Commentary | Published:

Free-riders to forerunners

Nature Geoscience volume 8, pages 895898 (2015) | Download Citation

Multi-actor integrated assessment models based on well-being concepts beyond GDP could support policymakers by highlighting the interrelation of climate change mitigation and other important societal problems.

Hope has been rekindled this year that the long-standing deadlock in climate negotiations may finally be overcome: in June, the G7 countries agreed to terminate fossil energy use by the end of this century. There are other signs, too, of a revived political concern for the climate problem, prior to the United Nations Climate Change Conference in Paris in December. Yet, despite this increased political attention, it is not clear that the obstacles for progress in climate policy have really been removed.

We suggest that the lack of progress results from a disparity between the aspirations of the public and the perspectives of policymakers and that the disparity results, in part, from the limited perspectives presented by scientists to policymakers. The scientific advice has been based on traditional economic models that are too narrow in their focus to capture the complexities of the science/policy interface. A more realistic generation of models is urgently needed; models that go beyond the traditional cost-benefit analysis of climate mitigation and instead relate the central issues of climate change to other important problems of global society that policymakers face, such as the Euro crisis, the influx of refugees, or international conflicts as in Ukraine.

Change in perspective

Human-induced climate change is no longer seriously disputed. Furthermore, there exists a broad consensus that the economic costs of adapting to unmitigated climate change exceed the costs of timely mitigation, and that any delay in mitigation actions increases the total mitigation costs. Most cost estimates lie in the range of 1 to 4% of global gross domestic product (GDP). Applied to a global GDP growth rate of the order of 2% per year, the cost of mitigation translates into a delay in global economic development of 0.5 to 2 years, over a climate mitigation period of several decades. This seems an acceptable price for the preservation of our planet.

These results are not new. They have been published in numerous assessments of the impact of climate change1,2. Nevertheless, the successive annual climate conferences following the Rio Earth Summit in 1992 have signally failed to respond to the public expectations awakened by these analyses.

Climate change mitigation has traditionally been treated in these integrated assessment models, the key tools used to advise policymakers, as a purely economic problem of optimizing a cost-benefit ratio governed by GDP growth. This narrow perspective divorces the problem of climate change from other major concerns of policymakers striving to resolve the complex conflicts of modern civilization.

Climate change can aggravate these conflicts, as is widely recognized. But actions to mitigate climate change can also contribute significantly to their resolution — an opportunity that has been widely overlooked. To recognize and exploit this opportunity, however, the current integrated assessment models need to be extended to include other important aspects of societal interactions, beyond the economics of GDP growth.

More than monetary values

The seminal limits-to-growth report from the Club of Rome3 was published in 1972. Its message was subsequently strengthened by the enhanced recognition of the impacts of climate change4 and the explicit identification of planetary boundaries5. Today, an equitable transformation to sustainability is widely seen as the central objective of environmental economics. This goal can be achieved only through an understanding and quantitative representation of the basic dynamics of the global socio-economic system.

In mainstream economics, the dynamical aspects of the economic system are downplayed through the perfect market paradigm: it is assumed that external disturbances of the market are automatically attenuated through the stabilizing forces of supply and demand. This complacency received a rude awakening through the global financial crisis, which the traditional economic models failed to forecast or even foresee.

The dynamics of the socio-economic system are now recognized to be highly dependent on the strategies of key players, in particular in the financial domain. Multiplayer interactions can result in highly unstable feedbacks that need to be understood and properly incorporated in the design of effective government policies. The instabilities and attendant shocks can perhaps be ignored in historical representations of long-term economic growth. They represent a central concern, however, for climate mitigation policies designed to transform the present socio-economic system into a sustainable system governed by fundamentally different balances.

An immediate negative impact of the traditional focus on stable economic growth has been to motivate free-riding in climate negotiations. Climate is a common good that can be preserved only through the joint action of all nations. A single nation acting alone experiences costs — when expressed solely in terms of GDP — without significantly reducing global warming. In his influential paper 'The Tragedy of the Commons'6, Garret Hardin argued that the preservation of a common good is feasible in this case only if there exists an effective enforcement mechanism — which, unfortunately, is lacking in international climate negotiations.

Nevertheless, numerous examples of voluntary cooperation exist7,8, such as bottom-up renewable-energy initiatives or voluntary carbon offsets. These activities contradict Hardin's pessimistic assessment and demonstrate that the values, motivations and actions of humans or society cannot be simply subsumed in the concept of GDP. The initiatives of numerous non-governmental organizations (NGOs) and civil society organizations (CSOs), as well as independent global surveys9,10, demonstrate that many citizens worldwide desire a stronger engagement of their governments in climate mitigation.

The recognition of further values, in addition to GDP, in defining a person's 'state of well-being' would change the current negative assessment of a single country pursuing climate mitigation alone. A generalized well-being metric would need to encompass, among factors such as job security, equality or health services, the multiple beneficiary effects of a sustainable lifestyle11. This would include the simple personal satisfaction of contributing to the preservation of the planet. Applying this more realistic well-being assessment, free-rider countries would be recognized as backward-looking, and would strive to transform into forerunners in the sustainability transformation.

Reframe the models

The importance of reframing the problem of climate change as offering win–win opportunities rather than representing a free-rider problem has been stressed before12,13. However, to have a stronger impact on climate policy, these insights need to be translated into a new generation of actor-based system-dynamic models to replace the traditional GDP-based cost-benefit analyses that have dominated the economic advice received by governments in the past14,15,16,17,18,19,20.

The purpose of the models should then not be to identify a single optimal evolution path. Rather, they should translate the mental models of policymakers with respect to the assumed behaviour of important economic actors (politicians, firms, investors, central banks, households, voters, media and so on) into quantitative numerical simulation models that would exceed the predictive capabilities of conceptual models. These quantitative models would be used to identify pathways of socio-economic evolution that were consistent with the postulated response of the actors to the proposed policies, providing a quantitative basis for the rational discussion and resolution of conflicts of interest.

To remain communicable and trustworthy to policymakers, however, the models should be simple and robust with respect to the choice of parameters. Furthermore, they should be readily modifiable, thereby providing a flexible tool for rapidly clarifying the impact of alternative hypotheses regarding the response of the relevant economic actors to the proposed policies.

A green Marshall Plan for Europe

As an example, we consider the interrelation between climate change mitigation and the resolution of the current euro crisis, with a focus on Greece. For many years, Greece has imported more goods than it exports, with a mounting national debt. If Greece had its own currency, devaluation could solve the problem: an increase in the price of imports relative to exports would stimulate domestic production, increase exports, reduce imports and increase employment, resulting in a balanced budget. However, a Greek exit from the monetary union is rejected by the public majority, both in Greece and other euro countries. The symbolic political value of a united, stable euro zone must be accepted as a strong factual benefit in the search for a solution. Political controversy has accordingly revolved around two opposing alternatives: austerity or Keynesian21 counter-cyclic investment. Unfortunately, both options have been debated without serious reference to climate change mitigation.

Austerity advocates accord first priority to balancing the budget by reducing government expenditures and increasing taxes. It is assumed that the resulting reduced demand will induce suppliers to reduce prices to clear the market, resulting, in effect, in an internal devaluation. Proponents of government-supported increased investments argue instead that the response of companies to a reduced demand is not to lower prices, but rather to reduce supply by laying off workers. This further reduces demand, producing a vicious feedback cycle resulting in a recession. Thus, instead of attempting to immediately balance the budget, governments should pursue a Keynesian counter-cyclic policy of sponsoring investments that enhance domestic productivity and international competitiveness. The budget can then be balanced in a second step, after these objectives have been achieved — or in parallel, if the investments are provided as long-term foreign contributions.

In practice, all of the five countries that faced a Euro crisis (in addition to Greece: Spain, Portugal, Cyprus and Ireland) adopted an austerity policy. In all cases, the countries experienced severe recessions, with high levels of unemployment, particularly of young people, before gradually returning to a slow growth path — albeit still with persistent high unemployment. In the absence of government-supported investments, the data clearly support the recession prediction, rather than the assumption of a self-stabilizing market.

We propose a simplified system-dynamic model to explore the impacts of various policies (Fig. 1, Box 1). Our model indicates that the Keynesian strategy of external investments to boost domestic production, for example, in renewable energy, is by far the most attractive option. Yet this option was not seriously pursued. Considerable funds did indeed flow from the European Central Bank and International Monetary Fund (IMF) to the debtor countries, but these were used primarily to repay private debt rather than to invest in production.

Figure 1: Diagram of an actor-based north (N)–south (S) euro crisis model.
Figure 1

Initially, the southern government receives less tax than it expends on services, developing a debt. The southern government deficit reappears as a northern government surplus through a clockwise transfer of the imbalance via increases and decreases in household purchases in the south and north, respectively, and a corresponding increase in imports to the south from the north. A sudden readjustment of the southern government deficit, with corresponding adjustments of the money flows, produces shocks that affect the wages and employment levels in the south.

Box 1: A model for the Euro crisis.

The actor behaviour underlying the optimistic versus the pessimistic assessments of an austerity policy, together with the assumptions of the alternative Keynesian investment proposal, can be captured in a very simple system-dynamic model (Fig. 1). We consider the money flows in a hypothetical two-country model composed of a northern and southern firm, household and government, and a common bank. The money flows may be interpreted as the sums of the relevant money flows of the euro-zone creditor and debtor countries, respectively. Of interest is the impact of different financial policies on the southern employment level.

We assume that for the first four years, the southern government runs a constant budget deficit, resulting in a continual build-up of debt, held by the northern government. The southern government budget deficit is transferred into a northern budget surplus through a clockwise transfer of the imbalance: (1) southern households buy more goods from southern firms with the money saved through non-paid taxes, (2) the excess goods are imported by southern firms from the north, (3) northern households correspondingly buy fewer goods, and (4) the money thereby saved is transferred to the northern government in the form of higher taxes.

After four years, the southern government corrects the budget deficit by a step-function increase in taxes and reduction of expenditures. We assume that this immediately achieves a balanced budget, accompanied by a complete debt forgiveness by the northern governments (the alternative case of a budget surplus enabling a slow repayment of the debt, although relevant for the establishment of investor trust, is found to have only a secondary impact on the employment level; Supplementary Information).

The box figure summarizes the impact of the resultant step-function reduction in demand on the employment level in the south. Shown is the employed fraction of the total available labour for three model assumptions: (1) Stable market: a perfect-market austerity model. The employment level in this case remains unchanged, the only modification being a reduction of income, consumption and imports of households in the south, with a corresponding increase in consumption of households in the north (not shown); (2) Recession: a real-market austerity model. Here employers in the south lay off workers, further reducing demand; in the absence of government-stimulated investments, the employment level rapidly drops, before gradually recovering after the resulting decrease in wages has stimulated rehiring; and (3) Green investment: a Keynesian investment model. This cushions the laying-off of workers in response to the reduced demand by providing government-sponsored new work opportunities. The south suffers a similar decrease in consumption as in case (1), but no significant decrease in employment.

Employment level for three scenarios in response to a sudden balancing of the southern-country budget: (1) Stable market: the response to reduced demand leads to lower prices, with no impact on employment; (2) Recession: in the absence of government-supported investments, the reduced demand leads to a strong decrease in employment, with a slow subsequent recovery; and (3) Green investment: government-supported investments create new jobs, countering the reduced demand following a southern budget adjustment.

The model is highly simplified: the excessive debts held by private banks at the onset of the crisis have been assumed to have already been transferred to the public purse; there is no distinction between various levels of society, or between forms of employment; and the problems of societal and governmental reform underlying the origin of the budget deficit are not addressed.

The model nevertheless captures the central controversy over the appropriate response to the Euro crisis, enabling a quantitative analysis of the impact of the key assumptions — including any modifications suggested by the ensuing discussion.

An important reason for the lack of investments was that there were no major investment options on the table that would have been attractive for both the debtor and the creditor nations. Yet investments in renewable energy would have provided just such an option. For the debtor nations, the investments would enable the replacement of fossil fuel imports by domestic energy production, thereby creating jobs at the same time as achieving a trade balance. For the creditor nations providing the capital, the monetary costs would be offset by the well-being benefits assigned to the reduction of global greenhouse gas emissions — which are independent of whether the emission reductions are achieved at home or abroad. A joint European climate mitigation effort would have the further benefit of uniting rather than dividing the continent in its response to the Euro crisis. A green Marshall Plan, first proposed as a global vision by Al Gore22, has unfortunately not been seriously considered in the context of the Euro crisis. Instead of austerity-induced withdrawals of renewable energy subsidies (as in Spain), a European green Marshall Plan would have ringfenced existing national commitments to climate change mitigation, promoted further green investments and created jobs.

Similar opportunities for overcoming international conflicts through mutually beneficial transnational investments in renewable energy exist in other domains — for example, with respect to the current increased influx of refugees to Europe from politically unstable areas beyond Europe, or in disputes, such as in Ukraine, exacerbated by the dependence on foreign fossil fuels.

Most of these conflicts are ultimately intertwined with the longer-term goal of a global sustainability transformation. Scientists can support the efforts of policymakers facing these problems by providing a new generation of readily communicable, actor-based, system-dynamic models that clarify these interdependencies.

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Acknowledgements

The research leading to these results has received funding from the European Community's Seventh Framework Programme under Grant Agreements No. 308601 (COMPLEX) and No. 295068 (EuRuCAS).

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Affiliations

  1. Max Planck Institute for Meteorology, Bundesstraße 53, 20146 Hamburg, Germany

    • Klaus Hasselmann
  2. Global Climate Forum, Neue Promenade 6, 10178 Berlin, Germany

    • Klaus Hasselmann
    •  & Carlo Jaeger
  3. Climate Service Center Germany (GERICS), Chilehaus Eingang B, Fischertwiete 1, 20095 Hamburg, Germany

    • Roger Cremades
  4. Research Unit Sustainability and Global Change, Departments of Geosciences and Economics, Center for Earth System Research and Sustainability, University of Hamburg, Grindelberg 5, D-20144 Hamburg, Germany

    • Roger Cremades
  5. Centre for Studies in Technology and Sustainable Development, Faculty of Behavioral, Management and Social Sciences, University of Twente, PO Box 217, 7500 AE Enschede, the Netherlands

    • Tatiana Filatova
  6. Observatorio para una Cultura del Territorio, Calle de Duque de Fernán Núñez, 2, 1, 28014 Madrid, Spain

    • Richard Hewitt
  7. Beijing Normal University, No. 19, XinJieKouWai Street, HaiDian District, Beijing 100875, China

    • Carlo Jaeger
  8. Arizona State University, 1151 S Forest Avenue, Tempe, Arizona 85281, USA

    • Carlo Jaeger
  9. Nansen International Environmental and Remote Sensing Centre, 14th Line 7, Office 49, Vasilievsky Island, 199034 St. Petersburg, Russia

    • Dmitry Kovalevsky
  10. Department of Geo-information Processing, Faculty of Geo-Information Science and Earth Observation, University of Twente, PO Box 217, 7500 AE, the Netherlands

    • Alexey Voinov
  11. Newcastle University, School of Arts and Cultures, Newcastle upon Tyne NE1 7RU, UK

    • Nick Winder
  12. Agora for Biosystems, Sigtuna Foundation, Box 57, 193 22, Sigtuna, Sweden

    • Nick Winder

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Contributions

K.H. wrote the paper, R.C., T.F., R.H., C.J., D.K., A.V. and N.W. modified and extended the paper, K.H. and D.K. produced the model.

Corresponding author

Correspondence to Klaus Hasselmann.

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https://doi.org/10.1038/ngeo2593

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