Articles on Islamic Economics

Climate Crisis Mitigation – Maqasid Al-Shariah Framework in Islamic Economics

Prof. Dr. Tariqullah Khan, INCEIF University, Malaysia

Human behaviour, consumption and business activities have been identified as the main cause of the climate crisis the earth is facing at present, having seriously detrimental effects on the earth’s bio capacity to sustain life. These effects, referred to as anthropogenic impacts, are causing degradation of the globally shared public resource known as natural capital.

These detrimental consequences of our actions and activities are known in economics as negative externalities. They have been widely acknowledged in theory but trivialized in practice.

According to reliable data sources, the Earth’s average temperature has increased by 0.14° Fahrenheit (0.08° Celsius) per decade since the start of the Industrial Revolution in 1880. However, the rate of warming has accelerated in recent decades, with the rate since 1981 being more than double this average. The United Nations Intergovernmental Panel on Climate Change’s 2021 report states that unless there are significant and rapid reductions in greenhouse gas emissions, it will likely be impossible to achieve the temperature targets outlined in the Paris Agreement, which aim to limit global warming to close to 1.5°C or even 2°C.

The discipline of economics is not equipped to effectively address the current crisis because it is unable to account for negative externalities in market prices and lacks objective, binding normative values that prioritize environmental justice and responsibility. This makes it difficult to effectively manage the crisis using market-based approaches alone.

The dominant economic paradigm is represented by Samuelson’s circular economic flows diagram, which depicts the interrelationships within the economy. This paradigm views the economy as detached from society and the environment, with negative externalities such as pollution and negative social impacts being considered acceptable consequences of economic activity that must be managed separately.

This dis-embedded paradigm is widely accepted and forms the basis for much of mainstream economic thinking, intellectual recognitions, business practices and policies.

Mainstream economics assumes that humans are inherently selfish and prone to impatience, and have a lack of concern for the future. This belief has led economists to rely on high discount rates when making decisions as people are assumed to prefer present over future.

However, human beings are not simply machines or robots, and that the right values, worldview, and incentives can shape our behaviour in ethical and responsible ways. However, the dominant economic paradigm, which views the economy as detached from society and the environment, controls our mind-set, thinking, strategies, and actions in all areas of life.

To address the current crisis of environmental degradation and social disintegration, it is necessary to rethink the paradigm of shareholders’ capitalism, which prioritizes the pursuit of maximizing short-term profits at the expense of the natural capital and social foundations of communities. Instead, we must embrace an economic model that prioritizes the restoration and regeneration of our universally shared natural capital – the earth’s bio capacity, and the rebuilding of a responsible and harmonious relationship with the environment. This requires not only a halt to the degenerative practices, but also a proactive focus on restoration and rejuvenation.

Developed countries, particularly those with high levels of carbon emissions and biodiversity losses, bear a significant responsibility for the current environmental crisis. However, their commitment to and implementation of green economic transformation has been lacking. If these countries do not make significant progress towards a regenerative and sustainable economic model, the finite resources of the planet will be further strained and developing countries will be unable to achieve their own development goals within the constraints of one-earth planetary boundaries.

What is the response of Islamic economics to such an existential dilemma? In Surah ArRum verse 41, the Qur’an recognizes the anthropogenic corruption (fasad) and fixes responsibility on human beings. The Maqasid Al Shariah, a framework central to Islamic economics, emphasizes the importance of protecting and preserving the spiritual, physical, intellectual, economic, and intergenerational well-being of all. It promotes humility, simplicity, and a responsible attitude towards the natural world as a trust given to us by Allah. This framework encourages a respectful and dignified approach to fulfilling the needs of all people, future generations, and other species, while also cautioning against wasteful and extravagant consumption and encouraging moderation and the middle path. By following these principles, we can strengthen our connection to the ecosystem and fulfil our duty as stewards of the earth.

The Maqasid framework seeks to maximize and preserve Masalih, positive externalities, which are benefits that are not typically valued in market exchanges, such as the restoration and regeneration of shared natural assets. At the same time, it aims to minimize and prevent Mafasid, or negative externalities such as the degradation and depletion of shared natural assets, which are costs that are not compensated through market-based exchanges.

Since price mechanism does not capture the value and cost of positive and negative externalities respectively, the Maqasid framework helps in encouraging promotion of Masalih and prevention of Mafasid beyond market dynamics and exchange.

Behavioral norms in Maqasid framework include the worldview that human beings and all things in the universe are creation of Allah and humans are trustee of Allah on earth and have responsibilities beyond self-interest and maximization of profits. The norms emphasize on protecting the rights of passive stakeholders (future generations and other species) and avoiding exploitative and unethical ways of earning income, such as interest and gambling. The norms also encourage establishment of Mizan (the universal balance).

Going forward, as a research agenda, some areas of fostering regenerative businesses include the following important elements:

  • Environmental audit and inspection (Hisbah).
  • Businesses should include service and value to society as a primary goal.
  • Businesses should control the negative externalities in their operations by adopting criteria such as zero-waste and net-zero emissions by offsetting the unavoidable.
  • As an incentive for regenerative businesses, social subsidies shall be introduced to reduce the cost of financing green projects. Social finance and philanthropic institutions have an important role in contributing to the cost of financing on behalf of green SMEs.
  • It is also vital to rethink the nature of social and commercial finance to create blended finance structures in support of internalizing externalities.
  • Reliance on green technologies like clean energy sources and proactive and supportive regulatory regime.
  • Academic programs of business, economics and management schools need to be revamped with significant changes in curriculum and pedagogy to make central place for regenerative thoughts, systems and processes.

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