An Economic Solution to the Climate Crisis

Ph.D. alum of the University of Minnesota Department of Economics, Professor Per Krusell, recalls his fond memories at the U and how the basis of his macroeconomic research has been in huge part credited to the staff and resources that were available to him during his graduate school years. Per Krusell is a notable economist, particularly in the fields of technological change, inequality, political economy, macroeconomic policy, and labor economics. He has been able to channel his knowledge of macroeconomics as a professor at the London School of Economics, Stockholm University, and Princeton University and received many accolades for his research including the 2007 Söderberg Prize along with multiple grants across Europe and the United States. His most recent research has been on the economy of climate change and how the world can become more sustainable through economic policies. 

Last month, the Heller-Hurwicz Economics Institute had the honor of hosting Krusell as he spoke about the threat of climate change and how nations across the world can implement a carbon tax to move towards a greener and more carbon-neutral future. In his words, “The climate crisis acutely threatens the survival of mankind," and while economists are unsure of the exact amount of carbon that is being emitted into the atmosphere, it goes without saying that the threat of irreversible damage is real and forthcoming. With conflicting variables like geographic region, populations, and level of carbon emissions per nation, some possible solutions listed by Krusell include sequestration, geoengineering, and mitigation. However, to truly curb the effects of climate change, he believes that a carbon tax in some form must be implemented. But a tax needs to be implemented under a market and where is the market for carbon emissions and the global temperature? 

Krusell delved into the Pigou tax, in which the economy of the climate must be established by defining global warming as a negative externality. Essentially, under the Pigou tax, there would be an additional $2-$70 tax per ton of carbon emitted. He noted the different possible outcomes, including picking a tax that is too high or too low, having different tax rates depending on the country and region, and instead focusing on subsidizing green energy instead of taxing fossil fuels. 

Krusell specifically used the EU as an example, which pledged to reach climate neutrality by 2050 by:

1. De-escalating emissions and reaching a total emission of 16 billion tons by 2040,
2. Creating a new emissions trading system for transport and heating by 2044, and
3. Decreasing average emissions from new cars by 55% by 2030 and banning the sales of fossil fuel cars after 2035.

This would allow the EU to have full control over CO2 emissions by 2050, not only establishing a clear market for climate change and carbon emissions but also making the transition to a more sustainable earth easier on the consumers of carbon aka the citizens. 

As his audience of community members, students, and professors stayed engaged, Krusell concluded with the following: even a modest emission tax will reduce climate change and push towards green energy and less fossil fuel energy. 

But in order to see success, the emission tax needs to:

1. Be implemented globally, especially in China, India, and Africa, 
2. Not solely rely on green energy and implement a tax in tandem with green energy subsidies, and
3. Have geo-engineering be a plausible plan B.

He ended his talk on an optimistic note, claiming that the EU is a leader in this plan and will likely achieve climate neutrality smoothly by 2050 and if other major nations follow suit global climate neutrality by 2050 can be achieved at a reasonable cost.