The More Climate Skeptics There Are, the Fewer Climate Entrepreneurs20 March, 2017 / Articles
According to an October 2016 Pew poll, only about half of Americans believe that climate change is due to human activity. The U.S. remains home to a considerable number of “climate skeptics,” who clearly impact the politics around the issue, as they are unlikely to support costly actions such as carbon taxes intended to mitigate the challenge of climate change. Higher carbon taxes would have a direct effect on encouraging households and firms to consume less fossil fuels and would accelerate directed research in green technologies such as electric vehicles, solar panels, and other forms of renewable power.
In the absence of such carbon taxes, global carbon dioxide concentration levels are likely to continue to rise. This presents the challenge of how we will individually and collectively adapt to the new climate change challenges. If our summers are ever hotter, if our coastal areas face sea level rise and flood risk, we will need to unleash human ingenuity to tackle these emerging problems.
But how does the presence of climate skeptics affect the market for climate-related innovation? Economic theory suggests it can have a significant negative impact. In other words, climate skeptics don’t just stymie progress on climate policy. They ensure that would-be climate entrepreneurs have less incentive to invent.
Consider the example of a new drug for curing baldness. A drug company must incur a large fixed cost to do the basic research, so it has strong incentives to predict what the demand for the drug will be if its research succeeds. Suppose that there was only one bald man in the world. The small market size would lead the company to not invest in baldness medication. The higher the market demand for a drug, the greater the probability that at least one drug maker conducts basic research.
In our new NBER paper, we argue that the presence of climate skeptics reduces the aggregate demand for products that help with climate adaptation, and that this reduces the likelihood that innovative companies devote their efforts to solving these challenges. Our research is purely theoretical: We outline a model but don’t test it on real-world data. Nonetheless, in applying economic principles from previous research to the question of climate skepticism and innovation, we offer, at the very least, an important thought exercise in the negative impact of climate denial.
The “market potential” for climate adaptation matters because capitalism can help us to adapt to climate change along many fronts. To protect us from climate change–induced heat, we will need more-efficient air conditioning. To reduce flood damage to real estate, we will need architectural innovations. In the same spirit as Julian Simon’s call for human ingenuity to reduce natural resource constraints, capitalism could play a fundamental role in climate adaptation if firms anticipate that there will be a large market for the products they develop.
But the more people there are who don’t believe the climate is warming, the less market demand there is for would-be climate entrepreneurs, and the less incentive there is for companies to do research that could lead to climate-resilient products.
Our model for all of this is purposely simple. Each person in the economy maximizes their expected utility, which is calculated by multiplying the value of their future consumption by their chance of survival — basically, the value of enjoying your life in the future multiplied by the chance that you’ll live to enjoy it. Products aimed at climate change adaptation impact the latter variable, the individual’s survival rate. In our model, a rational agent demands climate-adaptation products in order to increase the chance that they survive to enjoy future consumption.
But now imagine that some people in the society are climate skeptics. These climate skeptics also seek to maximize their future utility. But they don’t believe in climate change and don’t believe that climate-adaptation products impact their chances of survival. So they have no incentive to purchase them.
Our model illustrates that the total market demand for climate-adaptation products depends, in part, on the number of climate skeptics. The more skeptics, the smaller the total available market for those products. Even in an economy with lots of climate skeptics, some entrepreneurs will attempt to build these products. But on the margin, more skeptics means less demand, which means less investment in climate-adaptation technology.
In our paper, we illustrate how essential globalization is for whether entrepreneurs enter the market for climate-adaptation products. In a world of over 7 billion people, entrepreneurs will be wise to target innovations that address the adaptation challenge both in the U.S and in developing nations.
Air conditioning demand is soaring in the developing world. As people in less-developed countries grow richer, they increasingly demand safer housing and comfort-enhancing home goods. People all over the world are likely to face similar challenges of extreme weather and sea level, and this suggests that globalization plays a key role in creating innovation incentives for climate-adaptation entrepreneurs. Globalization helps to offset the climate change adaptation challenge posed by the existence of climate skeptics in any one country.
Climate skeptics can, of course, update their beliefs over their lifetime as new information arrives. In this case, the climate adaptation demand by the nonskeptics benefits the skeptics, because entrepreneurs are more likely to invest in climate resilient products, due to the aggregate demand by the nonskeptics. If climate skeptics eventually come around, and realize that climate change is real and man-made, they’ll start to demand products that help them adapt to it. But those products will only be available to the extent that their fellow citizens recognized the threat earlier, creating the incentive for entrepreneurs to invent them.