Why People Don’t Act (2)

This is the second of two blogs about why people don’t care and why they don’t act. My view is that once we understand the “whys,” we can approach the “hows” of influencing people to take action on important environmental challenges.

I’ll focus here on incentives, social biases, and information deficits. I believe that we do not experience enough external pressures to minimize negative environmental impacts and to communicate those impacts to others.

Environmental sustainability discussions often refer to the long-term time horizon. We expect the world will be no worse off tomorrow than it is today. Bringing the future into current decisions is a large challenge. We have biases toward short-term returns and we don’t know much about the long term – hence we give it a higher risk premium. This bias and information deficit make us less likely to invest for the long term, especially in The Environment (as opposed to my environment).

Promoting the long-term time horizon brings many issues into focus. Those running our government try to appeal to current constituents, even if they know their ideas are not sustainable in the long term. We could easily remove fossil fuel subsidies, yet the price of energy is likely to rise which would be blamed on current government officials.

Climate changing behavior produces an unpriced negative externality, meaning the costs people bear are not equal to the costs they impose. These unpriced costs are not compensated. Those who benefit from climate changing behavior do not pay the full costs of their behavior and some of the costs fall on people who are not adequately compensated. This situation is especially true in less wealthy U.S. communities and emerging markets.

All of this distribution of costs causes perverse incentives to act. Any attempt to respond to climate change activates distributional conflicts. Those who benefit from the present inefficient system might be worse off in a more efficient system. If we couple this challenge with denialism about the reality of climate change, the economic question becomes irrelevant – if there is no problem there is no need for action. 99.9% of economists and earth scientists agree we must and can take efficient action now; a paradox in why people don’t act.

Economists are not always easy to understand and they argue on many details that do not aid in clarifying issues for the general public. For example, one debate is on setting the discount rate on future actions. This debate is highlighted by economists from Britain and the USA. Are the discount rates associated with competitive financial markets consistent with those for sustainability?

Economically, discounting is used to bring future flows of benefits and costs into a present-value context. The world’s financial markets use discounting methods to allocate capital to fund investments. This means much of what we do today benefits us in the future, and we want to know which behaviors (investments) will yield the highest future returns.

Thus, for government policy making and for financial markets, environmental sustainability projects must look attractive from a cost/benefit basis or a rate of return basis for private funds.

Individuals possess a time value of money for various reasons, not unlike why we pay interest on borrowed money. When lenders provide money for personal use or governmental use, the lender makes the lending decision based on alternative uses of the money such as buying goods or services now instead of in the future because of inflation or increased current utility; loaning to you in comparison to others; or investing in another business or in education.

Therefore, the opportunity cost of lending someone money is either the foregone utility of current consumption, foregone purchasing power due to inflation, or the forgone income that could have been earned by other investments. The interest rate charged on a loan has to be higher than the lender’s risk adjusted opportunity cost to generate a supply of loanable funds. The opportunity costs of capital to a firm is the next best risk-adjusted rate of return that is foregone when an investment decision is made.

Riskier investments tend to offer a risk premium in the form of a higher rate of return on invested capital. Climate changing behavior is viewed as risky due to the uncertainty of future outcomes. This risk perception makes climate changing behavior investments costly, another reason why people don’t act.

The most severe damages of climate change will occur in the long term. If we set the discount rate at 1%, the present value is much larger than if we set it at 5%, justifying more aggressive actions in the short-term. The lower the discount rate the more aggressive current policy. Whatever we do, we ultimately have to express an ethical judgment about equality. We have to decide on current inequality, temporal inequality, and risk. In other words, do we care more about current people or future people? Making this decision is not entirely an economic analysis – we have to decide, as a society, how we approach deciding on what is ethical in our world. This consensus does not come easily – hence we tend not to act.

We know that any action we take would involve winners and losers – and who is in each group is not clear.

Environmental sustainability decisions extend this logic into the social rate of time preference, which becomes the basis of discounting policies designed to enhance the well-being of society over time. This time preference reflects the rate at which society is willing to substitute present for future consumption of natural resources. While difficult to measure, a common proxy measure is the rate at which a society’s wealth generating capital stocks grow in productivity over time.

We need to make a core assumption to understand more about these ideas. Constructed capital is a substitute for natural capital. This assumption means that we can build a concrete barrier just like we can preserve a mangrove. Several people believe natural capital cannot be considered this way and that policy needs to be designed for safe minimums of irreplaceable elements for natural capital such as wilderness habitat and biodiversity.

Suppose we had a stable population and no inflation. Suppose that someone makes a proposal to invest in restoring a plot of land. Suppose further that the productivity growth rate for constructed capital (such as technological innovation) is 3% per year. By diverting a dollar of investment from constructed capital to today’s restoration projects, we must forgo a 3% social rate of return.

Calculating social rates of return is almost impossible given the differences among individuals.  Additionally, investment decisions generated by financial markets are biased towards projects and management plans that generate current rather than future benefits. Financial markets treat both natural and human-made capital as perfect substitutes when it comes to rate of return meaning the opportunity costs of capital drives management decisions for commercial natural resources.

We don’t act because environmental projects are difficult to quantify. Environmental challenges lack price information. For example, what is an ecosystem worth; a watershed?  Or, what is the beauty of a park work to those who use it or those who do not use it?

Our willingness to contribute to positive environmental outcomes decreases with its state of emissions. Willingness of a nation to contribute to the reduction in GHG emissions decreases with its share of these emissions. There are no examples where higher income is positively correlated with concerns for global warming or with support of climate protection policy.

We do not act because we believe the government will take care of things. Also, we tend to be politically isolated and do not respond to anything; we are alienated from the political process.

The more people we assume know about the problem, the more likely we are to ignore our own judgment and watch the behavior of others to identify an appropriate response, also known as the Bystander Effect.

We have few social or political spaces in which environmental outcomes are considered relevant or appropriate topics for serious conversation. The spaces we occupy (small talk with others, political settings, educational settings, social gatherings) do not easily lend to this conversation.

We stay silent because we tend to have a minority opinion; we defer to the informational signals provided by the statements and actions of others. We tend to ignore hard evidence (a force described in my last blog). We tend to agree with everyone else. Most people do not think we have serious environmental challenges; therefore, those that do see the challenges are silenced. We are silent because we want to avoid the risk of social isolation and punishment.

We do not have enough information about negative environmental outcomes of our actions.  Paradoxically, people who are better informed about climate change express less, rather than more, responsibility for the problem because they realize there is no solution. This is a diffusion of responsibility; already doing something – “I recycle” or, “I drive a Prius.”

Some people believe that various stakeholders such as the media, scientists, and politicians are misinforming the publicWe believe that factual and scientific evidence are often ineffective at reducing misrepresentations and can even backfire on issues such as climate change, weapons of mass destruction, health care reform, and vaccines.

We obtain information from people we trust and from those who share the same world views and values. This tendency means that we don’t normally listen to other sides of a debate.

So, between what I described in my last blog and this one, one can clearly see the plethora of reasons why people don’t care about and don’t act on important environmental challenges, especially climate change. In my next blogs I’ll describe what we can do about this lack of caring and actions using the CLIMATE model described in an earlier blog.


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