The Problem of Sunk Costs — and an Unpleasant Solution

Tom Easton

It is disappointing that the December 2019 United Nations Climate Summit (COP 25) failed to do much about global climate change other than declare a need for nations to be more ambitious about reducing carbon emissions and helping poorer nations cope with the impacts of global warming. A discussion of global carbon markets was put off till the 2020 Summit.

We know that many parts of the world face an existential crisis. Heat waves are already beyond all precedent. Sea level rise will surpass two feet by 2100. Billions of people will be affected, even in the richer nations of the world.

So why aren’t we doing anything about it?

We talk about denialism, about politicians refusing to believe scientific analyses, perhaps at the behest of the billionaires who fund their campaigns. We talk about corporate interests—not just fossil fuel companies, but also car makers, cement makers (and users), and highway builders—that want to keep on making money just as they always have. Business as usual, and that’s the scenario in all the climate models that leads inexorably to disaster.

We shake our heads. We rail at their short-sightedness. We call them stupid and blind and evil.

But… And I don’t mean to excuse their behavior, but to offer an explanation. According to economist Frank Ackerman, “The ultimate economic obstacle to climate policy is the long life of so many investments” (see “Inequality, Sunk Costs, and Climate Policy,” Triple Crisis, February 27, 2019; http://triplecrisis.com/inequality-sunk-costs-and-climate-policy/). The fossil fuel industry has a ginormous amount of money—on the order of ten trillion dollars–invested in coal mines, oil and gas wells, tankers, refineries, pipelines, gas stations, and more. That money is called sunk costs. It’s already been spent. It can’t be recovered. It can’t even be repurposed.

To eliminate carbon emissions means, among other things, to stop using fossil fuels as soon as possible. That means turning sunk costs into “stranded costs,” which are no longer serving any useful purpose. It means writing them off. It means turning a profitable industry into a massively unprofitable one, to the great dismay of its investors.

It should be no surprise that corporate interests are reluctant to bite the climate change bullet, no matter how necessary doing so may be.

Can we make them bite that bullet? The past may be instructive. By the 1940s, the developed world had a massive industrial infrastructure well suited to the needs of the time. World War II saw the United States’ portion of that retooled in a hurry to produce war materiel. Europe and Japan saw their portions destroyed. When they rebuilt after the war (with U.S. help such as the Marshall Plan), the U.S. found itself at a competitive disadvantage because much of U.S. manufacturing depended on older, obsolete facilities. It took a couple of decades to adjust.

I’d hate to think we need a war to make coping with climate change more feasible or practical. But we do need that level of replacement of old infrastructure.

And unfortunately, we are seeing the rise of populist demagogues who promise their people that older ways can be restored and nations can be great again. We are seeing barriers to the movement of environmental refugees. We are seeing the abandonment of treaties intended to forestall or limit the ferocity of war. We are seeing the death of alliances. We are seeing new weapons being tested and deployed.

World War III becomes easier to imagine every year.

If it happens—if we can refrain from using our nukes–the consequences may not be entirely negative.

If it doesn’t happen—the U.S. has retooled before. It can do it again.

It must do it again. In which case—soonest begun, soonest done.

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