Earth Day – Prisoner’s Dilemma April 19, 2023

Executive Summary

This Saturday, April 22, marks the 53rd anniversary of the original Earth Day back in 1970, which helped catalyze the modern environmental movement.

Looking back to that time, we find books such as Silent Spring, Small is Beautiful, The Limits to Growth, etc. built upon a literary and religious foundation that valued environmental stewardship. Those books began to refute the notion that economic growth always marks progress, and to point out that infinite economic growth in a world of finite resources is a challenging if not impossible goal.

Given the global nature of climate change and the intense competition in the world today, we think game theory may provide a useful framework for contemplating the problem and identifying potential solutions.

We believe that the best solution will not be entirely top-down, bottom-up, or based upon technological innovation alone, but a combination of the three approaches working in unison.

“When we try to pick out anything by itself, we find it hitched to everything else in the Universe.”
– naturalist and author John Muir (pictured below)

Over five decades have passed since the first Earth Day in 1970, when 20 million Americans participated in rallies and marches across the nation to raise awareness for environmental protection. The unprecedented public response to the first Earth Day helped lead to the creation of the US Environmental Protection Agency (EPA) and the passing of landmark environmental legislation, including the Clean Air, Clean Water, and Endangered Species Acts.

Since that time, Earth Day’s impact has grown beyond all expectations, becoming a global movement that now involves over one billion people in more than 190 countries. While the event has evolved, morphing to address pressing environmental issues such as climate change, deforestation, and plastic pollution, it remains a day to remember our shared home.¹

Despite the progress made in the past five decades, challenges seem only to be intensifying. The quote above hints at the reason; the planet, created billions of years ago and inhabited by billions of people, is so infinitely complex and interconnected that even a sincere effort to fix one problem can inexplicably create a multitude of others.

Infinite Growth vs. Finite Resources

The books mentioned in the Executive Summary, Silent Spring by Rachel Carson (1962), Small is Beautiful by E.F. Schumacher (1973), and The Limits to Growth by Donella Meadows, Dennis Meadows, Jorgen Randers, and William Behrens III (1972) represent but three examples of a broader movement, of which Earth Day is a part, to remind people of the externalities that are created by optimizing your society around growth and consumption. Pesticides may increase agricultural yield, but at a cost to the environment, wildlife, and human life. Likewise, supersized economies may increase Gross Domestic Product, but many times by sacrificing the ecosystem and eroding family and community values in the name of growth.

Rather than optimizing a society exclusively for economic growth, the authors and early environmental leaders suggested striking a balance by adding issues like environmental degradation, resource management, and ecological health to the equation. Unfortunately, even decades later these suggestions of taking a more measured approach seem to have gone largely unnoticed by many in power, especially those in business, economics, and finance.

“There are no…limits to the carrying capacity of the earth that are likely bind any time in the foreseeable future. There isn’t a risk of any apocalypse due to global warming or anything else. The idea that we should put limits on growth because of some natural limit is a profound error.”
– Larry Summers (Former US Treasury Secretary).²

Referencing the quote above, it is important to note that the scientific community has reached a different conclusion altogether. Based upon research from the Intergovernmental Panel on Climate Change (IPCC), National Oceanic and Atmospheric Administration (NOAA), and National Aeronautics and Space Administration (NASA), the planet is getting warmer and human activity is a factor (for a striking visual time series, see the link to NASA provided in the footnotes³). In fact, NOAA suggests that 2023 will be one of the top-ten warmest years on record going back to 1880 (>99.5% chance).⁴ Furthermore, the following risks exist if the planet surpasses the 2-degree Celsius mark about pre-industrial levels:⁵

1. Increased frequency and severity of extreme weather events

2. Sea level rise and coastal flooding created by the melting of glaciers and ice sheets

3. Loss of biodiversity and collapse of ecosystems

4. Ocean acidification and deoxygenation

5. Threats to water and food security

6. Health risks caused by increased vector-borne diseases

7. Economic and social unrest caused by population displacement

We are not mentioning these to be alarmist, only to point out that by doing nothing and continuing in the business-as-usual mindset we are still making a choice. Based on scientific evidence, it is a choice with meaningful consequences.

Environmental Stewardship – A Shared Story

While the modern environmental movement, which took root in the 1960s and 1970s, was certainly a product of the times, it is important to remember that people have long valued environmental stewardship. Many foundational thinkers, authors, and civilizations throughout history have believed in the interconnectedness of all things and the importance of people living in harmony with, rather than exploiting, nature. Renowned authors such as Leo Tolstoy (War and Peace, Calendar of Wisdom, etc.), Ralph Waldo Emerson (Self Reliance, Nature, etc.), and Henry David Thoreau (Walden) are examples from literary history that espoused these beliefs.

In addition, environmental stewardship and living in harmony with nature are consistent with many of the world’s religions, as well. Taoism may be the most obvious example, as the Tao Te Ching by Lao-Tzu focuses on the importance of living in harmony with the natural world and offers guidance on how to live a balanced life in accordance with the natural order (the Tao).

Environmental protection has grown in importance in the Catholic Church over time, as well (see Pope John Paul II’s quote below). In fact, one of the six major tenets of the US Conference of Catholic Bishops 2021 Investment Guidelines is focused on protecting the environment by prioritizing sustainable practices and supporting companies involved in clean energy, pollution reduction, and conservation efforts.⁶

“In our day, there is a growing awareness that world peace is threatened not only by the arms race, regional conflicts, and continued injustices among peoples and nations, but also by a lack of due respect for nature, by the plundering of natural resources, and by a progressive decline in the quality of life. The sense of precariousness and insecurity that such a situation engenders is a seedbed for collective selfishness, disregard for others and dishonesty.”
– Pope John Paul II⁷

Lastly, environmental stewardship has been a fundamental aspect of both Native American and Aboriginal cultures for millennia. A profound sense of interconnectedness and humility are common features in those cultures, as both realize that they are but a small part of a much larger and infinitely complex ecosystem. As a result, both cultures stress the importance of maintaining balance in the natural world to provide their ancestors with a promising future.

When you look for common themes or “metanarratives” from these great thinkers, religions, and cultures that have endured for centuries or longer, the idea of leaving the natural world better than you found it is impossible to ignore. Referencing the quote at right, it is hard to recognize the present moment’s growth-at-all-costs mentality because it is the water in which we presently swim, but it stands in stark contrast to these more enduring legacies.

Prisoner’s Dilemma

Given that most of this note thus far has been focused on the importance of environmental sustainability and the consequences of prizing economic growth above all, it is important to recognize that there is another side to this story. Confronting climate change and environmental degradation is a global issue that involves trade-offs. We may be able to avoid the worst-case scenarios of climate change, but we may have to throttle back economic growth to some degree in order to achieve that outcome.

However, the global and competitive nature of the world means that one country deemphasizing growth and prioritizing sustainability may put themselves at a disadvantage, at least in the short term, to countries that continue growing as fast as possible. To quote Shakespeare’s Hamlet, “Ay, there’s the rub.”

Game theory is a field of mathematics that studies strategic decision-making, modeling interactions between rational agents, and analyzing situations where the outcome of an individual’s choices depends on the choices of others. The formal development of game theory began with John von Neumann in the 1920s and it was built upon by John Nash (played by Russell Crowe in Beautiful Mind) and others in the century since.⁸

Prisoner’s Dilemma is a thought experiment in the field of game theory that explores how two rational agents will approach a situation in which they can either cooperate with their partner for mutual benefit or betray their partner (“defect”) for individual reward. While the original Prisoner’s Dilemma is somewhat simplistic, the concept has been iterated and built upon for decades and it is commonly utilized in fields as varied as economics, politics, sociology, and evolutionary biology.⁹

The climate change crisis can be framed as a Prisoner’s Dilemma, as well, because each country faces a choice between cooperation (by reducing emissions) and selfishness (pursuing economic growth without regard for the environment). The outcomes of these choices depend on the decisions made by other countries, as follows:

1. If all countries cooperate by implementing policies to reduce emissions, they would all share the benefits of a more stable climate, mitigating the worst-case risks associated with climate change (best environmental outcome).

2. If one country decides to prioritize economic growth at the expense of the environment while others reduce their emissions, the non-cooperative country may experience short-term economic benefits. However, it still benefits from the actions of the other countries that are reducing their emissions, creating a “free-rider” problem. The free-rider benefits from the environmental improvement created by other countries choosing to reduce emissions, while also benefiting economically by prioritizing growth (worse environmental outcome).

3. If all countries decide not to cooperate and prioritize economic growth without regard for the environment, they all suffer the worst-case consequences of climate change (worst environmental outcome).

In this example of the Prisoner’s Dilemma, the rational choice for each country in today’s competitive global landscape is to prioritize economic growth and not cooperate on emissions reductions since there are short-term economic benefits and the potential of free-riding on the efforts of others. When viewed through the lens of game theory, those leaders that have prioritized economic growth over sustainability aren’t necessarily villains, but simply rational actors.

The Path Forward

As we’ve discussed, climate change and environmental degradation are complex global problems, but we do not believe the challenges to be insurmountable. While we do not believe there is a simple “silver bullet” solution, we do think that we can make real progress by attacking the problems from multiple fronts.

Top-Down – The most obvious way to make meaningful progress is for the international community to establish binding agreements on key environmental issues to foster cooperation among countries (such as the Paris Agreement in 2015). The inclusion of incentives for good behavior and penalties for non-compliance would make agreements even more impactful, as they can help to offset the benefits of free-riding described in the Prisoner’s Dilemma above.

Bottom-Up – Our individual actions as citizens, community leaders, consumers, and investors can make an enormous impact, as well. As citizens and community leaders, we can raise awareness of local issues, volunteer with causes that support the environment, and participate in local and national elections to support like-minded candidates. As both consumers and investors, we can choose to be intentional about the products we buy and the securities we direct our capital toward to ensure that our money is working in alignment with our priorities and values.

We can also seek to engage others, including the scientific community, in an earnest dialogue about the issues so we can move forward together. If we have learned anything over the past decade, it is that Twitter tirades, condescension, and virtue signaling (see image at right) do not seem to be working for anyone.

Innovation – Advances in technology have also helped in the battle against climate change in the past decade, especially in the development and deployment of clean energy and sustainable infrastructure. Improvements in solar photovoltaics, wind turbines, battery technology, and grid management have helped drive down costs and increased the efficiency, reliability, and scalability of these technologies, making them more competitive versus traditional energy sources.

Additionally, recent leaps in artificial intelligence (AI) also hold promise. AI’s ability to process vast amounts of data to identify patterns may enhance climate modeling and forecasting, precision agriculture, and optimization of energy efficiency in buildings and across smart grids.

Summary

We believe that solving the climate crisis is a difficult, but not insurmountable problem. Top-down, bottom-up, and technological solutions, especially if used in concert, can all play important roles. However, this is fundamentally a human problem. If we can’t work together to reach a consensus on the path forward, it is difficult to imagine us avoiding some of the most severe outcomes associated with climate change.

As a result, we believe that solving the climate crisis requires open and honest discussions between citizens domestically and good faith negotiations between countries globally. That sounds simple enough, but in a world of increased global competition, divided domestic politics, and nudging social media, leaving the world better than we found it for future generations will be a monumental challenge.

We will end this note with the final quote from Small is Beautiful to come full circle. When asked by people what they can do to make a difference, the author ends the book with the following answer, which feels as relevant today as it was fifty years ago when the book was published:

“The answer is as simple as it is disconcerting: we can, each of us, work to put our own inner house in order. The guidance we need for this work cannot be found in science and technology, the value of which utterly depends on the ends they serve; but it can still be found in the traditional wisdom of mankind.”
– E.F. Schumacher

As always, please do not hesitate to reach out to discuss any of the topics covered in this note or to explore whether aligning your portfolio more closely with your values is appropriate for you.

~Brett Greenfield

References

1
Source: The History of Earth Day – Earth Day
2
Source: Forward to 2010 version of Small is Beautiful (Bill McKibben)
3
Source: Global Temperature | Vital Signs – Climate Change: Vital Signs of the Planet (nasa.gov)
4
Source: https://www.ncei.noaa.gov/access/monitoring/monthly-report/global/202301/supplemental/page-2
5
Source: IPCC_AR6_SYR_SPM.pdf
6
Source: Socially Responsible Investment Guidelines 2021 (003).pdf (usccb.org)
7
Source: XXIII World Day for Peace 1990,Peace with God the Creator, peace with all of creation | John Paul II (vatican.va)
8
Source: Game theory – Wikipedia
9
Source: Prisoner’s dilemma – Wikipedia

Earth Day – Prisoner’s Dilemma April 19, 2023

References

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