Date Published:

Abstract:

By nearly any perspective, insufficient effort has been undertaken to address the risks posed by global climate change. This failure to mobilize sufficient effort to combat climate change reflects the difficult political economy that characterizes the problem. To grossly simplify the problem, the challenge is that future, unborn generations will enjoy the benefits of climate policy while the current generation, and in particular those reaping substantial returns from a status quo that fails to address climate change, will bear the costs. In this paper, I describe the returns to narrowlydefined business capital and a broad concept of capital – physical capital, human capital, environmental capital, social capital, etc. – to illustrate differences in investment incentives and hence political economy considerations for those engaged in climate policy debates. While the standard economist’s prescription to price the externality could align private and societal investment incentives and ensure that future generations have the opportunities to enjoy a standard of living at least as good as the current generation, it must confront the political economy that the costs of changing prices are borne primarily by the current generation and concentrated among incumbent firms and the benefits are enjoyed disproportionately by future generations and emerging insurgent firms that aim to bring new technologies to market and capture the incumbents’ market share. Tailoring the design of climate policy to mollify the incumbents in opposition and to leverage the potential of the insurgents to build broad political support will be necessary to mobilize successful political action to combat climate change.