Economics of Climate Change

I recently read a fantastic article in the NYTimes discussing the economics of climate change. The author, Paul Krugman, compares and contrasts in remarkable simplicity, the concepts of Cap and Trade and an Emissions tax, two options currently being floated as methods to force corporations into being responsible for their environmental impact. Before reading this article, I had a difficult time wrapping my arms around either of these alternatives.

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One of the biggest issues facing the future of our environment is that the environmental impact of corporations is simply not accounted for (read the excerpt below).The author admits that measuring environmental usage is more of an art than a science, but through either a Cap and Trade and an Emissions tax, we will incent (force) corporations into improving their environmental record or paying for it. Naysayers believe this will devastate the US Economy but Krugman believes that even overestimating the costs will have a very small impact (leaving our economy between 1.1% and 3.4% smaller in 2050). Hopefully in the near future we will have political leaders willing to make these difficult choices in the face of animate opposition from corporations and conservatives alike (the same conservatives who championed market-based solutions under Reagan).

The full article can be read here.  An excerpt is below:

Environmental Econ 101

If there’s a single central insight in economics, it’s this: There are mutual gains from transactions between consenting adults. If the going price of widgets is $10 and I buy a widget, it must be because that widget is worth more than $10 to me. If you sell a widget at that price, it must be because it costs you less than $10 to make it. So buying and selling in the widget market works to the benefit of both buyers and sellers. More than that, some careful analysis shows that if there is effective competition in the widget market, so that the price ends up matching the number of widgets people want to buy to the number of widgets other people want to sell, the outcome is to maximize the total gains to producers and consumers. Free markets are “efficient” — which, in economics-speak as opposed to plain English, means that nobody can be made better off without making someone else worse off.

But what if a deal between consenting adults imposes costs on people who are not part of the exchange? What if you manufacture a widget and I buy it, to our mutual benefit, but the process of producing that widget involves dumping toxic sludge into other people’s drinking water? When there are “negative externalities” — costs that economic actors impose on others without paying a price for their actions — any presumption that the market economy, left to its own devices, will do the right thing goes out the window. So what should we do? Environmental economics is all about answering that question.

Investing in Oppression

Recently I’ve been rethinking all of my financial investments. Facing potentially long-term unemployment, it is important for me to make good decisions about imagethe current savings I have. More important, however, is scrutinizing the companies and countries that I currently support with my investments. Many of you know I made a big bet on China in late 2008 when the markets crashed. It has paid off well, returning something like 90% in 18 months.  This has been weighing on my conscious however – and is now at the forefront for me in Dharamsala.

Each day I spend 2 to 3 hours in English conversation classes with exiled Tibetans. I’ve heard story after story of tragedy, suffering and pain. Many of these Tibetans left everything behind for a chance at a better life or to escape persecution. Yesterday my friend Lobsang explained to me how during an attempt to enter back into Tibet (also illegal because if proves you left illegally), two of his friends were captured by Chinese soldiers, imprisoned and tortured for 2.5 years, just recently being released. He hid in a tree for 2 days and then walked for almost 3 weeks before he found refuge in Nepal. A monk told me his story of how in an effort to defend the leader of a protest, he was arrested and tortured daily for almost 4 years. The conditions he experienced in prison are so horrifying that I am not going to repeat them here. These stories are all too commonplace. Clearly, supporting a country with such a poor human rights record (which extends much beyond Tibet), disregard for the environment and democratic repression is creating negative karma and subtly supporting such practices. The governments of the world are no longer willing to stand up to China. Taking a few thousand dollars out of the country is not going to be noticed by anyone – but imagine if I convinced another 100 people to take $100,000 out of China?

But I digress – Cultural genocide in Tibet by the Chinese deserves its own post. Let me return to the topic of investing. What I’m really looking for is advice. How do others justify where they put their money? This is a very complex issue. Investing in specific companies is often a risky endeavor for a small time investor without the time or resources to do adequate research. Maybe the better option is to invest in Socially Responsible Mutual Funds?  That sounds great, until you look under the covers a bit. For example, I was excited to see that in my 401k account, IBM added the option to invest in Vanguards FTSE Social Index Fund, a fund that is self-described as a “Social investing” fund; invests primarily in larger U.S. companies independently screened to meet stringent social and environmental criteria.  Sounds great? Well dig into the prospectus and you’ll see companies like Bank of America in the funds top 10 holdings. While I’m sure that Bank of America gives a lot of money to charity and doesn’t pollute the environment, what about its recent record in the financial markets? Billion dollar bonuses to executives and denial of mortgage rewrites for those facing foreclosure?  While I would still prefer this fund over a general US fund that may invest in a corporation like Blackwater or ExxonMobil, it shows there is a long way to go in defining SRI criteria. Two websites that that I found are below:

http://www.socialinvest.org

http://www.socialfunds.com/

However they are limited in scope, and show that the market is not yet interested in SRI. I am back to the drawing board – clearly I don’t want to exit the market, losing potential return. Yet, how do I ensure my investments are aligned with my values?

And on a side note, many of you will say, “Well, I don’t have a lot of money, so this doesn’t pertain to me” . I will argue that this pertains to everyone. Whether you earn $10,000 a year or image$1,000,000, you still have choices on where and how you spend your money. Our political and economic systems are intricately tied together and the option of Voting with Your Dollar is one of your greatest democratic rights (and I would argue that it is also one of your greatest responsibilities).  Yes, you might pay a little more for a few items, but if truly consider the impact that you making, this will not be a difficult decision.

Looking forward to the discussion.