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Climate Change: Economics as a Plausible Solution

An Analysis by Andy Wang (’23)

Climate change has become one of the greatest challenges in the world, one that threatens all of humanity. As a species that has existed and evolved for six million years, according to Charles Darwin, the success of human civilization has been attributed to our adaptive behaviors which have increased our chances of survival. Yet, how could we be fully aware of this preeminent threat and at the same time, feel numb about it? For the same evolutionary reasons, we have developed present-biased time preferences which have made us prioritize imminent and instantaneous threats. On the other hand, the “real” threat of global warming can happen in the distant future, and the pace of it escalating is not urgent enough to stimulate the fight-or-flight response that warns and prepares us to take immediate action. Like a drop in the bucket, our own intrinsically- driven actions often do not make an impressionable improvement to the situation at hand.

Yet collectively, we can do incredible things. This is where economics could step in and provide a solution, one that provides financial incentives for people to reduce greenhouse gas emissions, and with the substitution of short-term rewards for long- term benefits, we can combat our myopic nature.

One plausible solution would be to provide households with an opportunity to save on their energy bills by comparing the level of energy consumption in the corresponding month of the previous calendar year. With a one-time voluntary sign-up for this free benefit, demand for this service will surge and residential energy consumption will significantly decrease.

For example, if a household’s electric consumption in January 2022 was 1,000 kilowatts-hours (kWh), a reachable goal of reducing electricity use by 10% or 100 kWh can be set for January 2023. If, by that date, electrical consumption is reduced to 900 kWh or under, the consumer would receive a discount. In the case where the recorded use of electricity is over 900 kWh, the price would remain at the current market price.

Considering the nature of government-regulated natural monopolies, utility companies are subsidized by the government and operate in a state where the marginal cost is greater than the marginal revenue. Therefore, the reduction in energy consumption would not create significant losses for the companies.

For the benefit of consumers, apps would be handy to display their energy consumption as a percentage of their monthly goals. In addition, to help them visualize their energy consumption, every 10% increase in usage would erase one of the 10 trees displayed on the screen. This hands-on method would not only give consumers accessibility to view their energy consumption but would also reward them monetarily for their contributions to slowing the detrimental effects of global warming. Although this solution is driven purely by financial incentives, the mere interest in joining the green movement will further stimulate environmentally responsible behaviors in individuals. The ripple effects from this incentive can extend to all businesses affecting our environment and will elevate the rising popularity of impact investing and sustainable business practices.

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