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Money and Climate Change: Can We Foot the Bill?

Words by 3p Contributor
Investment & Markets
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By Joseph Plummer

What is the cost of addressing climate change? This is not a tough question to answer assuming you know the method or methods you are going to use to address climate change. For example, if we wanted to start by zeroing our carbon footprint, we could easily calculate how much money it would take to do so. We can multiply the number of units of dirty energy by the cost to convert them to clean energy, and this would give us the total cost of the transition. So, let’s say we have 20 terawatts of infrastructure that we want to convert to clean energy at an average cost of $2 per watt or $2,000 per kilowatt. That means to convert all 20 terawatts of infrastructure it would cost $40 trillion. That’s a lot of dollars.

The current global money supply (M3) is around $75 trillion, and about $15 trillion of that is tied up in long-term investments. So, more realistically, let’s say we have $60 trillion to work with. Let’s say we spread the $40 trillion of investment in clean energy over the next 20 years. That would mean that $2 trillion would be invested in clean energy every year. This is the equivalent of about 3.33 percent of the money supply every year being devoted to clean energy investment. This is not a trivial amount of money.

Global investment in renewable energy is currently around $300 billion per year. And it will likely increase to around $500 billion per year over the next three years. So, if we are serious about zeroing our carbon footprint, we need to at least quadruple the pace of investment in renewable energy. How can we do that when there are other things like economic development, roads, education, healthcare and defense that need more money too? We need to increase the amount of money we have to work with. The $60 trillion that is our effective money supply has to increase.

Milton Friedman once said, “Most economic fallacies derive from the tendency to assume that there is a fixed pie, that one party can only gain at the expense of another.” There is some amount of money that is necessary to operate and maintain our society. If that amount is greater than the current money supply, then we need to consider increasing the money supply. As climate change becomes more serious, we will be forced to increase spending on either addressing or reacting to climate change. Whether it is installing more solar panels or fixing more broken windows, we will be forced to spend money on climate change.

If increasing the money supply must take place, what will be the effects of that increase on our economy? Will the increase cause inflation? Will an increase in one currency, but not others, decrease the value and power of that currency? Let’s say the United States increases its money supply to invest more in clean energy and sustainable infrastructure. The truth is most economists would agree that increasing the U.S. money supply has the very real potential of causing inflation in the U.S. and decreasing the value and power of the U.S. dollar. However, being aware of this risk allows us to address it and mitigate it.

Another concern is how to most effectively inject capital into the economy. Quantitative easement has been used recently, but there is a significant time lag between point of action and point of impact. Also, the current form of quantitative easement encourages an economy driven by debt instead of simple transactions. In other words, society only benefits from the increase in money supply if someone takes on more debt. Another way to inject newly-created money would be to provide block grants to states for the purposes of developing clean-energy and mass-transit infrastructure. This would have a direct and immediate impact on infrastructure and energy demands.

It is important to note that all infrastructure we build as a society has a life cycle. In other words, everything we build has to maintained, operated, rehabilitated and, some day, replaced. In order to maintain this quality of life with this much infrastructure, we need to understand the lifecycle costs of our system. This means every 25 to 50 years we have to make a lot of large capital investments that simply cannot come from tax revenue. If we want to maintain a strong, vibrant and growing economy, we need to detach capital investments from tax revenue. Tax revenue should really only be used for the operations and maintenance of society and its infrastructure. The creation or re-creation of infrastructure (things like roads, schools, mass-transit systems, major energy projects, etc.) needs to be funded by something that is not tax revenue or debt.

As we move forward in our pursuit of developing a sustainable economy and society, our self-imposed monetary constraints will become more and more visible. Looking ahead to 2050, we need to consider long-term infrastructure demands and the associated capital and operating costs necessary for that infrastructure. The more we know about the future, the better we can prepare for it.

Image credit: Flickr/Martin Nikolaj Bech

Joseph Plummer is a degree candidate in the Executive Master of Natural Resources (XMNR) program at Virginia Tech, expecting to graduate in May 2016. He currently works for a non-profit organization that works with schools and school districts on renewable energy and sustainability initiatives.

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