Not that Richard Murphy realises that he’s just proven that climate change isn’t something we should bother about but then that’s because Richard Murphy doesn’t understand the subject under discussion.
But on such a misunderstanding he has based his entire idea of a new form of accounting to deal with climate change.
Hey ho, that expansion of the universities was a mistake, wasn’t it?
The core point is this:
The framework must also have a forward-looking focus when considering capital sufficiency for the sake of protecting all stakeholders of the reporting entity. The aim is not just to protect creditors from the possibility of loss arising as a result of their engagement with the company. All stakeholders must be protected in the same way. This means that a current ability to settle liabilities as they fall due will be an insufficient criteria for viability within this framework. What this means when reconciling FA and NCA, which this new conceptual framework must do, is that if a company cannot demonstrate that it has the ability to maintain its activities in the long term as a going concern within the constraints that the environmental crisis that we face impose upon it then the costs to be incurred to meet those demands that climate change will impose must be provided for in the
present period and be treated as a cost.
All of the future costs of trying to avoid climate change must appear in the accounts of a company now. Today. With no discounting.
As he points out:
If when this appraisal has been undertaken the entity cannot be shown to be solvent on a sustainable basis the entity will have to cease to trade, just as it might in any other circumstance. That it might command significant financial capital at the time of doing so is not the point: the constraint in sustainable cost accounting is the environment and not availability of financial capital, and it would be better that the financial capital in question be reallocated to other activities if the result of its use in the existing activity would be the breach of environmental constraints. This is the world we now live in.
Therefore much current business will just have to close down.
He’s not grasped the point made by Nick Stern – or Bill Nordhaus. Or, actually, the point made by any and all of the economists who have looked at this.
Climate change has costs, it most certainly does. The things we currently do which creates climate change have benefits. People like eating hot food, being able to travel, having more than the one t-shirt. So, standard economics, what do we do about this? We aim for the optimal solution – where the costs are equal to the benefits.
After all, our aim is to maximise human utility over time. So, something that brings greater benefits than costs, we wish this to happen. Something with greater costs than benefits we don’t. This being exactly what Stern and Nordhaus worked through to get to their answers – we should do something about climate change. Some measure of averting it is a better – more optimal – solution than adapting to the full force of it.
A statement that climate change is going to be really bad therefore we must avert more of it is, in this framework, just a statement that the carbon tax should be at a higher rate.
Murphy now tells us that we must bring forward into the present all of the future costs of climate change. A cost today is larger than a cost tomorrow, even without considering the onward march of technology. And we are insisted at that no discounting of those future costs will be allowed.
Thus Murphy is making the costs of averting climate change higher. Which, as Stern and Nordhaus both point out, means we should, logically, do less climate change averting. We might just note for a moment that Bill Nordhaus at least in part has the Nobel for economic work on climate change. Richard Murphy – as yet of course – does not.
Murphy’s just insisted that we should do less about climate change by making it more expensive.
It is possible to get to Murphy’s end point via another method. We can indeed make sure that the costs of climate change are incorporated into all financial decisions and reports. We simply add a carbon tax at the correct and properly discounted rate and voila, all calculations that use market prices now magically include those future costs of climate change. Which is why both Stern and Nordhaus recommend the imposition of a carbon tax.
Murphy opposes a carbon tax.
Quite the best part being of course that Exxon’s calculations of whether future activities will be viable already include the assumption that a carbon tax of the correct size will be imposed.