How Climate Change is Challenging Fundamental Economic Principles

“The Earth. You may know it as that blue thing that Bruce Willis is always trying to save. Or from its famous collaboration with Wind and Fire. Or simply as the place where George Clooney lives.” True to form, John Oliver opened up his climate change feature with great fecundity. There is no need for me to state what everyone knows: climate change is real, scientifically proven, devastating, and affects every facet of society.

When the US climate change report was released last month, many views were adamantly published online, in newspapers, and on news networks. Among the 21,800,000 reactions I found while searching “US Climate Change Report” on Google, there was a single one that stood out to me: Six days after the world read the conclusive findings of the effects that climate change has inflicted, Mother Nature voiced her support for the report through her own, quiet but undoubtedly effective, take on climate change – the collapse of the West Antarctic Ice Sheet. Now that nature has spoken her piece, all we need is 97 scientists simultaneously proving climate change is real before we get cracking on the largest threat to humankind. Oh right, we already have that, thanks John Oliver! According to TIME’s article, the collapse could raise global sea levels by 15 feet, enough to flood coastal cities like American capital Washington D.C., and (more importantly) my hometown Richmond, B.C.

Recently, UBC students voted for the divestment from oil companies. One of the movement’s leaders, Gordon Katic, brought up a prudent point in the campus newspaper, the Ubyssey’s, article: “Why is UBC investing all their time and energy into [moulding] its students into future leaders, and at the same time investing in companies that would ensure there is nothing left to lead?” What Katic is fundamentally asking is: are the incentives from short-term gains in oil and gas investments aligned with the objective of UBC’s investment portfolio? One of the most basic principles of economics is that everyone responds to incentives. However, “incentive” is an extremely vague word. There are many types of incentives – incentives for financial purposes, or to better your reputation, or to improve your connections. So what sort of incentive do people respond to? Generally, an assumption that economists make is that firms seek to maximize profits, or, in other words, their financial incentives. Supposing this is rational, why would UBC remove its shares from the world’s largest industry in dollar terms?

Profits and financial incentives cannot be used as a model to align the firm’s objectives with the needs of the environment. If the objective of UBC’s portfolio were to maximize its financial incentives, a reasonable move would be to invest in oil and gas. However, it appears as though there is much more to a portfolio’s objective than simply maximizing profits. UBC students have chosen to consider the quality of the money being made by accounting for the “costs” that are inflicted by oil and gas investments. From a strictly economic point of view, these costs have no immediate consequence on UBC or on its campuses, and in fact, UBC’s portfolio may suffer from reduced returns by its abstinence in one of the biggest markets. This is, by definition, an irrational move by the school. It violates one of the most basic economic principles.

But we are not the only ones who can be deemed a little off our rocker. Divestment from oil companies started in US schools and numerous North American schools have taken such action. When such economically “irrational” behaviour begins to become the norm, it is time to reconsider what is rational and irrational.

As Annie Leonard (from “The Story of Stuff”) argues in this video, the goal of the economy is more, more, and more. But wouldn’t it make more sense to phrase the goal to be “better, better, and even better”? Instead of more roads, more factories, more products, we should focus the economy on “better roads, better factories, and better products”. This is analogous to UBC’s choice to divest. Instead of more return on investments and more money in pension plans, UBC chose to set its eyes on better impact on the environment and better policy for investment.

When sustainability and economic incentives are incongruous to each other, we have to choose one or the other. Instead of framing choosing sustainability as an economic loss, why don’t we view it as a gain for the environment? The fundamental principle that we are driven to maximize profits cannot be used if we want to address today’s issues. It is imperative to find an alternative model that aligns a firm’s objective with social and environmental needs. Profit will always remain in the picture, but it should be viewed only as a driver.

When I was younger, I always thought that everyone was allowed only one cause to support. My sister was part of the high school green team, so the environmental cause was “taken”. That left me with many other ones, like poverty alleviation, education, and income inequality. But as I read the news today, I realize that that sort of thinking is naïve and over-simplified. There is no way we can say that intergenerational interests are held in our actions when we restrict ourselves only to the issues that affect or interest us. In a similar way, economic profitability can be an issue to limits our abilities to make decisions for the planet and future generations.

And lastly, faithful to John Oliver’s rule, here is the obligatory photo of a polar bear balancing on a piece of ice for this climate-related blog post:

Polar bear on ice flow in Wager Bay (Ukkusiksalik National Park, Nunavut, Canada). Photo taken by Ansgar Walk. Available at: http://commons.wikimedia.org/wiki/Polar_bear#mediaviewer/File:Eisb%C3%A4r_1996-07-23.jpg

Polar bear on ice flow in Wager Bay (Ukkusiksalik National Park, Nunavut, Canada). Photo taken by Ansgar Walk. Available at: http://commons.wikimedia.org/wiki/Polar_bear#mediaviewer/File:Eisb%C3%A4r_1996-07-23.jpg

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