Why do we deal with climate change so poorly?

I am late to this, but I recently read the Cambridge Elements monograph on the gap between the prescriptions of even the most modest economic climate change models and the reality of our collective actions. It was published a year ago by Hersh Shefrin, a member of the Olympic gods of behavioural economics. In my view, this is a must-read for anyone interested in the politics of climate change and behavioural economics alike.

As an aside, the Cambridge Elements series is highly recommendable because it provides relatively easily accessible introductions to academic fields written by top experts. I say relatively easily accessible, but in reality, you have to have an undergraduate student level of knowledge in a discipline to understand them. In other words, investment professionals will understand the economics and finance books, but retail investors likely will not.

Unfortunately, the Cambridge Elements series is typically not available for free. If you are looking for free resources that are of the same quality and a little bit easier to read, I highly recommend the CFA Institute Research Foundation books.

With that aside, I don’t want to summarise the entire monograph by Hersh Shefrin and instead provide one extensive quote that goes to the heart of the matter (pages 73 to 75):

“Psychology and politics have been the primary drivers of climate policy, not recommendations by economists based on IAMs [Integrated Assessment Models]. As I continue to mention, actual policies have been more in line with business-as-usual behaviors than with the recommendations made by most mainstream climate scientists and economists. Why psychology and politics have combined to produce these unsettling behaviors is what I call the “big behavioral question.” The big behavioral question is the subject of this section, the focus of which is the psychological dimension of climate politics as it developed in the United Stated from 1980 on.

In my view, the global community’s reluctance to veer from business-as-usual behaviors is tantamount to aggregate procrastination and trusting to luck. Procrastination results from weak self-control, leading to “present bias.” Trusting to luck reflects aspiration-based risk seeking and the aversion to accepting a sure loss […]

Irving Fisher emphasized lack of foresight and self-control as major determinants of the irrational impatience preventing people from saving more than they do. Fisher tells the story of a farmer who would not mend his leaky roof because when it was raining, he was unable to stop all the water from leaking in. When it was not raining, there was no leaking water with which to be concerned.

The analogy is too close for comfort. In Section 2 I discussed the congressional testimony of Carl Sagan from 1985. Sagan articulately made the strong point that if the global community acted quickly, the threat from global warming could be contained at low cost; however, he warned that the costs from delayed action would be much higher. In the analogy 1985 corresponds to “it is not raining.”

Continuing with the leaky roof–global warming analogy, today it is raining. Perhaps it is not yet raining hard, but it is raining nonetheless, enough to create discomfort. In the summers of 2022 and 2023, record heat waves were occurring in the southern part of the United States, Southern Europe, the UK, and China […]

Irving Fisher was clear to distinguish between lack of self-control and lack of foresight. He recognized that while their effects might be similar, the causal mechanisms differed. In this regard, he wrote that while foresight pertains to thinking, self-control pertains to willing. As an example of weak will, he described those “workingmen” who are unable to resist the temptation of the “saloon” while making their way home. For him such behavior represented the inability to deny oneself “a present indulgence,” even in the knowledge of the “consequences” to follow. Today we understand that it is typically dopamine flows associated with present indulgences that give rise to potential self-control difficulties.

I suggest that the reluctance to institute an appropriate global carbon price is analogous to Fisher’s working men being reluctant to forego visiting a saloon. The issue is lack of willpower, not lack of foresight, as the “consequences” are clear. In the case of global warming, ever since the release of the Charney report mainstream climate scientists have stated very clearly what the consequences would be from continued emissions of GHGs into the atmosphere.

For his part, Nordhaus has been promoting the idea of a global price for carbon since the 1980s. His climate-policy ramp recommendation shares important features with the nudge program Save More Tomorrow, SMT, mentioned in Section 4, which was designed to help people overcome self-control challenges to increase saving. In 1997 Nordhaus was quoted in the New York Times as urging the United States to institute a carbon pricing policy. He said at the time: ‘Let’s do something modest, but let’s really do it.’”

What are we going to do about this? Read Shefrin’s book to find some interesting suggestions.