Mixed Messages as a Signal in the Climate Game
When a traffic light turns both green and red, which signal to follow?
“Mixed messages ~
Mixed messages ~
One second, I say you’re very pretty ~
And then I show up at your house and I kick your dog, yeah”.
I like Tom Cardy’s first album because of his touch of comedic absurdism into everyday observations. Mixed Messages highlights the confusion and frustration of navigating the early stages of a relationship, where the narrator seems to be intentionally sending mixed signals to his partner. Playing games is fun and all until someone loses patience and walks away.
Well, this seems to be trendy nowadays, when the world has moved from ‘climate change might be real’ to everyone having lived experiences with worsening extreme weather events. Now that the pressure for climate action is on, sending two contradicting signals appears to be the new normal, done by businesses to government at all levels.
The emergence of mixed messages
It’s important to distinguish climate mixed signals from greenwashing, though. Greenwashing is when an organization spends more efforts on marketing itself as environmentally friendly than on actually minimizing its environmental impact, in order to exaggerate their climate action.
Royal Bank of Canada (RBC), for instance, has a RBC Climate Action Institute and partially funds multiple climate action initiatives, such as the Talk Climate to Me program, while steadily giving more money to fossil fuel projects. Last year, RBC won the global chart as the largest fossil financier with US$42.5 billion. A green sheen on a red signal.
Mixed signals, however, is when a signal is genuinely green, and also red. It’s growing in popularity. This begs the question: In the early stages of a new relationship with a net-zero economy, is this phenomenon a must?
Government of Canada’s climate action, mainly led by Environment and Climate Change Canada, is strategically ambitious with the Pan-Canadian Framework on Clean Growth and Climate Change, including cutting-edge carbon pricing schemes, conservation, education and adaptation programs. Recently, Budget 2023 shows a clear emphasis on measures to grow the clean economy, in the form of tax credits to promote investments. Canada’s effort also expands internationally, with the new five-year commitment of providing $5.3 billion in climate finance to developing countries.
That being said, in 2018, the fed outraged many Canadians with the decision to not only buy the Trans Mountain oilsands pipeline — which clashes with vow to end fossil fuel subsidies, but also approved of its expansion (which is over-budget and burning through cash).
Announcing climate investments then follow up with a fossil fuel project, does this sound familiar? From his earliest days in office, Mr. Biden has highlighted climate action as a top priority. Most noticeably, he signed into law the Inflation Reduction Act, which provides $370 billion in incentives to green-light expansion of wind, solar, other clean energy and electric vehicles.
Yet, federal data shows a contradictory signal. The administration has approved nearly 100 more oil and gas drilling leases than Donald Trump had at the same point in his presidency. “He takes one step forward with the I.R.A., and two steps back with the Willow project,” said Representative Jamaal Bowman of New York on Biden’s decision in March to approve Willow, an $8 billion oil drilling project in Alaska.
Signalling and asymmetric information
In economics, signalling is one way to effectively solve asymmetric information, a situation where one party is better informed about unobservable details than the other party in a transaction.
Why is it bad? When some have more information than others, they can take advantage of those less-informed, often to their detriment (adverse selection). This creates market inefficiencies that can increase prices or prevent transactions from occurring in the first place.
How does signalling help? One classic example is Michael Spence’s Nobel Prize-winning work, showing how education credentials can be used as a signal to potential employers. By taking on sufficiently costly education, job applicants could signal their commitment, ability and vision to future employers, who can’t possibly see those qualities on the surface.
Similarly, governments and businesses can send signals to investors and consumers that they have what it takes — commitment, ability and vision — to credibly attract more money and accelerate the green transition. Those are all unobservable characteristics, so signalling will come in handy, especially when sustainability has become a buzzword in marketing.
The catch — the signal is credible, only if, it is sufficiently costly to do so. If the signal is cheap to acquire, then it is dim in credibility. Quite intuitive.
Last Friday, I went to my first ever climate protest, Global Climate Strike ‘Friday for Future’ in my city, Vancouver. While marching, I thought it was cool that the protest was also alive in hundred of cities around the world, on the same day, with the same call — end fossil fuels burn. That’s the message, and because protests like this are costly in terms of effort and time, the signal/message has some weight.
Say we ignore the fossil-friendly side of the mixed signals. Although it is true that global volume of climate-focused capital is going up, like how it tripled in private markets between 2019 and 2022, we are still spending relatively small amounts for breakthrough solutions. Even when assumed that the signal is purely climate-friendly, corporations, governments and sovereign-owned entities globally are spending 3 times less than the bare minimum to put the world on track with the Paris Agreement.
That’s some dim climate-friendly signalling if you ask me.
And that’s the case for non-contradicting-signalling. How about mixed signals? This wasn’t in my economics classes.
Mixed signals, is a signal, not two signals
Imagine that I had protested in the above climate strike around noon, in Canada, then went on a private jet to dine at my fav restaurant in Hanoi. What kind of signal am I sending to fellow environmentalists and others? (Yes, I’m looking at you Leonardo).
Does mixed signals help solve the asymmetric information problem, just like signalling does? I’ll refer to this as the mixed-signals signalling.
Some argue that this is a tactic for delaying climate action. Red flag.
Some say that the money to fund the green transition has to come from somewhere, and small investments initially would send signal that the best time for green investments is now. Better than nothing.
Puzzled that both arguments have some truth, I didn’t know where I stood. Then I came across a book by a behavioural economist Uri Gneezy, Mixed Signals, which draws on game theory, psychology and behavioral economics to outline how incentives effectively send signals.
How so? One summer day, Uri lied to the cashier at Disney World about his son’s age in order to avoid paying the kid’s fee, while having had taught his son, a couple weeks back, that being honest is what separates the good guys from the bad guys. Uri’s son received two contradicting signals from him: what he said versus what he did in the face of a $117 incentive. Talk is cheap, and the incentive backed the ok-to-lie signal.
The lesson — along with creating a financial gain, the incentive essentially changed the signals and the story of the mixed messages itself.
Of course, both climate investments and fossil investments offer incentive. However, when around 76% of world’s energy consumption in 2022 still comes from oil, coal and natural gas, one investment would seem to bring more financial gain, while the other seems to offer less in comparison.
Given the already dim climate-friendly signal, the fossil-friendly signal — when coupled with seemingly higher financial gain — shines brighter in the mixed-signals signalling to people on the receiving end.
In other words, climate investments would be seen as the ‘side gig’ here.
So what?
‘Two tigers cannot share one mountain’. There’re various versions of this Chinese proverb, but they all convey the same tale — two kings of the wild can’t coexist together due to the rivalry nature at their core. Same goes for climate-friendly tiger vs fossil-friendly tiger.
One day, in a small town, the traffic lights turned both green and red simultaneously at the intersection. Drivers traveling in the east-west direction would simply assume that their signal is green, while hoping that north-south drivers would interpret the mixed signals as red and come to a stop, and vice versa. Everyone sees what works in their own interest first. This frustration drags out for weeks.
However, everyone who grew up there knows that the north-south direction historically brought more money to the town, due to mining, manufacturing, and selling of asbestos-containing products. Scientists had ample evidence of asbestos’s harmful effects, such as lung cancer, on both workers and consumers. Despite the town council assuring that east-west, which trades in sustainable logging, is more important to the town’s future, the mixed signals is still there. People can read between the lines.
Essentially, if the true priority is for the east-west direction to have a green signal, but the council continues to signal both directions with green and red simultaneously, then the credibility of the green signal for the east-west direction would increasingly diminish. This, in turn, would make it more costly to maintain or even increase the brightness of the council’s priority to the people.
Considering the full picture
At a climate youth discussion last month, when I questioned the line for receiving money from fossil-involved actors to fund climate action, Dr Leah Karrer at the Global Environmental Facility (which has mobilized $129 billion for over 5,000 international projects), commented that there is no black and white line in practice for this. Keep in mind the trajectory for growth of those fossil-friendly actors, we can either help them tilt the weight towards the climate-friendly signal, or just adding a helping hand in the greenwashing.
It seems that mixed signals in the climate game are inevitable in the early stages of transitioning from a powerful sector, which has historically delivered incentive successfully.
With insights from Gneezy’s book, it’s likely that decoupling incentive from fossil-friendly signal, and adding incentive to climate-friendly signal might help with clarifying the mixed signals. An increasing amount of governments and businesses have recently changed the framing, from highlighting costs, to highlighting opportunities to bank on the net-zero transition with a first-mover advantage.
Mixed-signals signalling is not all good or bad. At the very least, it sends one signal — that neither signals can be taken seriously at face value, with the incentive-backed signal shining brighter, intentionally or not.
#1 — Sep 2023.
