From an economist’s perspective, Greta Thunberg is right. Why is it so difficult to understand?

The COVID-19 crisis has shown that humanity can make painful and impactful decisions to preserve what is at stake. Why is it then so endlessly more difficult to act on the arguably even more threatening climate emergency? (IPCC, 2018). To understand our inability to forcefully tackle the climate emergency as we tackled COVID-19, we should look at someone who has been calling for exactly that kind of response.

Greta Thunberg’s message is clear: The effects of climate change are known, and we have scientific evidence on what needs to be done. The conclusion is pure logic: On the current pathway, which foresees a temperature rise of 4°C (Climate Action Tracker, 2020), climate change will be of such devastating effect that humanity as we know it will end (IPCC, 2018). It is, therefore, only rational to stop anything that is only remotely contributing to climate change: fossil fuel burning, flying, meat consumption. This is the simple and scientific chain of causality that Greta has based her argumentation on.  

If we want to understand the absolute coherence of this logic, we have to review an article her mother wrote about the experience raising a daughter with Asperger syndrome and how Greta became the icon of the Friday’s for Future movement (Ernman, 2020). 

She writes:

 The important sentence here is actually not concerning Greta, it refers to her classmates. “Out in the corridor, the trash island off the coast of Chile is already forgotten.” As soon as her peers are confronted with other, contradicting information, their attention moves onto other things. Greta, however, cannot push back what she has just seen. She cannot ignore the contradiction between her peers’ behaviour and their emotional response to garbage in the ocean. She cannot wave the feeling aside and continue to pursue a lifestyle that contributes to that very problem. She is consistent and driven by utter logic in her fight against climate change. 

Climate change: The economic conundrum

Greta’s peers resemble in almost textbook form a key problem of classic economic theory: Humans are assumed to be rational, making decisions based on their costs and benefits in consistent way, irrespective of erratic emotions (Rittenberg & Tregharten, n.d.). Theoretically, this rational behaviour ensures that economic interactions and ultimately entire markets function efficiently. And it is based on a myth. We do not behave rational. We make consistently inconsistent decisions in our lives, based on our emotions, our (incorrect) guesses about the future, our current desires and in in response to our peer’s behaviour. Greta’s reaction, on the contrary, is the exemplary behaviour of a “homo economicus”. This becomes clear when we recapture the debate on the cost of climate change. 

While the effects of climate change were already well-known in the science community, economists only in the 1990s started to think about its costs and it took another 25 years until this work was awarded with a Nobel prize. The winner: William Nordhaus, whose DICE model forecasted a moderate loss in GDP and therefore demanded a tempered response (Nordhaus, 1993). Ultimately, Nordhaus argued that future generations would be just fine in coping with climate change, implying that we, the current generation, needed to worry much less about it.  

However, his report (2007), Lord Nicholas Stern forecasted that without climate change contained, the world would lose 5% of GDP annually on an indefinite scale. It would basically wipe out any growth in the future. In blunt terms, Stern’s scenario predicted the end of human civilization as we know it. 

What may seem like a negligible dispute between two economists in their respective ivory towers had real consequences. Nordhaus and Stern tried no less than to forecast the world we would bequeath to humanity in 50, 100 or 1000 years. And, more significantly for the political decision making of current governments, how much it would cost us versus the costs faced by their distant successors. It may seem trivial, but governments base entire policies on cost-benefit analysis (Hanley & Barbier, 2009). Having a forecast which argues that our descendants in the future will be rich enough to cope with climate change themselves or one that argues that we basically sell out our children, makes a big difference for the global political response to climate change. 

One may now ask what this has to do with Greta? Afterall, she does not care about the costs whatsoever. Her statement on the EU Climate law makes this point very clear: “This climate law is surrender – because nature doesn’t bargain, and you cannot make ‘deals’ with physics.” (Gherke, 2020). Nature cannot be asked to be reasonable; nature will not get out of the way. If we do not want to crash, it’s us who need to jam on the breaks. Nature is just there, and thus the risk of doing not enough is simply too great. In a way, Greta’s statement can be read as a condensed argument of what followed the Stern-Nordhaus debate. Another economist, Martin Weitzman (2009), argued in his ‘Dismal Theorem’ that the problem with climate change was the uncertainty surrounding the prediction of its impact, not the calculations fed into a model. This implies that, the further a climate model looks into the future, the more uncertain its predictions will be. In a hundred years’ time, it is possible that climate change is easily to be dealt with. At the same time, it could mean the end for human civilization. Quite an extreme distribution of possible outcomes, referred to as a ‘fat-tail’ due to its graphic depiction. In a nutshell, Weitzman (Ibid.) argued that “the debate about discounting may be secondary to a debate about the open-ended catastrophic reach of climate disasters”. Since the discrepancy of outcomes is so large, Weitzman concluded that the risk not to act on climate change is simply too big and precaution should prevail, thereby arriving at the same result as Stern, but with a completely different line of argumentation. 
 

The human error in tackling the climate emergency

We can, therefore, reason that the climate emergency is characterized by three issues: it is deeply uncertain how it will unfold; the severity of its impact is still somewhat in the future (though we can observe its first ramifications) and tackling it will require a significant change to humanity’s way of life (i.e., come at transition costs). Comparing this to the COVID-19 crisis, we can establish: Only the last criterion is identical. The other two explain why our reaction to COVID-19 has been diametral different to our approach toward the climate emergency.

For Greta, the solution to both problems is clear. The risk for nature and humanity stemming from climate change is too large to be ignored any longer. In economic sciences, this is a perfectly rationale economic decision. She is simply risk averse when it comes to climate change (and for good reasons). 

Let’s recall how Greta’s peers in class reacted to the movie on plastic pollution. If we would have asked the class immediately after the movie ended whether and how much they perceived the risk of pollution for nature, humanity and their own well-being, we can be sure that all of them would have stated some level of risk awareness. However, as Greta’s mother points out: “Out in the corridor, the trash island off the coast of Chile is already forgotten.” Within minutes, the children act in contradiction to what they have felt during the movie. 

The important point is, that this is a very illogical but normal behaviour. On average, mankind does not evaluate options on strict rationale terms (Thaler & Sunstein, 2009). But it implies a significant communication problem as to how we understand Greta’s activism.

Classical economic theory, after quite some debate, finally acknowledged that human beings are not perfect, robotic entities, driven by the urge to make the most rational decision. The concept of “bounded rationality” assigned humans some degree of rational behaviour yet accepted that this was not infinite and limited by emotions and inconsistencies (Shogren & Taylor, 2008). However, it took a new generation of economists, to actually develop how these limitations would play out in real-life.

Behavioural economics aims to explain the deficiencies of the (non-existent) rationale homo economicus through observations derived from psychology. We can explain our divergent reactions between the COVID-19 crisis and the climate emergency along three behavioural phenomena: Time preferences, loss aversion and social pressure. 

Time Preferences

In general, we value the present more than the distant future. It becomes, however, interesting when we value similar time periods differently over time. Suppose you are offered five Euros today, or 10 Euros in 60 days. Some may choose the money now, some in 60 days, dependent on their time preference. Now, suppose that someone offered you 5 Euros in 200 days or 10 Euros in 260 days. Certainly, there will be some respondents switching in their answer and thus in their time preference. However, the time periods are identical. Hence, our time preferences are inconsistent (behavioural economists refer to hyperbolic discounting) (Hepurn et al., 2010). 

In the context of COVID-19 and climate change, this usually implies that we discount short-term changes more steeply than the far future. Current catastrophes like the pandemic may force us to make immediately painful decision, being immediately aware of the dreadful consequences. The time distance between acting now on climate and avoiding similarly painful realities in the future is too far for us to grasp. But a purely rational being would attribute a linear risk preference for both COVID-19 and the climate emergency, based on probabilities and severity of impact.

Loss Aversion

This directly links to risk preferences, which we already touched upon. When it comes to risk preferences, we tend to overvalue what we already have and discount what we might get in the future. In simple terms, if a lottery will offer you the chance of winning 1000€ or losing the same amount at the same probability, most people will refuse to join the lottery, although the chances are 50:50. This is called loss aversion. On the other hand, we will link our decision on what risk level we accept on our direct environment and recent received information (Kőszegi & Rabin, 2006). The combination of reference dependence and loss aversion will result in an increased valuation of the status quo against future changes, the endowment factor (Kahneman et al., 1990). 

One reason climate policy in many countries remains quite hesitant in comparison to what would be required, is the idea of losing the status quo, while not considering potential gains. This results in a path dependency which hinders our abilities to initiate change (Grubb et al., 2014). However, the turbulence in times of a crisis might result in shifting risk preferences. The experience of the COVID-19 crisis could result in significantly bolder action on climate, as everything now is ‘up in the air’ anyways. 

Social Pressure

Finally, we are subject to social preferences. Other people’s behaviour will influence our very own decision making (Della Vigna, List, and Malmendie, 2009). In classic economics, the individual is assumed to be purely egoistic. Adam Smith described the famous example of a baker not making bread out of charity, but because she wants to sell it and make profit. The homo economicus does not offer her labour, product or service to someone in the hope of getting something in return. Rather, she will only engage in the trade if the payoff is appropriate. “Our house is on fire. […] You stole my generation’s future.” These words from Greta resemble this rationale understanding. Acting now will preserve (partly) her future, therefore her action will result in an appropriate profit of a less destroyed tomorrow. 

While at times, we may feel the same way, our decision making is blurred by emotions and social norms. We tend to reward good behaviour (and punish the bad one). That is, we base our altruism on how the other person is behaving toward us. We do see this issue in the pandemic as well. It is, for instance, difficult to maintain protective behaviour. The preparedness to wear masks can be subject to others wearing masks as well or can lead to a false sense of protection, resulting in carelessness (van den Broek-Altenburg et al., 2021). Similarly, we struggle to consistently reduce our own carbon footprint, not least because the reward (a safe climate) is not immediately materializing and others around us may impact the significance of our contribution by living a less climate conscious life. Thus, we base this decision on our social environment and our emotions, not our analysis of what is most rational.

Human behaviour cannot be aligned with the strict rules of economic theory

The pandemic has shown that humanity is able to do very swift, decisive action, based on scientific facts. However, this requires two preconditions: First, a tangible, clearly visible threat to the own way of living (in this case, the risk of health impact for oneself or social relatives). And second, an obvious payoff by changing the behaviour accordingly (stay home, protect lives!). Once these conditions are no longer given, changing our behaviour becomes much trickier, despite the risk and impact on our livelihoods being arguably much greater. 

As such, our insufficient response to act on climate change is irrational in that it puts our very existence or at least our wealth at risk. We cannot grasp the severance of climate change for future generations, its beyond our understanding. If all of us, based on the available information on climate change, would make perfectly rational decisions, we would determine the best possible (in economic terms efficient) response. But we are not. We are dependent on our social environment. Our peers influence us, our guilt and pride drive our behaviour more than our rationality.

Because we think this way, we cannot understand Greta, or better Greta’s rationale for her behaviour. It is very much like a different language, a different logic she follows. And as such, she is admired or ridiculed, loved or hated. It is nothing less than an emotional reaction to rationality. Greta Thunberg is consistent in an inconsistent world. Nicholas Stern has called the human inaction on climate change the biggest market failure in history. Greta might prove to be the market corrective that restores efficiency. Her activism might finally have triggered humanity to respond adequately to the climate emergency. Better late than never. 

She herself has called her Asperger diagnosis a “superpower” (Rourke, 2019). From a behavioural economist’ point of view, she is right.

Sources

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