Time to Rethink Economic Metrics

I have lived in South Africa my whole life; I have watched the sun set from the top of Table Mountain and witnessed wildebeest roam the plains of the Kruger National Park. Yet ephemeral moments like these belie an existential threat endangering the sustainability of this beauty: climate change. For decades humans have been destabilising the earth’s delicate biosphere without regard for the potential calamitous consequences. Carbon emissions have been rising since the Industrial Revolution, causing the earth’s climate to change at a terrifying rate. The foremost scientific estimates suggest that unless we dramatically reduce carbon emissions, average global temperatures will increase by more than 1.5°C by 2100 - resulting in rising oceans, unbearable temperatures and more frequent extreme weather events.

Consequently, governments have begun to introduce climate change into their agendas and implement policies to mitigate greenhouse gas emissions. In the South African government’s National Development Plan for 2030, for example, chapter five is devoted to addressing climate change. Yet, despite governments’ efforts, carbon emissions are still rising, and we are rapidly approaching several tipping points beyond which even a substantial decline in emissions will not be enough to reverse the damage and avoid worldwide calamity. So what are governments currently doing and what should they be doing instead?

Typically, government interventions have focused on market-orientated policies that aim to reduce emissions by penalising unsustainable behaviour. For example, in 2019, the South African government introduced a carbon tax that it hopes, by changing relative market prices, will shift consumer behaviour to move towards low-carbon options. However, I am doubtful that this policy will be sufficiently successful as I believe that it has failed to account for certain behavioural implications of such a tax.

In a seminal work examining the effect of a tax on human behaviour, Uri Gneezy and Aldo Rustichini performed an experiment on parents at day-care centres in Israel. In the experiment, if parents were late to pick up their children, they were fined a certain monetary amount. The intention was to change parents’ behaviour and reduce the frequency of late arrivals. The economic theory behind this was straightforward: in order to avoid having to pay the fine, parents would make a fervent effort to arrive on time.

However, this was not what happened. After the introduction of the fine, there was in fact a significant increase in the number of parents arriving late; the fine resulted in an increase in the behaviour that was being taxed. The authors posit that one reason for this outcome was that the fine changed the implicit conditions of the parents’ contract with the day-cares. Before the fine, if parents arrived late, the day-care workers had to stay beyond their contracted hours with no additional compensation. Parents, not wanting to take advantage of the workers’ generosity, assiduously tried to arrive on time. The introduction of the fine altered this perception; now that the workers were being compensated for tardiness, the guilt of inconveniencing them disappeared, and parents no longer felt obligated to rush to fetch their children on time.

My concern is that the carbon tax in South Africa will have a similar, unintended effect: because individuals will now have to ‘pay’ for the production of their emissions, they will no longer feel guilty about consuming carbon-heavy products. It will be simply another commodity that they have purchased. Therefore, paradoxically, the tax could actually lead to an increase in carbon emissions.

So what should governments do instead? I believe that it is no longer adequate merely to tax environmental degradation; we inextricably need to link climate change to principal economic indicators. Heterodox politicians and economists have already begun the call for a move away from the excessive focus on Gross Domestic Product (GDP) towards new, more inclusive measures. Measured as the market value of goods and services produced within a nation’s borders in a year, GDP has long been used as the leading indicator of a country’s economic health. However, in the context of today’s ecological ruination, this narrow metric is simply no longer a panacea.

In her 2017 book, Doughnut Economics, economist Kate Raworth cogently argues for a new economic metric which, rather than concentrating on growth for its own sake, focuses on the desirable outcomes that growth should achieve: these include social objectives such as sufficient food, access to education and healthcare, as well as ecological measures such as climate change, freshwater withdrawals and biodiversity loss. Adhering to this school of thought, New Zealand, under Prime Minister Jacinda Ardern, recently pioneered a laudable movement away from GDP as the principal measure of the nation’s success towards a multidimensional measure that focuses on social, financial, human and environmental issues.

I believe that more governments need to advocate similar measures and that these should intrinsically be linked to the central economic activities of a country. Imagine if, when negotiating international agreements, such as multilateral trade treaties or a country’s ability to raise funds in the debt market, these holistic measures were an influential determinant of the outcome. Imagine if, instead of solely focusing on a country’s capacity to repay its debt, credit agencies - such as Fitch and Moody’s - develop an economic sustainability indicator that influences investor risk and required yields. If integral changes such as these occur, climate change may shift from being a periphery issue that is hidden in a country’s long-term development plan to one of the primary, immediate focuses of government. With this shifted emphasis, environmental policy will hopefully change from negatively taxing individual actions to positively promoting and investing in carbon-reducing ventures.

To some, this might sound quixotic - but I strongly believe that it is necessary. Governments can no longer afford to put immediate national interests first and reassure themselves that they can worry about the environment later. Addressing climate change demands fundamental systemic change, and it demands it now. If this occurs then, perhaps, the beauty of Table Mountain and the Kruger National Park will not be lost forever.

*Disclaimer: This is an essay that I wrote for The Economist's Open Future essay competition.