Want to Solve Climate Change? Solve the Economy

Aimun Malik
Oct 3 · 5 min read

Introduction

The Earth’s global surface temperature has risen by one degree Celsius since the industrial revolution, and two-thirds of that has occurred since 1975, at a rate of around 0.15–0.20 degrees Celsius per decade. With one additional degree of global surface temperature rising, the water deficit will double and deadly heat waves will occur annually; with two additional degrees, a third of all species could face extinction, and with three additional degrees, rampant forest fires could turn the Amazon into a savannah. Four additional degrees could mean widespread water scarcity and famine.

The policies required to reverse this process necessitate a replacement of the myopic economic system built on subsidies resulting from blatant exploitation of the Earth’s resources with a long-term, bipartisan, public-private economic and political system. It is critical to understand that the seeds for these underlying conditions have already been planted- Toyota Motors has set a 2050 goal of achieving a net positive environmental impact, multiple bipartisan bills have been proposed in Congress, and oil giants such as BP, Shell, Statoil, and Total support a carbon tax.

To leverage the initial momentum and make the economic and political changes necessary for long-term change, an entirely new system must be created. The two most important characteristics of this system are the internalization of externalities and the establishment of international investment infrastructure.

  1. Internalization of Externalities
Economic Depiction of a Supply-Side Negative Externality, like Pollution

Internalization of an externality is the process by which the cost of an externality is included in the originating firm’s cost structure. One common and relevant example of this is pollution: due to the fact that air pollution costs aren’t fully borne by a motor vehicle driver, the cost structure for the polluter is lower than if internalized, and more fuel is burnt than optimal. In this case, the policy required to curb this excess of carbon dioxide emission is that the government tax the per-gallon cost at the point of consumption and invest the proceeds in offsetting the environmental impact.

In one industry this practice has been executed successfully: air travel. The UN and the ICAO have created legislation called CORSIA that requires international flights to offset carbon emissions and has been adopted by 70 countries. Proceeds from these offsets range from planting trees to investing in technologies to limit dairy farm methane production.

Internalizing environmental costs at the point of production or consumption and investing the proceeds to offset the impact should be implemented for all environmentally damaging activities. The procedural justice from using data-driven cost internalization to offset the specific environmental damage enables corporations and consumers at the receiving end of a higher cost to understand and support the new system. Regarding CORSIA, Willie Walsh, CEO of International Airlines Group, stated “we have to demonstrate both financial and environmental sustainability or the industry will decline.

2. Establishment of International Investment Infrastructure

The second key characteristic of a successful system to reverse climate change is an infrastructure for international investment in environmentally-friendly projects. These projects can generate an attractive return on investment, improve the livelihood of the residents of developing countries, and decrease the effects of climate change; however, significant investment is required to open these markets and remove frictions.

The optimal approach to open markets to international investment takes the form of an intermediary governmental organization that invests in infrastructure by way of consumer education, merchant aggregation, regulatory oversight, financing, and distribution. The governmental backing behind the intermediary organization reduces the risk threshold for suppliers and financiers who may otherwise choose not to operate in an uncertain region and consumers who may be averse or unable to make such an investment. Once these markets are opened, there is a considerable opportunity for mutually beneficial investment with strong positive externalities for the environment.

One such example is solar power in Kenya. Burning one liter of kerosene produces 2.6kg of carbon dioxide, and with Kenyan kerosene consumption of more than 500 million liters in 2017, the annual addressable carbon dioxide savings are over 1.2 billion kgs. In addition, kerosene comprises more than half of a Kenyan family’s total energy expenditure. Lighting Africa, a joint International Finance Corporation (IFC) and World Bank program, created a verified market for private companies and investors to sell off-grid solar powered lamps and home systems to save Kenyans money and limit environmental damage. 17.9 million products have been sold, benefiting manufacturers, consumers, and the environment alike.

Lighting Africa’s Off-Grid Solar Technology

Lighting Africa’s success enabling 28.8 million people across Africa to meet basic electricity needs was the product of a considerable degree of local investment and collaboration. The program began with consumer education, using traveling roadshows to reach rural populations and provide first-hand exposure to the product. In addition, Lighting Africa conducted substantial market research to encourage international distributors to target the regions, instituted quality assurance to increase consumer confidence, and provided financing to both consumers and suppliers.

Not only does this infrastructure connecting consumers in developing countries and international manufacturers open up massive, attractive markets that can improve the livelihood of billions across the globe, but it also fits perfectly with the internalization of externalities characteristic of the new system, creating new investment opportunities via microfinancing or direct investment into these environmentally favorable projects.

Conclusion

It is through correctly administered free markets that both the environment can be restored and progress can be achieved. With sufficient buy-in, a new free market system can be created that automatically offsets environmentally damaging activities with investments into technologies that not only help improve the environment but also have the potential to fundamentally improve the livelihood for billions of people on the Earth.

This system is one that replants the 46% of the world’s now lost trees, provides potable water to 840 million people without access via microfinancing for well construction, and produces solar power in homes to give light and food to 1.4 billion people without electricity.

Aimun Malik

Written by

Founder & CEO @ Coalescent Strategies https://www.coalescentstrategies.co/; Private Equity @ Trustbridge Partners; Investment Banking @ PJT Partners; Penn ‘18

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