Monday, September 21, 2009

Climate change and impacts on the bottom line

© 2009 Joshua Stark

Very, very often these days, government management conversations must include "economics", a series of arguments around the costs and benefits of particular programs in terms of direct dollars and jobs. Unfortunately, the "economics" to which I refer isn't real economics, but more akin to a quotation attributed to Benjamin Disraeli, that there are "lies, damn lies, and statistics."
Economics is real. It is not mathematics, it is not a hard science, and in those cases it is therefore much more like the real world than the previous two. However, humans use boxes and models and discrete hypotheses to help us understand the world, while recognizing the truth of what, for example, Magritte is saying here:

Sadly, most conversations around proposed and existing programs are merely ways to use the public perception of economics as a hard science and math, poorly apply a theoretical model from economics, and pass it off as an A + B = C argument. Then, they roll that argument up into a tight cylindrical object, glue it together with pathos, and hit their opponent with it as hard as they can.

So it is with great happiness that I offer some refreshing examples of real economics.

The first is a report on a University of California study about rents and 'green' buildings. The Fresno Bee's opinion does a good job of capturing the idea, and it is something to consider if you own rental property. Basically, the article points out the financial benefits of improving the energy efficiency of property, but it includes what it calls the "intangible value of the Energy Star label." It's funny, because the previous paragraph made tangible, financially, the Energy Star label, and yet this comment is still true, and it goes to a point I made over and over when I taught economics: Trust is as vital to a well-functioning economy as informed self-interest.

Really, Adam Smith's hand isn't invisible, it's the one you just shook when you made the deal. If you don't trust that hand, you won't shake it. What Energy Star and other government programs can do is help ensure that trust. For example, why do we keep our money in banks right now, during the largest economic downturn since the Great Depression, and with 94 bank failures this year alone? The FDIC, that's why.

In Energy Star's case, we get a guarantee that the product has met certain conservation requirements, and that is important in increasing value, not just for the environment, but for people's costs, too.

The next one is a report from the Washington Post on the flip-side of climate change: Not fixing it will hurt many companies.

Of course, many other companies may benefit from climate change, and there will be people trying to create wealth from what we'll have (life and lemons and all that), but the biggest problem of climate change for most companies is the uncertainty of it all. Trust is vital for individual transactions, but it is also important for the overall climate, and that goes for the economic, social and political climates as well as the physical one. A prime example of this is shipping, which many say has benefited from climate change opening up the Northern Passage. However, since we aren't sure what will happen in the future, imagine putting all your boats into those waters, and then getting an ice-up the next year, crushing all those boats and cargo. Kinda dampens your guarantees for timely delivery of merchandise, no?

The last is an entry at Prof. Kahn's blog, Environmental and Urban Economics (another witty title, like mine!), where the good professor quotes the President of Hamilton College, Joan Stewart. This is a small story, but it provides a great example of the intersection of macro- and microeconomic thought.

President Stewart argues that it is not in the best interest of the college to put solar panels on a particular building during renovation, and she gives a wonderful list of reasons. Now, what would encourage her to either put those in, or at least obtain clean energy from another source? The bottom line. She explains very succinctly the costs and benefits of those particular panels, and I applaud her for these efforts. On the broader scope, then, it is vital for us to include the additional costs we've been dodging in our personal lives, but it's hard for us to understand the individual economic impacts of climate change, or bad air quality or water quality. Perhaps we have asthma (1 in five kids in California's Central Valley does), or we farm and realize lower yields with dimmer sunlight (also a problem in the Central Valley). These effects help to quantify it for some, but beyond them, we don't grasp the weight of bad environmental choices upon our lives.

This is where macroeconomics and democratic institutions step in. We don't have to understand the individual impacts, we can try to grasp their totality instead, and then try to alleviate them by, for example, making the costs of bad air quality a financial matter up-front, rather than a health and financial matter after the fact.

It's good to see some solid economics around these issues, but it's also important to understand the limitations of economics. It is a tool, like others, to be used for us: Think of it as the study of trade-offs. But, it is not a pipe. It is only a picture.

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