Esther Duflo: ‘This is what we owe’

French-American professor Esther Duflo has been one of the world’s most prominent economists in recent years — particularly after she won the Nobel Prize for economics in 2019, alongside her research partner and husband Abhijit Banerjee and their collaborator Michael Kremer.

Duflo’s research has focused largely on poverty alleviation, notably through her work as co-founder of the Abdul Latif Jameel Poverty Action Lab at the Massachusetts Institute of Technology. That’s forced her to grapple with the economic implications of climate change, which is having increasingly heavy effects on many of the world’s poor.

In Washington last week, during the spring meetings of the World Bank and IMF, Duflo unveiled a new proposal to use targeted taxes on companies and the ultra-rich to fund climate-related assistance for low-income nations and individuals.

Have a read of my discussion with Duflo below, and let us know what you make of it: as always, you can reach us at moralmoneyreply@ft.com.

The Duflo plan for climate finance

This interview transcript has been edited for length and clarity.

Simon Mundy: What exactly is the proposal you’re making?

Esther Duflo: The point I’m making is very simple. I’m trying to put a number for the moral debt that rich people of the world — particularly people in rich countries — have towards the poor people of the world related to our consumption choices, and thereby our carbon emissions.

And how do I compute this number? I focus on mortality: on the greatest cost of all, which is losing your life.

Poor people face a double jeopardy vis-à-vis climate change. The first problem is that they tend to live in places that are already hot. And therefore, as the planet warms, there’ll be more and more days above 35C, particularly in those countries. 

And then the second problem they have is, of course, they’re poor. And poverty is a big impediment to adapt to climate change. We can see that people are much more likely to die with a particular number of days above 35C in poor countries, even if they are used to heat.

So if you put these two things together, you get this really remarkable map that was made by the Global Impact Lab, which shows there is going to be massive damage: about 6mn extra deaths a year until 2100. And this damage will be concentrated in poor countries outside the OECD [group of developed economies].

The second part of the argument, of course, is that the majority of the damage is still done by us [in rich countries]. So if we take into account consumption, the carbon footprint of the 10 per cent richest Americans is 122 times larger than that of the median African.

Every tonne of carbon we put into the atmosphere imposes a cost. And we can focus on the mortality cost, because that’s the most striking. You combine the effect of one tonne of carbon on global warming, multiplied by the effect of temperature on mortality, multiplied by a value that you put on one year of life — the number that our governments keep using, which is the “value of a statistical life”. 

If you combine these three numbers, you get basically the money value of the cost of carbon in the air. [University of Chicago economist] Michael Greenstone and his team estimated it to be $37 a tonne. So, take $37 a tonne, multiply by 14bn tonnes a year of carbon emissions — that’s the total footprint, including consumption, of Europe and the US. And you get about a little over $500bn a year. That’s the damage that we impose on poor countries, just the mortality damage. Just from the rich part of the world to the poor part of the world.

So that’s what I call a moral debt. This is not what it would cost to adapt; this is not what it would cost to mitigate. This is what we owe. That’s the first point.

The second point is: how are we going to find this money? Until now, we’ve not been very good at it. There is a loss and damage fund; there is no money in it. I think there is a grand sum of $700mn, which is kind of ridiculous.

So to break the logjam, what I’m proposing is: let’s look for new sources of funding that we don’t have yet — and therefore, have not yet been assigned to anything — and that are not implausible, that could conceivably exist.

The minimum tax on corporations has been fixed at 15 per cent [under an international agreement]. But originally, the number that was proposed was 25. So I’m thinking, well, there is maybe a bit of margin. And if you went from 15 to 18 per cent, you could raise about $200bn a year.

And then, in February, the G20 discussed the proposal of Gabriel Zucman and the EU Tax Observatory of a tax on the super-rich — a tax of 2 per cent yearly on the wealth of the 3,000 richest billionaires. That would raise $300bn. So if you combine these two, you get to your $500bn.

SM: This is only one element of the mortality — there are deaths attributable to droughts and storms and floods . . . 

ED: It’s very partial in many ways. First of all, it’s just heat. It doesn’t include the disasters. The second way in which it is partial, of course, is that mortality is not the only damage. There is also damage to agriculture, there is the cost of adaptation . . . the total social cost of carbon is much higher.

So why just take mortality? First of all, it’s very clear that this is a cost imposed on poor countries. The second reason is that one could argue with everything else. But how can we argue with the fact that our behaviour is killing people, and that this is worthy of compensation?

SM: This dovetails with the International Tax Task Force that was announced at COP28 in December by [French economist] Laurence Tubiana and [Barbados climate envoy] Avinash Persaud, on using tax to meet some of the costs of climate change. They talked to me about how the numbers needed for climate action in developing countries seem very big. But even bigger are the numbers for fossil fuel subsidies, the numbers for fossil fuel profits, the numbers for corporate profits in general — and the tax revenues that you could generate through targeted taxes.

ED: I have chatted with Laurence about this, and this very much dovetails with that effort. What is interesting with this $500bn number is that OK, it looks big, but it’s not really that big. There are two instruments [in my proposal], and they are not going to weigh on the middle class in rich countries. They’re not going to be a big burden on the ultra-rich, because 2 per cent of their wealth is only 30 per cent of their income from their wealth, which is currently untaxed. I think we need to rely on taxation because that is the way in which traditionally we ensure that everyone in the economy, private companies and individuals, contributes to the public good. And the two instruments I propose — they are not necessarily the only ones possible, but they will be sufficient to raise the money.

SM: You’ve famously been an economist who puts a lot of emphasis on empirical data. How has that informed this proposal?

ED: In many places. The mortality estimates that I rely upon, computed by the Global Impact lab — the empirical work is super, super serious and robust, using historical data from tens of thousands of micro-regions.

Another is in my comfort with taxation, which, again, is based on a lot of empirical work that shows that rich people will not stop working or inventing because taxation is higher. They might try to escape. But that’s why we need international collaboration. If there is international collaboration, if we manage to have uniform taxation of companies and individuals, it’s not going to have a big efficiency cost on the functioning of the economy.

And the third point is how the money would be used. This is where my own work comes in much more directly. So how would we use the money most effectively to compensate people, but also to protect them? That’s why I propose, as one big outlet for the fund, direct cash transfers to people, which would be triggered by climate events.

SM: I’ve written a bit about direct cash transfers, and it seems there is a growing amount of data to suggest that this is effective.

ED: We have tonnes of evidence that people are using this money very well. And with the technology we have today, everyone in the world could be connected to a bank account, connecting everyone to a cash transfer that could be automatically triggered by climate events. This is not the stuff of science fiction at all. Togo is putting that infrastructure in place, and it is perfectly possible to do it in other places.

A second use of the money that I propose: people are very badly insured in poor countries; the insurance market has not really managed to penetrate. So when there is a problem, it’s the government that has to step in. But the governments themselves are not very well insured. So it can become too much for them. And we saw during Covid, the rich countries were able to spend about 27 per cent of their GDP on fiscal stimulus measures, and the poorest countries 2 per cent. So I think there should be a role for automatic payments to governments in response to disasters.

The third thing is that there is a need to develop and scale up adaptation measures to deal with climate change. Things as simple as making sure there are cool places for people to go to in cities, to trickier things such as drought-resistant crop varieties.

SM: Let’s come back to the question of tax. It sounds like you think tax rates are too low on high earners, too low on companies. What if you were in charge of taxes globally? Or perhaps just in the US or France? How would you change the tax system?

ED: Well, in a sense, that’s a bigger question than this one. And I’m not sure I want to go there because people might think I’m a dangerous extremist. Whereas this thing is not an extremist proposal at all; this is extraordinarily reasonable.

Let me say one thing: the US has a fiscal deficit issue, which is structural. It should do something to reduce its deficit — I think that everyone kind of agrees to that. It also only taxes 25 per cent of GDP, compared with the Nordic countries that are taxing 40 per cent to 45 per cent. So clearly, there is some fiscal margin in the US . . . that’s it, I’ll stop there.

In terms of the ultra-rich, I think everyone has recognised the fundamental unfairness in the fact that the ultra-rich are not being taxed on the income that they are making from their wealth. You are being taxed on the income you’re making by interviewing me; I’m being taxed on the income I’m making as an academic. But if we are sufficiently wealthy to have a lot of money invested in various places, and we keep reinvesting this money, we never have to take it out, and therefore, we are never taxed on it. If [the super-rich] want to consume, in a lot of cases, they will borrow against their wealth. So it’s a loan, not an “income” — so they are not taxed on it. That seems to be fundamentally unfair. 

So if you go back to the idea of the 2 per cent tax on wealth — think about it as a tax on the income of this wealth. If someone is making, let’s say, a 6 per cent return on their wealth — a 2 per cent tax on the wealth is simply a third of that 6 per cent. So that just amounts to an average tax of 30 per cent on the income from their wealth. That’s probably less than what you pay. 

But it needs to be done globally, because these people have enough wherewithal that, you know, if Elon Musk’s fortune is being taxed in the US, he can always move it. So that’s why it needs to be done as a co-ordinated effort. 

SM: What is your sense of how the political winds are blowing right now? Do you think your proposal is really possible politically?

ED: I think there is clear political momentum for a minimum taxation of the super-rich. I don’t think it will happen today or tomorrow, but I think it is really much more out in the open as something that is reasonable.

As far as my proposal . . . in shopping around this proposal in the past year, I used to get more polite yeses with everyone saying, “Oh, that sounds like a cool idea”. Which is a sign that they haven’t really listened to me at all. Now people are asking, “But where should the money be housed? And what is going to be the governance?” Much more concrete questions, which makes me think that it actually might be exactly the right moment. 

I want to believe that it will happen. It’s really necessary. And it’s reasonable. It’s not that hard.

Smart read

Recent lawsuits suggest that even well-intentioned employers could be vulnerable to discrimination allegations, warns Camilla Cavendish.

Source: Economy - ft.com