consuming and producing. The consequence is that authors like James Hansen, with a clear understanding of the scientific issues implied by climate disaster and at the front of the fight for policies to prevent climate catastrophe, believe that the policies they propose are not inconsistent with economic growth. It is thanks to the insistence of economic-growth enthusiasts that the eighth Sustainable Development Goal agreed on by the General Assembly of the United Nations in 2015 is an annual economic growth rate of at least 7%. Since in the past 20 years, with a rate of growth between 2% and 3%, the world economy has produced CO2 emissions growing on average 1.8% per year, not much math is needed to guess how emissions would evolve with world economic growth of at least 7%. To call that goal “sustainable growth” is like saying that drinking two bottles of whisky a day is “sustainable drinking.”

Economic growth is the accelerator pedal for the runaway train that is transporting us into climate-change land, where a cliff awaits at the end of the trail. Gail Cohen and the economists who coauthor her research agree that economic growth is accelerating the train but, on the basis of flimsy evidence, they argue that since in the long run this accelerator will be increasingly ineffective, and can even become a brake, we must not worry about stepping on it. If we are to believe what knowledgeable people tell us about climate change, human beings are in a terrible situation, heading in the near future to major worldwide disasters. There is no time to wait for the long run. Economists claiming that in the long run economic growth will take us to heaven are just telling fairy tales.

Technical appendix — References and statistical notes

Figures 1 to 3 in this article are elaborated by the author using data from the CAIT database of the World Resources Institute, available at www.wri.org/resources/websites/cait.

Estimates on number of deaths to be attributed to climate change are from several sources, including the book edited by B. S. Levy and J. A. Patz, Climate change and public health, Oxford University Press 2015.

In “The irreversible momentum of clean energy” (Science, Vol. 355, No. 6321, pp. 126 – 129, 2017, available at science.sciencemag.org/content/355/6321/126) Barack Obama asserted optimistically that mounting evidence left him confident that economic growth and CO2 emissions were decoupled and that trends toward a clean-energy economy that had emerged during his presidency would continue. I answered the assertions of Obama in the December 2017 issue of the Rail, in the second part of my three-part series on “Climate Change: What is to be Done?” (see also the issues of November 2017 and February 2018). I have replied in a more technical way to Obama’s assertions on the decoupling of emissions and growth in the United States in “Policies to reduce CO2 emissions: Fallacies and evidence from the United States and California,” coauthored with Clive L. Spash and forthcoming in Environmental Science & Policy.

Larry Summers’s considerations on the judgment of financial markets “that a recession is significantly more likely than not in the next two years” were published January 7 2019 in The Washington Post (“The right policy as recession looms,” available at www.washingtonpost.com/opinions/be-prepared-a-recession-is-significantly-likely-in-the-next-two-years/2019/01/07/628c67b8-12a3-11e9-b6ad-9cfd62dbb0a8_story.html?noredirect=on).

Arik Levinson was the economist asserting in 2002 that the idea that some pollutants increase and then decrease with economic development had become a widely accepted regularity among economists. He was also the one claiming that attempts to test for the inverted U EKC had generated “a thicket of mathematics and econometrics.” Martin Wagner, Georg Mueller-Furstenberger, William T. Harbaugh, David Molloy Wilson, and David I. Stern are authors who have questioned the statistical soundness of the EKC in quite a number of papers. “An analysis of the environmental Kuznets curve for carbon dioxide emissions: Evidence for OECD and Non-OECD countries” (European Journal of Sustainable Development, Vol. 4, No. 3, pp. 33-45, 2015) can be cited as an example among many papers on climate change published in economic journals arriving at shocking conclusions. In this paper, Kris A. Beck and Prathibha Joshi conclude that “countries across the world regardless of their development status should educate their citizens more fully about the dangers of excessive CO2 concentrations and mass overconsumption of resources.” Why is it so is unclear, because Beck and Joshi also assert after much torturing of the data that “increased energy use actually helps to decrease CO2 emissions.”

The IMF Working Paper WP/18/56 “The Long-run decoupling of emissions and output: Evidence from the largest emitters” by Gail Cohen et al. is available at www.imf.org/en/Publications/WP/Issues/2018/03/13/The-Long-Run-Decoupling-of-Emissions-and-Output-Evidence-from-the-Largest-Emitters-45688. The webpage titled “Decoupling of emissions and incomes: It’s happening” (voxeu.org/article/decoupling-emissions-and-incomes-it-s-happening) presents the main ideas and results of the IMF paper in more accessible language. For those with statistical background it is worth to mention that the results of the IMF paper by Cohen et al. are largely based on a regression which looks very much like a spurious statistical exercise. The model Cohen et al. compute for twenty countries is based on equation (3) on page 11 of the paper, where the dependent variable is the trend of the log of emissions and the explanatory covariates are a constant, the trend of the log of real GDP, and an error term. The trend of both log emissions and log real output is computed by Cohen et al. using the Hodrick-Prescott filter with a smoothing parameter set at 100. Thus what they are doing is to regress a trend on a trend, which is just one of the typical examples of spurious regression (see for instance Gujarati, Basic Econometrics, 4th ed, New York, McGraw-Hill 2003, pp. 792 and 886,or Bisgaards & Kulahci, Time Series Analysis and Forecasting by Example, Hoboken, New JEersey, John Wiley & Sons, 2011). For German data corresponding to the years 1990 – 2015 Cohen et al. find a real GDP trend elasticity of trend emissions of -0.6 without reporting the standard error of the estimate or the Durbin-Watson of the regression. They say though that the estimate is statistically significant at the 10% level of confidence. I computed the model and obtained an elasticity of -0.692 with a standard error of 0.009, which is very consistent with the result reported by Cohen et al. However, in my regression the Durbin-Watson is 0.087 which makes the regression seriously suspicious of being a spurious one.

Puzzlingly, Cohen et al. also say that they find emissions and GDP cointegrated in the period 1990 – 2014 (p. 11, footnote 7). But cointegrated variables are precisely those that in the long-run follow each other; somewhat cointegration between two variables can be understood as exactly the opposite of decoupling.

“Economic growth and carbon emissions: The Road to ‘Hothouse Earth’ is Paved with Good Intentions” by Enno Schröder and Servaas Storm (Institute for New Economic Thinking, December 2018, www.ineteconomics.org/research/research-papers/economic-growth-and-carbon-emissions-the-road-to-hothouse-earth-is-paved-with-good-intentions) is a quite strong refutation of the views presented by Gail Cohen in the IMF paper.

Bertrand Russell’s essay, “Ideas that have Harmed Mankind,” written in 1946, was included in the book Unpopular Essays, published in 1950 by George Allen & Unwin. The essay is easy to find online.