Matthew Levine, Policy Manager at the IFoA, reflects on the second webinar in the IFoA’s Presidential Speaker Series on alternative economic thinking
At this fascinating webinar, Simon Sharpe presented some key ideas in his new book Five Times Faster: Rethinking the Science, Economics, and Diplomacy of Climate Change. He argued that addressing flaws in our thinking and our institutions is necessary to give the world a chance of limiting temperature rise to low levels and avoiding extreme risks. The IFoA co-sponsored the work on risk assessment described in his book.
Simon Sharpe is Director of Economics for the UN Climate Champions and a Senior Fellow at the World Resources Institute.
Kingsmill Bond is an Energy Strategist for RMI.
Katie Kedward is an economist and Policy Fellow in Sustainable Finance at the Institute for Innovation and Public Purpose, University College London.
The discussion was chaired by Louise Pryor, Immediate Past President of the IFoA. She welcomed Simon and the other panellists, noting that the series aimed to give perspectives on alternative economics from both actuarial and external sources.
Simon explained that ‘five times faster’ in the title of his book refers to the rate of decarbonisation. It needs to be five times faster in the 2020s than it was in the previous two decades.
This would be a formidable challenge, and Simon wanted to highlight a less well-known aspect of it: transforming ‘invisible infrastructure’. Although changing physical infrastructure like power stations and transport is essential, changing the invisible infrastructure of our ideas and institutions will be just as important. Simon acknowledged the influence on his book of IFoA thinking on climate issues over the past decade.
Simon addressed invisible infrastructure within the topics of science, economics, and diplomacy.
Scientific research tends to focus on making predictions of what outcomes are most likely, whereas risk assessment asks what the worst outcomes could be. From an investment perspective, lack of risk assessment means investors will be ignorant of the potential for large losses in asset values over the long term. Simon believes that policymakers need to be exposed to more analysis of the risk assessment kind to appreciate the nature of the risks humanity faces. For example, what is the impact of extreme heat on human physical tolerance? We need a greater understanding of crucial thresholds like this. To achieve this, there needs to be more funding for research that takes a risk assessment perspective.
Simon referred to the point – discussed in the first webinar in this series: an introduction to alternative economic thinking – that traditional economics assumes equilibrium. This assumption is a barrier to achieving climate goals, where what is needed are large and rapid transitions. A focus on equilibrium tends to favour carbon pricing as the main policy solution, but in practice taxing the old technology isn’t enough. Where carbon pricing is used, it should aim to trigger tipping points in markets. Since those markets will differ, the carbon prices should differ too.
Failures in economic analysis mean that investment opportunities in clean technologies are not created or realised as quickly as they could be. But the history of major economic transitions shows investment in new areas has made a real difference. In the early stages of transitions, targeted investment strengthens reinforcing feedbacks and increases returns to scale. Regulation can also be effective, reducing costs if done appropriately, with tough standards.
Simon argued that diplomacy is currently focused on long-term economy-wide emissions targets. But these require assent from so many parties that they are impractical – they represent ‘the point of least leverage’. This approach results from seeing decarbonisation as only a burden. Diplomacy then focuses on how to share that burden. But once we appreciate that the decarbonisation process also includes opportunities, diplomacy becomes more about coordination within specific sectors. In that context it can benefit all the parties involved.
Responding to Simon’s presentation, Kingsmill Bond highlighted the failure of financial modelling by those running today’s dominant industries and technologies. Such models often recommend that existing approaches can survive with a bit of tweaking, but history suggests otherwise. The models fail to account for the speed of growth of alternatives. Three striking facts Kingsmill cited in support of this are that:
Katie Kedward noted that in finance, risk is usually modelled in a quantitative way, and such ‘probabilistic risk’ is based on historic data and is measurable. By contrast, some risks are characterised by ‘radical uncertainty’ – these cannot be quantified because there are no precedents. Quantitative models tend to have more impact on decisions than qualitative ones, but the green transition is an example of radical uncertainty. The financial sector cannot afford to wait for a set of historic probabilities to accumulate before acting. Even though high-carbon sectors remain profitable and there are no incentives to divest from them, the financial sector needs to act now.
In this context, she referred to the ‘precautionary principle’. There is a social responsibility to protect the public from exposure to harm when scientific investigation has found a plausible risk.
Katie added that public investment generally plays a bigger role than private in getting new technologies off the ground. New thinking on public-private partnerships is needed to give private investors the confidence they need to invest.
An audience member asked how the financial sector can have a positive impact on climate change policy. Simon responded that economic models tend to assume continued growth, but this goes against climate change evidence. We should ‘just read the science’ rather than looking at economic models.
The panel was asked to recommend public policy solutions for the financial sector. Katie Kedward said more public investment would enable development in areas like retrofitting homes and nature restoration. Smarter regulation could encourage innovation: for example, green credit guidance to steer finance in a positive direction, with sanctions such as punitive capital requirements for fossil fuel developments.
Kingsmill Bond believed the government had the primary responsibility, not the private sector. The cost of rolling out renewables was high, but still less than continuing to buy fossil fuels. He highlighted continued large subsidies for fossil fuels, but he expected the fossil fuel industry to be in terminal decline by 2030.
One questioner was interested in how the way climate change was presented could influence investors. Sharpe emphasised the importance of presenting climate change as an opportunity, not a burden. Pace was also important: modelling by incumbents exaggerates the slowness of change, but investors actually have an urgent task to form views about future scenarios and invest accordingly. Louise Pryor commented that actuaries had an important role in reviewing the reasonableness of models and scenarios.
Another audience member suggested that the climate emergency warranted a shift to a planned economy. Simon said this was unnecessary as markets could be influenced by regulation and by institutions. Innovation was in the public interest, so governments should incentivise markets to generate new ideas and products.
On the IFoA Virtual Learning Environment, you can watch a recording of the webinar. You can also view Simon’s slides.
Read more about the event: Five times faster: the invisible infrastructure of climate change
