The Economics of Climate Change

Disclaimer: David and I are just econ hobbyists and this is a blog. For that reason, there’s a lot of stuff that I chose not to add to this article because I didn’t want to confuse you (or myself, for that matter). If you have a question, feel free to ask! Also, I recently published a lecture recommendation that is related to climate change as well. Check it out!

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Like it or not, the evidence of climate change is overwhelming  – temperatures and sea levels are rising, ice sheets are shrinking, along with other depressing stuff that we’d all like to ignore. The majority of this climate change is human-induced by various types of industry and production that saturate the air with chemicals like carbon dioxide.

The Intergovernmental Panel on Climate Change (or IPCC) has released a massive report on what will happen to our Earth if we continue to not care. A website called Global Weirding has summarized this into an interactive, easy to use website that details the catastrophic state we will be in by 2100. I highly recommend you take a look, especially if you want to be in an Al Gore kind of mood.

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However, according to economists, zero pollution is not socially desirable. If you were to ban all pollution, it would effectively stop all production, which would be “inefficient” for the human race. So this raises some concerns – How much pollution is necessary? Is saving the Earth profitable? Will Rachel from the Bachelorette ever find true love?

A (Cost-Benefit) Analysis of Mitigating Climate Change

The economics of climate change are difficult and unique, mainly because it is on an extremely long term, global scale, and there are a lot of uncertainties involved. You have to assess the benefits and costs of climate change mitigation, and sometimes it costs corporations and governments a lot to be considerate to the world around them.

In any economics textbook, you will find that all corporations seek to maximize their levels of profit. They do this by finding the point where their marginal benefit is equivalent to their marginal costs. Basically, they produce output up to the point where it does not make sense to make more, because it will cost more.

However, sometimes the most profitable level of output for the industry actually hurts the people who are not part of it. In a situation where a company is polluting the air, for example, the people who live in surrounding neighborhoods may find themselves exceptionally phlegmy (ew). Their gross lung troubles are what economists call a negative externality. There are positive ones too, but pollution is negative so we’ll ignore good things for the rest of this article.


What are the costs and benefits for a corporation being forced to reduce the effects of their externalities? This study discusses this in depth. Here’s a summary:


  • Finding a substitution for fossil fuels
  • Finding a substitution for the amount of energy being used

This seems easy when you put it this way, but in reality it isn’t at all. The R&D costs and production costs would go through the roof for a company trying to find suitable alternatives.


  • Avoiding “negative human welfare”(i.e. killing the human race)
  • Avoiding market damages (like with climate dependent production). An example of this is wheat crops being dependent on temperature. If our world ends up like what happened in the movie Interstellar, things could get really bad.
  • Avoiding a loss of biodiversity.


Who Can We Trust to Make These Changes?

When so many of the world’s scientists agree that we are harming the planet we live on,  isn’t it at least prudent to try and decrease our environmental footprint? Will the government start implementing more policies that deal with the negative externalities industry is pushing on us?

In 2015, the Senate voted that climate change was a real thing. Congratulations, Senate! You just confirmed what NASA has been saying for decades now. However, after admitting that global warming was happening, they voted to deny that climate change has been caused by human activity despite ridiculous amounts of evidence proving otherwise. One step forward, two steps back.


In 2016, our two main parties failed to agree in yet another way. This graph shows the polarization between Democratic and Republican voters on environmental bills, and it was our most ‘anti-environment’ year thus far.

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According to the League of Conservation Voters, this massive difference was in order to block the Obama administration’s climate change initiatives, and to roll back provisions of the Clean Water Act, the Clean Air Act, and other “cornerstone” environmental laws. Many of these votes in the House never even made it to the Senate, because these bills never received enough votes. (Note: As of March 28th, Trump has rolled back most of these policies in an executive order, unwinding a lot of careful work.)

And this could be where corporations tie into the issue. As noted earlier, large companies have plenty of reasons (mainly $$$) as to why they do not want to mitigate climate change in any way. And suspiciously (not really suspicious, but pretty eye opening), “in the 2016 election cycle, 88 percent of the $31.3 million that the fossil fuel industry donated in Congressional races went to Republicans; 12 percent to Democrats”, according to data compiled by the Center for Responsive Politics.

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So clearly, this explains why Republicans largely deny climate change being caused by humans – their science is normally based off the research done by fossil fuel giants. And you may be thinking – maybe their research isn’t half bad!! And maybe companies will start to do things on their own!! Patagonia does it, so why not just trust corporations to reduce their energy emissions?

A Case Study on Exxon

In the 1970’s and 1980’s, Exxon employed many top environmental scientists to study the issue of climate change. Exxon believed that the way to get ahead and protect their business in the future was to research climate change and think of alternative ways to further themselves. According to the Scientific American, they created rigorous climate models and tested various levels of carbon dioxide in the air.

They even went as far to learn about how carbon dioxide is absorbed by the ocean by submerging a tanker deep underwater in a $1,000,000 project. This was “unprecedented research”, and Exxon was at the frontier of it all.

In 1977, the senior scientist at Exxon, James Black issued a dramatic statement (slightly reminiscent of Waterworld) which I have pulled from the article linked to previously: “…There is general scientific agreement that the most likely manner in which mankind is influencing the global climate is through carbon dioxide release from the burning of fossil fuels…man has a time window of five to 10 years before the need for hard decisions regarding changes in energy strategies might become critical.”

Well, that was over 30 years ago. In the years that followed this, Exxon started backpedaling…hard. According to an ExxonMobil spokesperson, “[they] didn’t reach those conclusions, nor did we try to bury it like they suggest”.

I sadly have to burst your bubble – they did bury this news. Exxon slowly began calling the science controversial, and then began to sow doubt about the issue entirely. In what comes across like a massive conspiracy (it is), “experts agree Exxon became a leader in the campaigns for confusion”.


Sketchy things that Exxon did:

So trusting corporations really is not a smart decision. But maybe things will change in the future??

As we all know, the 2016 presidential candidates varied widely in their view of environmental concerns. Hillary Clinton had not always been known to be very “green” (she supported the Trans Pacific Partnership (TPP) which was criticized during the campaign). However, she came out as anti TPP during the campaign and unveiled an intense clean environment plan. Donald Trump, as expected, has vehemently denied climate change being man-made, and will probably not push any legislation to help the environment at all.  If the government is not going to change anything and fossil fuel companies are also denying their impact, I’m not really sure where else we could turn.

Okay… I Guess We’re All Going to Die

People do believe that climate change is real and a lot of people do realize that there is a man made impact, and here is a political breakdown of that.

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However, it is up to those who recognize the impact to begin doing whatever they can to push that we care about our future (and our “human welfare”). I recommend you start adopting energy saving habits yourself, or even contact your representatives about it [Some information on how to do this: 1 2 3]. If your reps are worried about not being voted for, they may begin to act in your interest and your future grandchildren’s interest and not Shell’s interest.

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