Skip to Main Content

Kartik B. Athreya

The Risks and Inequities of Climate Change

headshot of Kartik Athreya

Nov. 19, 2020

Kartik Athreya

Executive Vice President and Director of Research

Climate Change Economics

Highlights:


  • Addressing climate change is arguably the most challenging public economics, and maybe macroeconomics, question currently facing the world.
  • Global collective action seems unlikely, and the negative effects of climate change are most likely to be felt by already-poor and vulnerable populations.  
  • Communicating the scientific consensus on the costs and benefits of climate action to the broadest public is essential, even if only to manage unabated climate change.
  • Economists can help by identifying changes in incentives that would help preserve the climate commons without imposing additional aggregate costs.

Good morning. Thank you all for joining us. It’s a delight to kick off a really nice event. Before I say more, I have to note that the views I express are my own and not necessarily those of the Richmond Fed or the Federal Reserve System. I’m excited to hear first from Per on policy and on one of the many areas in which he has been influential for a long time. It’s been almost 25 years since Per and Victor published a key paper that was important for getting macroeconomists to think more about the power of vested interests. That work was on what you might call the “economics of politics.” As to whether politics can let us attain (potential) pareto improvements (in the case of their vested interests paper, economic growth), it isn’t comforting.

Similarly, Clare’s results will be salient, I suspect, in driving home that collective action problems abound at even the subnational level—inland versus coastal infrastructure, for example—to say nothing of the truly global collective action issue in coordinating emissions and abatement activity.1 Brigette’s paper will also be helpful here, no doubt.  

These researchers, along with the other economists we’re excited to have join us today, are directly or indirectly addressing what is arguably the most challenging public economics, and maybe macroeconomics, question out there: If at least some measure of consensus is essential for the efficient use of global commons as exhaustible resources, is there any hope of animating the global “us” and, specifically, animating the other “us”—the U.S. of A.?

I conjecture today that the answer to both of these questions is: probably not. That may be wrong, but let’s imagine it’s right, perhaps simply because that’s what prudent risk management would ask of us. Looking first at the United States, my view derives from the fact that the opponents of greenhouse-gas-abatement have been very effective at turning their preferences into policy (or the absence thereof). There is a lot of rationality is this position. After all, we are only one of many, we can mitigate, we can move within our borders, and we can fortify the perimeter much more intensively. The U.S. as an island is a strategy, and it is one that has evident appeal in the polity thus far. As for the globe, it is hard to imagine growing nations agreeing to abate in the absence of rich-country action.

Of course, if this comes to pass, we will likely end up with a particularly cruel outcome: In the one realization of world history that has brought us here, a small group of nations found ways to be productive, ate up the commons, and now are capable of pulling up the drawbridge as major chunks of the remainder face greatly heightened risks of broiling, drowning, and going thirsty and hungry. The inequities from not achieving consensus sooner appear hard to overstate.2

At the same time, if we catastrophize—like I may just have done—it seems key to be specific about it. The real damage of climate change may well not be global catastrophe but instead “second-moment” disasters mainly in the “global south,” while those in the “global north,” to the extent that they occur, could affect mainly the poorest populations. The victims in essentially all places will be those who appear already—by societal-revealed preference—expendable. Collective action thus seems unlikely to occur.3

In asking about the odds of serious action, let me be very clear that I am not a central banker veering out of his lane. Instead, I am one trying to understand what path to expect. Indeed, as a central banker, I take as parametric the judgments of the political system and carry a sense of responsibility for understanding as clearly as I can the risks we face—very much including climate change—and how they matter for our lines of business: monetary policy, community development, and the safety of the financial and payments systems.

To assess those risks, though, requires asking “What will happen?” And that’s what these remarks are meant to do. All that said, I am comforted to know that central bankers rather more eminent than me, and central banks maybe more venerable than even the Fed, have spoken very clearly on how they think climate matters.

I’ve speculated that internal inequities likely won’t do the trick. Notice that we already tolerate massive inequity and gaping holes in risk-sharing, and especially so when the losers are of color.4 We also appear to have at least a vocal minority, if not a plurality, that defines individual freedom as “freedom from mandates,” even if those mandates expand the feasible set in the long run. I see this doctrine as stymieing even local efforts to manage climate risk, for better or worse. If you doubt this, think about the doctrinal conflict between those who view mask mandates as essential to delivering protection for others—when that requires mass participation to succeed but where free-riding is a temptation—versus those who see them an unwarranted intrusion into personal sartorial choices. It’s just not a winner. We rarely do equilibrium analysis as a population. 

If little or no real climate action is a sensible base case, what are things worth paying attention to on the consensus building front? What follows is mostly “mom and apple pie,” as we Americans like to say, but maybe it’s useful to say it anyway.

First, I think conveying the ideas at play here is central. A full weighing of costs and benefits by the public requires the right analogies, the right metaphors, and effective connections to be drawn between aggregate events arising from we economists might describe as the “integration of a continuum of measure-zero actions, all of which right now are individually rational.” How should economics be taught? Should it focus on market failure more intensively in vivid ways to create awareness of the possibility of disaster?5 Should Solomon’s work be conveyed to high school kids? Should that come at the expense of a lot of other material? Can it be done without being incoherent? I defer to the teachers attending today to think about that.

Second, can economists use our tools and understanding to put a grand bargain on the table that would command broad enough support? As a nonexpert in either climate economics or mechanism design in public finance, I am not qualified to answer. But I do want to ask about the possible upside of a simple policy that might survive a skeptical, or simply “not Nash enough,” population—and that’s an increased reliance on consumption taxes rather than income taxes. The euro area leads the way on this in using VAT so much more than here. Can its experience be leveraged to inform the U.S. conversation in ways suspicious U.S. counterparties can agree on?

I’m drawn to this policy given that U.S. and EU consumption equals 45 percent of world consumption and currently contributes about one quarter of the world’s CO2 emissions. Also, while the factories of the world may be located elsewhere, beyond the reach of U.S. or EU policy, they are producing consumption for the rich world especially. Moreover, I think it’s important to clarify that the lifetime incidence of consumption tax may not actually be regressive, as Metcalf has argued.6 Regressivity of consumption taxes is an argument that carries the day often enough that we should be careful about letting it choke off useful baby steps.

Similarly, we face hard steps if we are to sell the economics of this to the subgroup that appears most concerned about climate change. For starters, the idea is to ensure that the future looms large enough in current period decision-making. Chamley and Judd’s work makes escaping the logic of capital income taxes pretty hard: Whatever else capital income taxes do, they tax consumption increasingly heavier the further out in the future we look.7 But abiding substantial capital income taxes means making current consumption relatively attractive, all else equal. If our current technologies are dirty, though, delaying consumption has to be part of the solution. However, consumption taxes are still effectively taxes on labor, and this too will not be lost on a population. But since we don’t have a major consumption tax in the United States, we have to ask: To what extent are labor income taxes getting us the labor wedge needed to lower consumption? As a result, a solution that deals with climate—and which will likely protect the currently vulnerable—may have to come in a form with very bitter optics and may demand that we tolerate weird bedfellows.

Third, can we derive bounds on the benefits of unilateral action (U.S. and EU)? Will some countries go it alone, or is it all or nothing? Let’s stick with the base case we have been working with so far. In this case, effect mitigation is all we have. But again, when it comes to mitigation, the world’s least capable face a serious constraint: They are either too poor to make this a priority or are under fossil fuel exporting leadership. I look forward to hearing from Jim and Christian tomorrow. 

On a happier note, if climate change turns out to impose risks at the national level rather than inevitable disasters on some countries, we can exhume Shiller’s macro markets—which seem dead even as his prescient arguments ask that we take them exceedingly seriously. Alternatively, revisiting just how well federalism can be made to work in nation-states, especially large ones, seems critical. An NBER working paper released only two weeks ago underlines how local public finance can take sustained hits.8 This seems mitigable through the diversification that the federal government can achieve—allowing us to avoid fluctuating state and local spending, which are so critical to sustaining human capital investment. Indeed, climate shocks may create scars analogous to those coming from the pandemic: severely interrupted education and permanent setbacks suffered by the least well-off and the least connected. So, I do think we’ve now seen the future of what unabated climate change will do.

Thus, macro markets, or a public proxy for them, seem especially vital if one sees mitigation as hard to sell.9 A grim silver lining is that maybe, just maybe, the intranational collective action problem alone is so difficult that there is little moral hazard at the level of nation-states to worry about. As a result, perhaps it is mainly risk-sharing in a world endowment economy that remains? This is where I see Glenn and Toan’s work informing us.

So, with those thoughts from a nonexpert, I will stop and let the experts take over. Thank you.

 
1

On inland versus coastal flooding in the United States, things are perhaps a bit subtle. Low-income and minority residents are more likely to live in high-risk zones for inland floods while high-income white residents tend to be concentrated in high-risk zones for coastal floods, likely because of the high amenity value associated with living by the coast. See Laura Bakkensen and Lala Ma, “Sorting Over Flood Risk and Implications for Policy Reform,” Journal of Environmental Economics and Management, November 2020, vol. 104,. 

2

Ranie Lin, Lala Ma, and Toan Phan found that minorities are also disproportionately more concerned about global warming in surveys. See “Race and Environmental Worries,” presented at the Federal Reserve Bank of Richmond, Aug. 12, 2020.

3

One potential mechanism is that minorities, even in the richest countries, are more exposed to heat because they tend to live in neighborhoods with fewer trees and parks. For example, recent research has found that formerly redlined neighborhoods are today about 5 degrees Fahrenheit hotter in summer, on average, than other neighborhoods. See Jeremy Hoffman, Vivek Shandas, and Nicholas Pendleton, “The Effects of Historical Housing Policies on Resident Exposure to Intra-Urban Heat: A Study of 108 US Urban Areas,” Climate, January 2020, vol. 8, no. 12, pp. 1-15. This study was nicely summarized in the New York Times, using the city of Richmond as the prime illustrative example.

4

There is an established literature in economics documenting that the poor and people of color are disproportionately exposed to air and water pollution. See H. Spencer Banzhaf, Lala Ma, and Christopher Timmins, “Environmental Justice: The Economics of Race, Place, and Pollution,” Journal of Economic Perspectives, Winter 2019, vol. 33, no. 1, pp. 185-208; and “Environmental Justice: Establishing Causal Relationships,” Annual Review of Resource Economics, October 2019, vol. 11, pp. 377-398.

5

Kartik Athreya, “Keeping Economic Education Relevant in a Turbulent World,” Speech at the Council for Economic Education’s Financial Literacy & Economic Education Conference, Oct. 1, 2020.

6

Gilbert Metcalf, “The Lifetime Incidence of State and Local Taxes: Measuring Changes During the 1980s,” In Tax Progressivity and Income Inequality, ed. Joel Slemrod, New York: Cambridge University Press, 1994.

7

See Christophe Chamley, "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, May 1986, vol. 54, no. 3, pp. 607-622; and Kenneth Judd, "Redistributive Taxation in a Simple Perfect Foresight Model,” Journal of Public Economics, October 1985, vol. 28, no. 1, pp. 59–83.

8

Rhiannon Jerch, Matthew E. Kahn, and Gary C. Lin, “Local Public Finance Dynamics and Hurricane Shocks,” NBER Working Paper no. 28050, November 2020.

9

Maybe hopeful are the findings from Danae Hernandez-Cortes and Kyle C. Meng, who have documented that climate policies, in particular the introduction of California’s carbon market in 2013, can help reduce the pollution exposure gap (also known in the literature as the “environmental justice gap”). See “Do Environmental Markets Cause Environmental Injustice? Evidence from California’s Carbon Market,” NBER Working Paper no. 27205, May 2020.

Subscribe to News

Receive an email notification when News is posted online:

phone Contact Us

Jim Strader (804) 697-8956 (804) 332-0207 (mobile)