Climate Change and Economic Theory -- A Neo-Ricardian Approach to the Economy of Climate Protection

Abstract

The Stern Review (2007) is the most comprehensive work to date on anthropogenic climate change from an economic perspective. It caused a general uproar because for the first time a renowned economist recommended the rapid implementation of expensive measures against climate change because hesitation would be even more expensive in the future. Nonetheless, the Stern Review moves in the familiar orbit of neoclassical theory, which supplanted classical theory (Smith, Ricardo, Marx) towards the end of the 19th century and is still dominant in academia today. Neoclassicism has made many contributions to environmental economics, but it seems to fail in the face of climate change. Ecological economics, which has been on the rise since the 1980s and works with the concept of entropy borrowed from physics, has not made any progress here either. If one understands environmental problems as disturbances of natural cycles (of water, carbon, nitrogen, etc.), then in dealing with them one will give preference to an economic theory that also regards the economic process as a material cycle. Piero Sraffa's theory, which follows on from the classical theory, is of this kind. It makes it possible to integrate the carbon cycle into an economic model that includes trading in emission rights with the participation of CO₂ sinks. The model shows that this trade does not generate extra profits, but cuts the profits of CO₂ emitters. It also shows that all CO₂-intensive products would have to be much more expensive in a CO₂-neutral economy than they are today.