Measuring Risk to Manage Climate Disaster

This is the second piece on Professor Semmler’s work on the economics of climate change. Read the first here.

Images of a burning Amazon rainforest last week brought people across the world face to face with the effects of increasingly aggressive deforestation and the killing and displacement of humans and animals in one of the most diverse ecosystems on earth. São Paolo, the largest metropolis in the Americas, was covered by a blanket of smoke that turned the day to night.

The images are searing, but the response so far from Brazilian President Bolsonaro has been callous. The incentives toward inaction are evident: clearing forest expands arable farmland, which many growers see as key to economic growth. But is this analysis sound? Is environmental degradation truly a way to stave off economic stagnation?

Deploying models traditionally used to measure the dynamics of financial crisis and economic contraction, Willi Semmler, Arnhold Professor of International Cooperation and Development, is at the forefront of new efforts to try to make measurable the economic impacts of climate catastrophe. His conclusions may be alarming, but the concreteness of his analysis offers some hope that hard data can change the kind of short-term thinking behind the Amazon fires.

Semmler began his academic career with a mathematical economics dissertation inspired by the work of the classical economists of the late 18th and 19th centuries. For these luminaries – Smith, Ricardo, Marx – political economy was very much focused on theorizing a novel and wholly transformative phenomenon of industrial capitalism. Their questions were basic, and their approach socially informed: Why and how do economies grow? Where does the growth go, what impact does it have on inequality of income and wealth, and how? And, most importantly for subsequent generations of economists including Semmler: How can the economic engine periodically sputter and stall?

Soon after earning his Ph.D., Semmler became interested one particular kind of crisis-prone growth: climate change. “We realized that the economy is using up resources and also producing pollution. So we started working on growth and resource availability and exhaustion. How much do we leave to the next generation, and what are the environmental effects of economic growth?”

He began to adapt dynamic economic models that measure risk and recovery around financial crises to work in climate catastrophes, drawing inspiration from similar work around natural disasters by University in Exile Economics professor Emil J. Gumbel.

 “The same thing that happens during financial crises is happening in climate disasters. You usually have certain regions where  public capital — infrastructure and zoning — is destroyed. Private capital is destroyed. People lose lives. Agricultural production is destroyed. When capital is destroyed, potential output is destroyed. And the similarities are so striking,” with how financial disasters play out, says Semmler. Read his co-authored paper.

The results of Semmler’s decades of work at The New School, as well as his work as senior researcher at the International Institute for Applied Systems Analysis in Austria, and his work for the IMF, the ILO and the World Bank, are a set of practical recommendations for how to actually manage the risk of catastrophe in the era of accelerating climate change. In moving to that next step of formulating policy, Semmler thought carefully about risk distribution across generations and between different regions of the world. Referring to the work of philosopher John Rawls, Semmler notes that the problem of risk management is “a problem of fairness and justice.” The resulting policies are meant to both help prevent the worst catastrophes while also enabling the best possible response to the ones that do occur.

In order to prevent as many catastrophes as possible, even at our current stage, a large-scale and structural transformation of the economy is needed, says Semmler, encompassing a shift away from fossil fuels and the construction of preventative infrastructure, such as dams. This shift will itself require financing, but the typical mechanism for funding new public initiatives appears to be a political non-starter. “Raising taxes and winning elections? This will be insufficient!” he remarks.

Instead, Semmler proposes that governments raise money by issuing bonds. These 50-100-year “green bonds,” as Semmler calls them, “can transform the energy system on the large scale. They are more effective than just using a carbon tax…and distribute the burden of stepping out of fossil fuel energy and moving into renewable energy between the generations.” “Financing Low-Carbon Transitions through Carbon Pricing and Green Bonds,” a recent paper co-authored by Semmler and several NSSR alumni and students, including Mariana Mazzucato, will be published by the venerable German Institute for Economic Research in its Quarterly Journal for Economic Research. Read a working version, published at the World Bank working paper series.

Semmler has also considered how to narrow the gap between affluent countries, which tend to generate the most pollution, and developing nations, which generate relatively little pollution but are most vulnerable to its effects. An international financing effort building on the Copenhagen Accord would be necessary to both address how to build infrastructure to help reduce the risk of climate disaster as well as how to repair the damage when disaster does occur.

His prescriptions thus vary in scope. Semmler believes that the involvement of supranational organizations, such as the World Bank and the International Monetary Fund, is absolutely necessary to support recovery developing nations  after disasters. But when it comes to preventative measures, “nation-states are responsible for certain things and for third and other things, the global community is responsible,” he says. “There’s a balance to recognize the fact that on an individual level, we can’t really do too much. There’s a sense in which there needs to be global redistribution and global responsibility, but also we can’t defer responsibility to a kind of imagined global community, when in fact nations are still effectively the ones who need to be taking action, raising taxes, issuing climate bonds.”

Semmler’s work encapsulates much of what’s best of The New School’s tradition of engaged scholarship. Drawing on specialized knowledge, Semmler has worked to adapt existing dynamic models to deal with unforeseen but pressing sociopolitical issues with an eye towards practical, sustainable solutions. Very much in line with the NSSR’s intellectual heritage, however, Semmler is not working alone. As director of the Economics of Climate Change project at NSSR’s Schwartz Center for Economic Policy Analysis, and in conjunction with the University’s Centennial celebrations, Semmler is organizing the “Climate Disasters and the Green New Deal” conference on September 3, featuring economists Stephanie Kelton (NSSR alum now at Stony Brook University), Claudia Kemfert (German Institute of Economic Research), Bob Kopp (Rutgers University), and Stefan Mittnik (Ludwig Maximilians University of Munich). Semmler hopes the event will inform and motivate policy makes to take action on climate change now. “There’s a huge group of new Congress members who are pursuing [issues related to climate change], but nobody can put this platform forward without talking about the Green New Deal. I want to put these two things together. There’s the climate disaster, and Green New Deal.”