Climate Change and the macro economy.

IPCC Scenarios, Source: https://earthobservatory.nasa.gov/Features/GlobalWarming/page5.php

Recently here in BC, we have had a change in the legislature, a return of the NDP (kind of) after 16 years. 

I say kind of because for those not familiar, the NDP have only obtained power by brokering a deal with the BC Green Party to obtain a slim majority through their working relationship and by slim I mean one seat. Truthfully much still needs to be determined - a Speaker for the House will still need to be elected. If this speaker comes from the NDP/Green, it will result in an equivalent number of seats between the BC Liberals and the NDP/Greens, meaning any legislation will need to be carefully crafted if they hope to pass it through the house. 

political background aside -  the whole point to get at is that the NDP and Greens have committed to increasing the carbon tax here in BC. You can read my thoughts about the carbon tax in a previous post about Alberta's here. To summarize that post, Carbons taxes are desperately needed -- however I don't think anyone will actually be happy with one being put into place -- essentially because we are now forced to pay for something which we previously were getting for free (pollution).

Now there are serious economic implications of implementing a higher carbon tax - which will often be presented in the news - how higher taxes will hurt the already fragile economy. How if BC increases a carbon tax while other provinces do not, we will lose businesses to other provinces, etc. 

While all these arguments hold an element of truth - the problem is they are all short-term arguments. that we shouldn't implement a carbon tax today because it will hurt today. The problem with this argument is that it will hurt a lot more tomorrow if we don't do it today.

On this topic I have recently come across a report released by the European Systemic Risk Board which was published in February of 2016 titled Too Late, Too Sudden: Transition to a low-carbon economy and systemic risk, the full article can be found here.

Where other papers I have read focus on the devastating climate effects on the economy due to inaction on climate policies, this report takes a different approach. Acting under the assumption that humanity will eventually be forced to deal with the climate problem - either today, allowing a gradual change towards a new low-carbon society, a "soft landing". Or in the future when the situation is so dire that the costs are very real, apparent and demanding immediate action, a "hard landing". 

In the latter, as we will be forced to rapidly adjust to low-carbon production processes the effect on the economy will be severe and systemic. To look at one side of this, the report suggests that massive amounts of capital will be rendered worthless in a short amount of time due to their reliance on carbon fuels. 

A short snippet on this from the report:

Avoiding substantial climate change implies that assets dependent on fossil-fuel energy will become obsolete. Carbon-intensive sectors such as transportation, manufacturing, agriculture and real estate rely on a large stock of long-lived physical capital whose efficient use requires a continued supply of cheap energy and, in many cases, energy specifically derived from fossil fuels. In a “hard landing” transition to a low-carbon economy, carbon-intensive physical capital (such as conventional vehicles, electricity supply infrastructure, machinery used in manufacturing processes) would quickly become obsolete.

It often seems rather removed to look at the effects of rapidly transitioning to a low-carbon society when talking about generic capital and manufacturing processes which often appear as a world removed to most Canadians.

When we talk about the fact that during a rapid adjustment to a low-carbon society that your house or automobile will quickly become obsolete and worthless due to its dependency on fossil fuels - now, suddenly, this becomes a reality and a situation which we would hope to avoid given how much of our individual net worth is held in these assets.

The report itself is a very light easy read which I would recommend. Hopefully showing that we need to start acting today in response to this (as painful as it is) rather than wait until the 11th hour.

Unfortunately - given human behavior - I will be pleasantly surprised if humanity can unite to deal with this problem before we are forced to. But maybe I am a bit of a pessimist.

What are your thoughts? Feel free to comment below.