Opinion – Why? Economês in good Portuguese: How to solve the climate problem? An explanation from the point of view of economists

Climate change is a real and urgent problem. Therefore, promoting initiatives focused on climate mitigation and adaptation is one of the greatest challenges today. But how are we going to do this? And more specifically, what is the role of individuals, private institutions and government?

It may seem like a trivial question with an obvious answer: everyone will need to do their part. But let’s think about what that really means.

Decisions about carbon emissions are the result of interactions between economic agents, specifically, the relationship between consumers and firms, which includes companies’ choices about how to produce and how much to produce and consumers’ decisions about what and how much to buy.

With this in mind, it is clear that preventing climate change requires changes in individual behavior. It is something that is already reflected in the different choices that some people make these days: paying more for a product if it is certified sustainably sourced, adopting a vegan or vegetarian diet, or even (as some friends of mine do) completely boycotting travel. to places that depend on planes and only use low-carbon means of transport such as trains, buses and bicycles. The point is that everyone knows that individual initiatives –no matter how well-intentioned they may be– are not only insufficient, but often insignificant compared to the magnitude of the problem.

A company action, then, may seem more relevant. After all, fighting climate change involves rethinking the entire production chain. As we mentioned earlier, there are many opportunities for the private sector to enter new markets, especially carbon. An example is when companies buy carbon credits to offset (in English, offset) the pollution generated in their usual activities.

However, this will not solve the climate problem either. The main challenge is that the offset market often appears today as a form of green washing, or in English, “greenwashing”. Greenwashing occurs when companies convince consumers that their products or services are more environmentally friendly than they really are. If companies buy enough carbon credits to offset all the pollution generated by their activities, they can claim that their products are “zero emission”, which in effect makes them appear “greener” to customers. Of course, these credits are associated with carbon offset projects, which can reduce emissions or increase carbon storage when done well. But the fact that companies buy these credits are short-term solutions, as they do not decisively address the main sources of carbon emissions, such as the use of fossil fuels.

Also credits act almost as if they are excusing companies from blame, which can be problematic.

The climate problem is first and foremost a problem about externalities, and it is not always in the interest of companies or individuals to take unilateral action. And when it is, the impact of isolated voluntary initiatives is extremely limited.

Here comes another economic agent: the government. It is the government that must act to change the decisions of companies and individuals in a climate-friendly direction, whether market-based instruments, command-and-control policies or other incentives are used. What will be the mechanism by which future goals will be translated into actions? The government needs to decide which climate target is reasonable, what we have to do today to achieve it, think about whether there are obstacles to this action, design actions with the objective of overcoming these obstacles, identify who are the agents that may be negatively affected by these actions and, finally, outline compensation mechanisms to minimize welfare losses –that is, minimize the agents’ loss of utility, or, in other words, avoid the loss of surplus by consumers and producers.

It is an extremely challenging task that falls to our elected officials. However, government will alone is not enough to solve the climate problem. There also has to be a way to measure progress, from analyzing policies to actions. And also being able to compare alternatives when choosing the best way to reach goals, that is, the way that has the lowest cost for the same effectiveness. That’s where scientists come in, including economists and other researchers. In addition to the role of designing, evaluating and predicting the impact of public policies, scientists and researchers are also responsible for creating new technologies –including more efficient economic instruments– to help in the transition to a low-carbon economy. That is why in other texts in this column we talk a lot about the importance of science and innovation for the green recovery of the economy.

Without joint action between civil society, companies, governments and universities, we will not be able to solve the climate problem, the great crisis of our generation.