The ecological debt of the carbon pricing gap

Photo by Ehud Neuhaus on Unsplash

The carbon pricing gap

According to data from the Worldbank’s carbon pricing dashboard, only ~22% of global emissions (~11 Gt) are currently priced at a value of 94 bn USD, implying an average price level of ~8.5 USD/ton CO2e. This means that only ~2% of the social cost of carbon (estimated at 100 USD per ton CO2e by 2030 and steeply rising thereafter) is actually incorporated into market price signals today. In accordance with the “polluter pays” principle, this share must be raised quickly enough (alongside other systemic decarbonization measures, such as green financial regulation) to achieve the goals of the Paris Agreement, by:

  • correcting a longstanding market failure,
  • accelerating the deployment of already existing climate solutions, and
  • pushing the commercialization of nascent climate solutions.

To provide an indication of the carbon price levels needed, the “Network for Greening the Financial System” assumes for its “orderly transition scenario” an average global price level of 100 USD/ton by 2030 and 300 USD/ton by 2050.

The concept of ecological debt

The term “ecological debt” has been used in the context of political ecology discourses, usually in an effort to establish historic/country-specific contributions to the climate crisis. Here, I would like to explore the concept from a different angle, as a predetermined future fiscal liability that has been incurred by human civilization over the late 20th and early 21st century. With a current global annual emissions volume of about 50 Gigatons of CO2e p.a., the unaccounted future costs and damages of GHG emissions represent an escalating economic burden for today’s young generations of at least 5 trn USD per year, which is similar in scale as the IMF’s estimate of 5.2 trn USD for indirect (“post-tax”) fossil fuel subsidies in 2017. Assuming an average interest rate of 2% p.a., this amount is equivalent to an annual interest payment for an ecological public debt of about 260 trn USD (roughly 3x the global GDP of 85 trn USD in 2020). It is as if the world’s governments of the late 20th and early 21st century had decided to borrow this amount from the future — in addition to the current global fiscal debt of 281 trn USD — with the intend to finance unsustainable and short-lived economic gains in return for immense future losses. The only way to (at least partially) reduce this ecological debt is by stabilizing the global temperature increase at safe levels. As long as GHG emissions are not declining quickly enough, our intergenerational ecological liability is steadily increasing and cannot be expected to be ever repaid — not only because the global economy is most likely driven into ruin by the climate crisis, but because the losses of biodiversity, planetary habitability and human lives are irreversible and invaluable.

Implications of an ecological debt

The IPCC estimated an average annual energy investment need of ~2.4 trn USD between 2016 and 2035, whereas current annual climate investments are closer to ~600 bn USD. When conservative politicians argue that green fiscal spending programs (as suggested by the Green New Deal, for example) supported by deficit spending would create an undue economic burden for future generations, they are not taking the disproportionately larger future economic burden of the crushing ecological debt into account, for which they are to be held accountable. Neither are they taking into account the possibly huge net gains in terms of decarbonisation-related job creation and economic growth that they are failing to capture. A recent economic outlook by the IMF, for example, projects a potential net gain of 13% global GDP by 2100 (including economic damages avoided), when combining carbon pricing with a green fiscal stimulus as part of a comprehensive mitigation policy package. It’s much more in the interest of future generations to invest e.g. 2.5% of global gdp over the next 15–30 years (if necessary fiscal deficit-based) than to pay interest in perpetuity for an ecological debt at the scale of 300% and more of global GDP (2020).

Similarly, when climate skeptic politicians argue that an “orderly transition” towards a “Paris-aligned” low carbon economy might put human societies under destablizing pressure, they are are not taking into account the alternative of a substantially more destabilizing “disorderly transition”, or the much worse geopolitical chaos and state failures driven by rising temperatures as the result of a failed transition. In addition, they are ignoring the stabilizing effect of a “climate income”, which would be possible by distributing carbon pricing revenues to consumer households to ensure their sustained political support, even in the face of ambitious and increasing carbon price levels.

Finally, when nationalist politicians claim that their country has a “fundamental right” to exploit its fossil fuel resources, they are not taking into account the ecological debt which this activity creates for their nation’s descendants and humanity in general. The short-lived economic benefits created this way come at the expense of their nation’s future security, prosperity and stability. The rationality and legitimacy of such a claim is not much different from a trustee’s claim to a “fundamental right” to misappropriate its trust fund for personal gain. The only reason why these fossil fuel reserves appear as a valuable asset instead of the liability that they actually represent, is because of the market’s failure to get the pricing right.

In conclusion

Closing the carbon pricing gap in time and reducing humanity’s ecological debt is our generation’s collective responsibility. It is a responsibility of historic significance as future generations will most likely look back at the early 21st century as an axial age, a “hinge of human history”. Political leaders— as well as their constituents — need to understand that this extraordinary period requires similarly extraordinary leadership qualities in terms of determination, courage and providence, and a break with obsolete conventional wisdoms that have done the humanity a tragic disservice over the past few decades. We owe it to our children and grandchildren to ensure a legacy of genuine human progress rather than long-term ruin. Rising to this challenge means that we need to be willing to increase carbon price levels by as much as needed, and raise as much public/private funding as needed, in order to avoid facing an overwhelming ecological debt, which human civilization won’t be able to service one day. A future ecological, moral and economic bankruptcy would be practically predetermined. In the end, whether humankind is winning or losing the climate fight may boil down to this question: can our scientific and institutional wisdom be greater than our institutional short-termism and inertia?

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Young-jin Choi

Young-jin Choi

https://www.linkedin.com/in/ychoi3/

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