Don’t Believe in Climate Change? Hedge your Bets.

As discussed at depth in previous blog posts, climate change is a partisan issue. Just bringing up the topic in mixed companies promises to elicit strong opinions from many corners. Yet existing arguments have done a poor job at persuading either side to budge.

 

From the perspective of those of us who strongly believe that climate change exists, it is frequently baffling that support from the whole scientific community is not enough to change the opinion of the other side. Yet it behooves us (for the sake of our projeny) to look for other paths of persuasion to get the other side on board—so we can enact the measures necessary to preserve the future of our planet.

 

Michael Greenstone presents just such an argument in a recent piece published in the New York Times, by focusing on the financial side of things. Even if you don’t believe in climate change, he points out, it is fiscally wise to hedge your bets.

 

The social cost of carbon was codified in the U.S. about a decade ago, but was applied by federal agencies as far back as the mid-1980s. It is, in short, an estimate of the damages caused by the release of one additional ton of CO2 into the atmosphere. Accompanying the social cost of carbon is a discount rate, which translates future damages into a value in the present day. Discount rates are a standard function of financial markets—they reflect the risk profile of an investment.

 

In his article, Greenstone points out that the Trump administration has significantly increased the discount rate. Which basically means that they have rated the risks associated with climate change as minimal. It is one thing if you don’t believe in climate change, but it is another thing if you don’t hedge your bets: by raising the discount rates, the administration is doing the equivalent of dumping a bunch of money into the stock market while a majority of analysts are warning that a crash is imminent.

 

As we strongly believe here at Scoville, that is a bad choice from the environmental perspective. But it is also notably a bad choice from a financial perspective.

 

Greenstone’s piece is definitely worth a read—for those on both sides.