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Part 2: What Most Economists Believe About the Financial Aspects of Climate Change

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In a previous post I listed some numbers that convince most economists that burning all the proven carbon resources – coal, oil and natural gas owned by energy companies- is  very dangerous. Scientists have calculated that it might be safe to burn up to 20% of the known carbon stock . Economists as professionals accept the scientific view that to burn all the fossil fuels that energy companies have on their books will result in atmospheric carbon dioxide level far above the levels thought to be reasonably safe.

The fossil fuel stocks still in the ground currently count as wealth. A large part of this wealth appears as the value of shares of companies on the world stock markets. The value of many stock portfolios therefore depends on right to burn the known stocks and to add 2,795 gigatons of carbon to the atmosphere. John Fullerton is a former managing director at JP Morgan who now runs the Capital Institute. He calculates that at today’s market value, the carbon resources are worth about $27 trillion.

But carbon stocks are not  not wealth if they cannot be burned. If the fossil fuel companies were forced to leave 80 percent of their carbon underground, they would have to write off  $20 trillion in assets. Economists who have considered the question realize that, if carbon emissions are sharply reduced, energy companies will suffer huge write-downs, stock values will fall, and companies and pension funds that own carbon stocks will take a serious hit.
A possible outcome of a sharp reduction in paper wealth like this is a world-wide recession. A stock market crash contributed to the Great Depression. A massive writedown of the value of the American housing stock precipitated the worst financial crisis since 1929, and brought on a world wide recession. Most economists certainly believe that that a write-down of carbon assets on this scale could cause a financial crisis.

On the other hand there is no way to say whether most economists believe that a write-down really would cause a financial crisis. Even if it did, only some economists believe that financial crises cause depressions and recessions. The link between financial markets and the “real” economy is not very tight. The stock market often goes down when employment increases, for example. Employment can increase when the stock market is falling.

Whether or not the write-down causes a depression, it would certainly shift the distribution of wealth. Carbon stocks are owned disproportionately by the wealthy. The wealthy will take a much larger hit than those living hand-to-mouth. They only suffer when the wealthy force governments to pay them for their losses, or when investment slows down and employment drops. Neither has to happen.
Most economists don’t believe that the owners of the carbon stocks will take their losses lying down. They will not accept a reduction in their wealth just to save the planet.  This follows from the way economist think about people.   We think economic incentives have  a much stronger effect than moral views in most cases. We don’t believe strongly in `”corporate social responsibility,” Very few  economists believe that carbon companies will energetically promote carbon reduction.

In fact, most economists assume that companies hire CEOs to maximize share value.  Energy companies pay CEOs millions to sell that carbon. Because economic theory says people tend to do what is in their economic interest, most economists can be easily convinced that these CEOs will spend a small amount of to reduce their losses. It seems likely that most economists believe a small amount of $20 trillion  is a lot of money. I  think it is fair to say most economists would predict that a lot of money will be spent on on pro-carbon propaganda.

This prediction is easy to check. Watch for oil companies like Enbridge buying expensive TV ads to convince Canadians that they are very nice people doing good things, and that therefore Canadians should help them keep selling carbon to China and the USA. If you don’t see any propaganda from oil companies, and if you don’t see oil billionaires in the USA supporting climate deniers, then perhaps economists don’t understand human nature.

If you do see this kind of  propaganda,  perhaps it is because there is $20 trillion at stake, and the war to save it has begun.

November 11, 2014


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