This interview was conducted by Victoria Watts and originally published in the Department magazine .inspired No. 12 in German.

No other topic shows the interrelation of our own environment with global developments as clearly as climate change. Economists of all disciplines agree that climate change is having unprecedented effects on economic and social development and should be one of our top priorities. We spoke with David Hémous on the challenges facing economists and politicians to find answers to the climate change – and fast.

David Hémous, why does research on the effects of climate change come to such different predictions?

First, there is a lot of uncertainty. We do not know exactly how the temperatures due to CO₂ emissions will rise, and we do not know the economic effects of these temperature changes. We cannot say exactly how much of an increase sea level or an additional tornado costs. Second, climate policy involves a trade-off between the present and the future. Depending on how the future is valued in comparison to the present, different discounting parameters will be defined in the economic models. This leads to very dissimilar results.

One of your research areas is innovation and growth. Climate change calls for innovation; this is a good thing for economic growth...

The desire to combat climate change and any corresponding policies can be a driver for innovation. If the price of oil rises, there will be more innovation in electric and hybrid engines and less in the area of classic combustion engines. Nevertheless, I would not say that more innovation happens overall. Typically, resources are shifted from one area to another. More research and development in the field of clean technologies usually means less research and development is pursued in another area, for example in artificial intelligence.

We had a lot of innovation in the field of clean energy production in the 2000s, but this trend has weakened in the 2010s.

Why?

I am currently working on a project that suggests that this decline could at least partly be attributed to the effects of the shale gas revolution in the USA. The cheap access to shale gas (fracking) makes the natural gas sector cheaper. This increases innovation in the field of turbines for gas power plants, but not for solar panels. Although the innovation in power generation with natural gas reduces emissions in the short term, as shale gas is cleaner than coal, it reduces green innovation and thus leads to emissions in the long term, as natural gas of still generates more emissions than solar energy.

What types of political influence should we pursue?

If global regulations can be enforced, then a CO₂ tax should definitely be part of the answer. Furthermore, innovation in clean technologies should be subsidized. Historically we are a society dependent on fossil fuels, so there has been a lot of innovation in this area. Innovation is path dependent; subsidies can be used to shift innovation activity away from fossil fuels towards other forms of energy. In practice, introducing a global CO₂ tax will be very difficult. If production in some countries is now subject to such a tax, a part of this production will migrate to countries without any such tax. That would harm the local economy and give the countries that continue to produce CO₂ an unfair advantage. We therefore need complementary measures that apply for countries that do not participate in the CO₂ tax. For example, import duties could be levied on products produced in these countries.

Implementing this sounds quite impossible.

It is not impossible, but it is not easy either. The amount of the import duties would have to be based on the amount of CO₂ associated with the product, which is not always easy to determine. Moreover, the duties would have to be compatible with the WTO rules – it is presently unclear how this should work. Nevertheless, there are many areas where a CO₂ tax would be easy to implement and would lead to direct results. If the production of CO₂ emissions and consumption take place at the same place, e.g. for heating or driving a car, then such a tax works without undesirable side effects.

If global responses are needed, what can a small country like Switzerland do?

Even if Switzerland becomes CO₂-neutral, this will not make a big difference as long as the rest of the world continues to emit a lot of CO₂. However, a small country like Switzerland can, for example, set the goal of taking over a leading role in the field of innovation in clean technologies. These technologies can be used globally, which will reduce emissions at home and abroad. Thanks to innovation like this, even a small country like Switzerland can make a significant contribution to reducing global emissions. This applies also for action at the level of the individual citizen. Minimizing your own CO₂ emissions admittedly only has a limited effect. Nevertheless, government cannot ignore the social movement on climate change and will have to take political decisions that meet the demands of individuals.

Why do we need more research in the field of the economics of climate change?

In addition to climate scientists and engineers, we need economists to quantify the costs of climate change and model alternative approaches. Economics has the methodological tools to create effective solutions for key policy challenges of climate change with regard to emissions taxation, customs duties, and redistribution issues.