In reply to my last post, Katharina linked to a think tank arguing for “degrowth” as a strategy of preventing further global warming. My mini model seems to support exactly that strategy: reduce consumption and production to reduce greenhouse gas emissions. But there is another way to deal with the problem, which is usually referred to as “decarbonization”. This strategy calls for reducing the use of greenhouse gas emitting modes of production, like switching from coal to nuclear power. In my experience both strategies tend to be supported by the same set of people. But think about them in terms of my model and you realize that they cut in opposite directions – the more we “decarbonize”, the less we need to “degrow”, and vice versa.
When left unregulated, the economy produces more than what is socially optimal, because private households and firms do not take into account the climate externality of their consumption/production decisions. Climate policy aims to solve this problem.
In terms of the graph below, individuals choose allocation P where the marginal rate of transformation between consumption and leisure equals the private marginal rate of substitution between consumption and leisure (the slope of the blue indifference curve). A social planner would choose allocation S where the marginal rate of transformation equals the social marginal rate of substitution (the slope of the green indifference curves). The private MRS is higher than the social MRS in every point, i.e. the social planner is less willing to give up leisure for extra consumption than the individual consumer. It follows that S lies in the “North-West” of P, containing more leisure and less consumption.
Now there are two ways to deal with the problem. One is degrowth: shifting the privately chosen allocation P in the direction of the social optimum S. This could be done by taxing consumption/production and substituting leisure. The other is decarbon: shifting the social planner’s chosen allocation S in the direction of P. We can do this my switching to technologies that emit less GHG per unit of GDP (reducing k in terms of my model). Decarbonization reduces the discrepancy between the private MRS and the social MRS, i.e. the social planner’s indifference curves come closer to the individual’s indifference curve. In the limit, if we manage to produce GDP with zero GHG (a no-carbon economy), the social optimum coincides with the private optimum.
But the more we decarbonize, the closer will be the distance between the social optimum and the private optimum, reducing the need to degrow. The more we degrow, the more we move the private optimum in the direction of the social planner’s choice, eliminating the need to decarbonize.
I think that’s a neat insight.