(Shutterstock)
(Shutterstock)

As evidence of rising greenhouse gas emissions accumulates (see the latest Intergovernmental Panel on Climate Change report, here), a new controversy has erupted. Robert Stavins, an influential advisor to the United Nations Framework Convention on Climate Change and professor at Harvard, complains that the report had been substantially redacted to make it more palatable to member governments.

Sovereign governments intervened to soften passages inconsistent with their respective positions and national interests? I'm shocked! Shocked, I say.

But, seriously, this episode does raise a couple of interesting issues regarding the economics of climate change and the role of the international architecture.

Let’s begin, however, by asking: why might governments resist measures to address climate change? There are several possible responses to this question. First, most obviously, the government disputes the science. Second, the government could have what might be called (incorrectly?) a Westphalian view, in which the concept of international obligations is foreign, and opposing climate change mitigation on the basis of individual national self-interest: the costs of mitigation measures exceed the expected costs of climate change to the country concerned. Or, third, it might be argued that future generations, which are likely to be richer than the current generation, should pay the cost of mitigation. Needless to say, there are moral and philosophical issues of discounting the future and accounting for the costs of irreversible climate change as well as debates to be had on the relative costs of mitigation (small costs today versus much-larger costs to be borne later).

Governments might also be concerned that the costs of mitigation could be higher than expected; in particular, that unemployment might result as production in carbon-intensive industries declines due to binding climate change policies. Yet, this concern belies a popular misconception in thinking about the economy: that employment “lost” when a plant is shut down is gone forever. In theory, full employment is pretty much assured in well-functioning market economies by virtue of the economists' handy construct of general equilibrium in which demand equals supply in all markets — including the labour market. Workers who lose jobs in one sector put downward pressure on wages that increases demand for labour in other sectors. As a result, workers find employment in sectors that are expanding. Mitigation measures might similarly have negative effects on some sectors, reducing production and employment in high-carbon sectors. But these effects will be offset by other adjustments in the economy, including expanded employment in low-carbon sectors and changes in real wages that restore full employment.

It could be argued, therefore, that those who worry about long-term employment effects of mitigation measures may implicitly question the effectiveness of market forces to restore and sustain full employment. Alternatively, such concerns may reflect distributional effects: the knowledge that mitigation policies will have different effects on different sectors and different regions. And, concerns about the possible employment effects of mitigation measures may be based on the fact that, however effective in theory, the process of adjustment is subject to frictions that impede the return to general equilibrium. Moreover, adjustment takes time, so that, while full employment may hold in the long-run, it need not prevail in the short-run; and, as Keynes argued in a different context, "in the long-run we are all dead." Democratically elected governments facing electoral timelines may be justifiably worried about the time required to return to full employment.

Enter the international financial architecture. In the current global conjuncture, unemployment remains too high in many advanced economy countries six years after the global financial crisis. Some members of the Eurozone face Great Depression levels of unemployment. Asset prices reflect the extraordinary monetary policy responses to the global financial crisis, while financial markets anticipate the exit — orderly or otherwise — of quantitative easing. The integration of large emerging market economies, meanwhile, has introduced large adjustment shocks. And, one fear, perhaps, is that climate change mitigation measures could be used to introduce trade barriers. As the title of this blog asserts, we are in a new age of uncertainty that further clouds economic prospects.

In some respects, the current situation is reminiscent of the international conjuncture that prevailed 70 years ago when the fear of relapse into global stagnation and post-war adjustment challenges loomed large. A key concern then was that unstable exchange rate movements would be used to gain competitive advantage, making it more difficult to bring down the tariff and non-tariff barriers that had strangled international trade in the 1930s. The Bretton Woods system that emerged was all about sustaining full employment in the face of these threats to global prosperity. While the effectiveness of the system in promoting that objective can be debated, it is fair to say that the Bretton Woods system, together with gradual, negotiated reduction in tariff barriers, did reduce uncertainty about policy frameworks and the rules of the game governing international adjustment and thereby encouraged savings, investment trade and innovation. Perhaps a similar commitment to full employment and clarity on the international rules of the game would reduce the fears of governments reluctant to tackle the threat to shared prosperity posed by climate change?

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.