Economics is an extremely broad field with many subsets that is applicable to virtually every issue. Thus far, I have explored microeconomic theory, macroeconomic policy analysis, and environmental economics, to name a few. In this blog post, I’m going to be exploring how principles of financial economics and political economics can be applied to environmental protection (or any social cause in a capitalist society, really).

To understand how to defend the environment, we must first understand what we are defending it from. When talking about the issue of climate change, we are defending the Earth from the practices of fossil fuel companies, those companies that profit from supplying society with dirty fuels that release climate change inducing greenhouse gases. We must also understand why other bodies and mechanisms aimed at protecting the environment have failed. The body and mechanism to which I am referring is our government. The government has largely failed at implementing the policies and regulations necessary to ensure a sustainable climate on the Earth. This is in large part because of the corruptive influence that that the fossil fuel industry has on political processes as a result of the extensive lobbying that is done on behalf of the industry through organizations such as the American Petroleum Institute, and because of the stranglehold which the fossil fuel industry holds on the American economy due to its sheer size. This is not to say that there is no hope for our political system to adequately regulate the fossil fuel industry; it is simply to say that the system may need some extra help.

One of the most effective activist techniques for enabling our political system to regulate the fossil fuel industry is divestment. To divest is to dis-invest. It is to remove one’s investments from any given firm or industry. The fossil fuel divestment movement is one of the fastest growing social movements in contemporary America, and the fastest growing divestment movement of all time. The movement encourages bodies of all types to remove investments in the fossil fuel industry from their financial portfolios. In the United States, there are fossil fuel divestment campaigns at over 380 college campuses, numerous cities, and large religious denominations. Of those 380 colleges, Penn State, which invests tens of millions of dollars per year in the fossil fuel industry, is one. (I happen to be the president of Penn State’s fossil fuel divestment group, Fossil Free PSU). Of the numerous cities that have committed to divestment, State College happens to be one as well.

Fossil Free PSU is Penn State’s student divestment team

Now that we’ve all got some background on fossil fuel divestment, let’s get into the economics of it.

As I mentioned at the beginning, I will be focusing on financial economics and political economics in this post. And it turns out that divestment can go a long toward hindering the fossil fuel industry both financially and politically.

Fossil fuel companies, like any other publicly traded companies, are owned by a group of shareholders, people who buy shares of the companies’ stock. Basic economic theory tells us that as demand for these shares rises (more people buy them), the price increases. And a higher share price correlates to higher profits for a company. If the demand for a company’s share were to suddenly decline (resulting from people selling shares rather than buying), the profits of the company would be impacted. Based solely on economic theory, this end goal of divestment seems entirely reasonably. The problem is that, realistically speaking, it would take an enormous number of shareholders to divest in order to meaningfully impact a company of the size of ExxonMobil, Shell, BP, or the like. A more realistic goal of a divestment campaign is to politically, rather than financially, bankrupt the fossil fuel industry.

This graph illustrates an increase in demand. As the demand curve shifts right, the equilibrium is moved further up the supply curve, and to a higher price level.

This is where the concept of a political economics comes into play–applying economic principles and analyses, such as cost-benefit analyses, to political issues. Under the current situation, it is more beneficial than it is costly for politicians to oppose policies that restrict the fossil fuel industry because of the large monetary influence that such companies have on political processes. Divestment can show our elected officials that influential societal institutions disapprove of the practices of the fossil fuel industry. The amount of institutions needed to show their disapproval through divestment in order to overshadow the power of the fossil fuel industry in our political system, to politically bankrupt it, is far less than the number that would be needed in order to financially hinder the industry as a whole.

Our government has largely failed at taking the necessary steps to protect the environment and combat global warming. When government’s fail their people, it is time for direct action, and fossil fuel divestment can be one of the most effective means of direct action within the environmental movement. Divestment allows the power of all-mighty dollar to work against the fossil fuel industry for a change. Wouldn’t that be a turn of the tables?

Sources:

Click to access SAP-divestment-report-final.pdf

http://www.theguardian.com/sustainable-business/bill-mckibben-fossil-fuel-divestment-campaign-climate

In my previous posts on this blog, I’ve discussed the negative economic effects of climate change, and some economics policies that have been proposed for combatting it. In other words, I have explored the negative effect that fossil fuels, such as oil, can have on society when they are burned to create energy. I have not, however, discussed the negative effects of fossil fuels before they even reach that point–in the stages of extraction and transportation–especially when things don’t go as planned.

This past Monday, March 24th, marked the 25th anniversary of the Exxon Valdez oil spill, which spewed 11 million gallons of crude oil into the previously pristine waters of Alaska’s Prince Edward Sound. This catastrophe occurred when an oil tanker, the Exxon Valdez, crashed into a reef. The effects of the spill were detrimental to the ecosystem and all wildlife in the area, as well as the region’s largest industries, fishing and tourism. The spill has been responsible for a loss of nearly $300 million for the commercial fishing industry in the region since the spill, an industry that supported the livelihood of 32,000 individuals at the time of the spill. Tourism spending in southwest Alaska took a significant hit as well, dropping by roughly 35% in the year following the spill (1). To this day, the fishing and tourism industries in and around the Prince William Sound are crippled, both as a result of the reputation of the area created by the spill, and the lingering oil that remains in the area. A 2001 study conducted by NOAA found that roughly 16,000 gallons of oil are still present in the Prince William Sound, and that the oil is decaying at a rate of only 0-4 percent per year, and the actual rate is likely closer to 0. At that rate, the oil will not disappear entirely for centuries (2).

Workers attempt to clean beaches after the Exxon Valdez spill 1989

For many years, the Exxon Valdez spill was thought of to be the worst oil spill in United States history. It was believe that we had learned from our mistakes and that potential leaks in the future would be avoided. The explosion of BP’s Deepwater Horizon oil rig in 2010 changed all those ideas. The explosion of the oil rig resulted in the deaths of 11 workers, and the free flowing of oil for 87 days. When it was all said and done, roughly 210 million gallons of crude oil had been released into the Gulf of Mexico (3). The huge toll that this monumental spill took on the wildlife and overall ecosystem of the Gulf aside, the economic impact was detrimental.

Oil washed ashore at many beaches in Gulf of Mexico after the Deepwater Horizon oil spill

In the area around the Gulf of Mexico, the fishing and tourism industries carry heavy weight. The $3 billion per year fishing industry in the Gulf of Mexico supplies one-third of all seafood consumed in the U.S., and in the months following the spill, up to 40 percent of federal waters in the Gulf of Mexico were off limits for fishing of any kind (4). Even now as the waters are reopened for fishing, marine life is being discovered with various diseases and deformities such as “shrimp without eyes, crabs without claws, and fish with open lesions (5)”, a trend that will likely increase, as over 60 percent of the oil from the spill remains unaccounted for in the Gulf (6). In addition to the fishing industry, the tourism industry of the Gulf of Mexico was also adversely affected by the oil spill. Panama City, Florida saw its tourism rate drop by 15% in the months following the spill, and the state of Alabama experienced a decrease of about one million tourists (7). All things considered, the Canadian Journal of Fisheries and Aquatic Sciences has estimated that the spill will be responsible for $8.7 billion in lost economic activity in the Gulf region by 2017 (8).

In this post, I have discussed the economic effects of two very large oil spills in recent history. While large events such as these get the lion’s share of media coverage (and deservingly so), oil spills are far more common than most people realize. For instance, I’m willing to bet that most of my readers are not aware that two spills occurred earlier this week, one in Lake Michigan (the culprit being BP, again), and one in the Houston harbor. The point is that, no matter how “safe” extraction of fossil fuels may seem on paper, in the real world, things go wrong. When things go very wrong, they can take serious tolls on the economy.

Sources:

1. http://oceana.org/en/our-work/stop-ocean-pollution/oil-pollution/learn-act/exxon-valdez-oil-spill-facts

2. http://www.evostc.state.ak.us/Universal/documents/LingeringOilReport.pdf

3. http://www.uscg.mil/foia/docs/dwh/fosc_dwh_report.pdf

4. http://www.bloomberg.com/news/2012-02-23/bp-oil-spill-haunts-gulf-business-owners-almost-two-years-after-disaster.html

5. http://www.americanprogress.org/issues/green/news/2012/04/19/11409/the-lasting-impact-of-deepwater-horizon/

6. http://news.nationalgeographic.com/news/energy/2012/03/120322-gulf-oil-spill-tar-balls-wash-up-on-beaches/

7. http://www.npr.org/2011/04/18/135326540/a-year-after-deepwater-florida-sees-a-comeback

8. http://www.sciencedaily.com/releases/2012/02/120217115553.htm

So far in this blog, I have explored how climate change can have negative effects on businesses, and how extreme weather events caused by climate change can come with high price tags for society. But I haven’t explored or offered any means by which to attack the problem of climate change. So, in keeping with the principles of climate change economics, I’d like to share some economic solutions to the problem of climate change.

One of the most popularly proposed economic policies to combat climate change is a “Cap and Trade” program. The general idea of cap-and-trade is that companies have an allotted amount of units of pollution that they are permitted to emit. When companies do not use up their allotment, they may sell their unused units to other companies. This incentivizes companies to operate more efficiently and reduce their emissions because the sale of unused units can be a significant extra income source for companies. Cap-and-trade also works for businesses that are unable to reduce their pollution levels for one reason or another. They have flexibility in that they can purchase more pollution units to raise their allotment, should they determine that the financial benefit they get from polluting is greater than the cost of purchasing more units. Cap-and-trade is not a new concept. It came to prominence under the Clean Air Act of 1990, when it was used to reduce the amount of acid rain-causing sulfur emissions that companies could emit. The program was successful, as it was a key part of dramatically reducing acid rain.

This graph shows the effectiveness of cap-and-trade programs in cutting down on Sulfur Dioxide emissions since the program’s inception in 1990.

Now, Cap-and-Trade is being considered to use for the purpose of limiting carbon dioxide and other greenhouse gases. The contemporarily proposed programs suggest that the federal government would auction off a set amount pollution permits, and companies who require more permits than they were able to obtain via government auction could purchase them in the marketplace from companies that acquired more permits than they needed. Cap limits would gradually become stricter and stricter, forcing companies to reduce their emissions over some set period of time, while giving them a grace period to do so. 

Another potential economic policy that is geared toward combating climate change is the idea of a carbon tax. This policy would not set a limit on the amount of pollution that can be legally emitted, but would charge a direct tax on products that release carbon dioxide, such as fossil fuels. The taxes would subsequently raise the prices of said fuel sources, encouraging individuals to utilize renewable fuel sources whenever possible. For example, switch the heating company that generates its power from wind, putting up solar panels on one’s home, or purchasing an electric vehicle. The criticismfor this policy is obvious; most people simply do not have the financial means to switch the sustainable options, and increasing the price of fossil fuels would cripple the middle and lower classes. But there is an answer to that criticism. The new revenue created by a carbon tax could be used to fund income tax breaks for individuals, and tax breaks for businesses as well. This would put money back into the pockets of individuals and businesses, enabling them to make the switch to the renewable fuel sources, which would be priced competitively compared to increased price of fossil fuels. Thus, phasing fossil fuels out of the equation. 

Policies such as cap-and-trade and taxation of carbon have broad support from economists on both sides of the political spectrum. That’s because, speaking in terms of rudimentary economic theory, these proposals are no-brainers. So prepare yourselves for crash course in the introductory economic concept of “social cost.” For businesses, there are two types of costs: internal and external. Internal costs are those that businesses must pay for in production, e.g. workers salaries, raw materials, machinery, etc. External costs are those costs that are inflicted upon third parties not directly involved in transactions. The sum of these types of costs make up social cost. Let me provide an example: if you go to an Exxon station and fill up your tank, you have paid for a good. Exxon has paid the internal costs of extracting and refining the fuel. But when you drive away with your tank of gas, you pollute the air, thus, inflicting a cost onto the rest of society–a third party not involved in the transaction of you purchasing a tank of gas. This is the external cost of that tank of gas. Forcing companies to pay for the pollution they create, either through cap-and-trade or a carbon tax, is a way to ensure that companies incur their total costs, their social costs. A market in which companies pay their full social costs is truly in equilibrium, and is therefore economically ideal.

Sources:

http://www.americanprogress.org/issues/green/news/2008/01/16/3816/cap-and-trade-101/

http://www.epa.gov/captrade/

http://www.newyorker.com/talk/comment/2012/12/10/121210taco_talk_kolbert

http://www.nytimes.com/2012/07/05/opinion/a-carbon-tax-sensible-for-all.html?_r=0

http://www.brookings.edu/research/opinions/2013/03/12-taxing-carbon-gale

As I introduced in my first blog post, the interests of industry and the environment are not generally in opposition, as they are often made out to be. To further exemplify that point, I’d like to share the specific case of some corporations that have become seemingly unlikely supporters of the fight against climate change, and these corporation has become so strictly for financial reasons (they are, after all, a corporations).

Coca-Cola’s support for the fight against climate change was kindled in 2004, when it lost an operating license in India as the result of ongoing drought that caused severe water shortage in the country. This event was the first of many in the past decade that would prove to be harmful to Coca-Cola’s finances, as drought continues to drive up the cost of input goods, like water, sugar cane, sugar beets, and citrus, for the company’s products. Coca-Cola’s opinion on the effects of extreme weather caused by climate change were summed up by the company’s vice president, who said, “When we look at our most essential ingredients, we see those (extreme weather) events as threats.” In response to this threat posed by climate change, Coke has begun speaking out publicly in support for the environment, expanded their use of water conservation technologies, and dispatched a “clean air fleet” of all-electric and alternative fuel based trucks and other delivery vehicles.

Another unlikely fighter in the battle against climate change is Nike. We all know of Nike’s habits of utilizing cheap labor, often in extremely immoral contexts, but the company’s addiction to cheap labor means that much of their production occurs in Southeast Asia and Oceania. This area of the world is perhaps more vulnerable to the threat of extreme weather that climate change poses than any place else. Floods have temporarily shut down numbers of Nike’s factories in recent years, and droughts have significantly driven up the price of cotton that Nike uses in manufacturing its attire. Falling in line with Coca-Cola, Nike has taken steps to speak out against climate change and to adapt its practices to adverse effects of global warming, and it has done so strictly for economic purposes. 

Coca-Cola’s and Nike’s stance on climate change is but a microcosm of a much larger phenomenon. In fact,  there are numerous firms in the United States who have taken steps toward sustainability such that they now use 100 percent green energy (just to be clear, Coca-Cola or Nike are NOT one of those firms). In the aggregate, these 100 percent clean energy companies use roughly 11.8 billion kilowatt-hours of clean energy per year; this is the equivalent of avoiding the carbon dioxide emissions of approximately 1.1 million average households in the United States. And there are some names with a fairly high degree of notoriety in the “100 percent green club,” as I’ll call it. Some of the bigger names on the list include the likes of: Intel Corporation, Kohl’s Department Stores, Whole Foods Market, Staples, The Philadelphia Phillies (!), The Philadelphia Eagles (!), and Green Mountain Coffees, among others (you can view the whole list here). The point is that there are a lot of private firms and groups that are making leaps and bounds in the fight against climate change. Because these firms are largely extremely profitable, we can assume that their commitment to clean energy has not come at a high financial cost.  Still, carbon emissions continue to be problematic and to increase worldwide.

As it turns out, only 50 companies contribute 73 percent of the total carbon emitted by the largest 500 corporations on the planet. This means that even if most companies were to drastically reduce their greenhouse gas emissions, we would still be in trouble. Some of the corporations that top the list of the 50 worst polluters include: Wal-Mart, Exxon-Mobil, Bank of America, and Verizon. So the question that seems to linger is, how can we, as a society, persuade corporations such as these to undertake sound climate practices? It is obvious that the invisible hand of the free-market economy has not yet done the trick, and sometimes waiting for that invisible hand to fix things takes just too darn long (see The Great Depression). In times when the market fails to produce ideal outcomes, it is time for government to intervene, and we will explore options for potential climatic-economic policies in future posts.

Sources:

http://www.nytimes.com/2014/01/24/science/earth/threat-to-bottom-line-spurs-action-on-climate.html?_r=1

http://roybal-allard.house.gov/news/documentsingle.aspx?DocumentID=256456

http://www.epa.gov/greenpower/toplists/partner100.htm

http://thinkprogress.org/climate/2013/09/12/2609611/companies-emissions-revenue/#

Climate Change and Economics; popular conception of these two topics is that they are mostly unrelated or, if any relation exists, that they are opposing. Political pundits oftentimes frame the perception of sound climate policies as being at odds with sound economic policies and vice versa. In fact, it has nearly become commonplace in the world of American politics to assume that any policy is strong on the environment will have negative economic consequences. My hope for this blog is that I will help to correct this misconception and to illustrate the intersection of climate change and economics. I hope to show that sound climate policy often can translate into sound economic policy and that we CAN have it both ways: a clean and sustainable Earth along with economic prosperity. After all, the science indicates that, when it comes to sustainability, we haven’t got a choice, and we haven’t got long.

To start off the blog and get everyone on the same page, I’d like to first introduce a basic assumption that I’ll be operating under and a few things that I’ll be referencing. First and foremost, that climate change is fact. 97% of climate scientists agree on this, and every reputable scientific organization in the world agrees on it. Secondly, I will often reference the Intergovernmental Panel on Climate Change, or the IPCC. The IPCC is a team of esteemed climate scientists (including Penn State professor, Michael Mann) that convenes yearly on behalf of the United Nations to issue a report on the state of our changing climate. Specifically, I will often reference the IPCC’s warning that the Earth can handle no more than 2 degrees celsius of warming by 2050 if we wish to sustain human civilization as we know it.

Now, a bit about that IPCC report and how it relates to economics. The IPCC has concluded that we cannot allow the temperature to rise by more than 2 degrees celsius by mid-century to keep alive any hope of sustaining society as we know it. What is meant by that is that we must keep warming below twodegrees to avoid things such as island nations and coastal cities everywhere becoming regularly inundated by water, extremely strong hurricanes and storms regularly, prolonged and severe droughts, and more frequent wildfires. To stay below this 2 degree target, scientists estimate that we can spew no more 565 gigatons of carbon dioxide into the air between now and 2050. To put things in perspective, at the rate we’re at, we will emit that amount of carbon dioxide in about 16 years. Moreover, fossil fuel companies such as Shell, Exxon-Mobil, so on and so forth, currently hold reserves that, if were utilized and burned to produce energy, would equivocate to roughly five times, 2,795 gigatons, the amount of amount of carbon dioxide that scientists believe we can safely emit into the atmosphere. And the balance sheets of these companies operate under the assumption that all their reserves will be extracted, refined, transported, sold, and burned. This is where economics and finances come to intersect with climate change.

In 2012, Hurricane Sandy ravaged much of the East Coast of the United States

Fossil fuel companies depend on the prospect of utilizing all of their reserves, and keeping them from doing so would certainly be bad for their bottom line. But what of the bottom line for the rest of society? In 2012, Hurricane Sandy struck much of the East Coast of the United States; New York City and New Jersey were hit especially hard. The total cost of the property damage caused by Hurricane Sandy has been estimated at $65 billion. In that same year, the U.S. faced severe drought. The total economic cost of the drought in 2012 has been estimated to be as much as $77 billion. That makes a total cost of $142 billion resulting from climatic events brought on and/or exacerbated by global warming in 2012 alone by drought and one storm. Is this something that we can afford on a yearly basis? That does seem to be the direction we’re headed in–9 of the 10 most costly hurricanes in U.S. history have occurred in the past decade. It seems that climate policy that cuts down on the frequency of costly extreme weather events would also make for sound economic policy.

Moving forward, I’ll be doing more in depth case studies of specific weather events, troublesome economic events, various climate and economic policies, etc. But for now, hopefully the existence of an intersection of climate change and economics is clear to you.

Sources:

http://climate.nasa.gov/scientific-consensus

http://www.rollingstone.com/politics/news/global-warmings-terrifying-new-math-20120719?page=2

http://thinkprogress.org/climate/2012/11/27/1244021/cost-of-superstorm-sandy-and-other-2012-extreme-weather-events-on-the-rise/

Click to access Sandy13.pdf

Click to access nws-nhc-6.pdf

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