How can we reconcile economic theory and market systems with the climate emergency?

By Todd Olive, GLOBUS Editor-in-Chief

In the first of this series, this correspondent outlines the forgotten, and fundamental, assumption that underlies conventional neoliberal economic theory, and the functioning of modern-day markets: that finite environmental assets underlie every transaction made on our planet. Essentially, that while economics is purported by many to be ‘the study of the allocation of scarce resources’, it fundamentally fails in this aim by not considering the environment as integral to its functioning.

As a consequence, a common denominator in many modern-day activist discussions around climate change is a fundamental critique of capitalist, consumerist economic systems that destroy environmental resources for material gain.

For an excellent write-up of this perspective, see Monbiot, 2019.

From the perspective of an economist, therefore – the name under which this correspondent spends half of his academic life – and in the context of the climate emergency, this all poses an effectively existential question: in a practical but also moral sense, are ideologies that believe fundamentally in the power of market systems compatible with mitigating the threat of the climate emergency?

As this article will go on to argue, this correspondent firmly believes that the answer to this question has to be, and indeed is, yes.

The most important, and indeed most obvious, path by which economics can truly contribute to a better future is through a concept commonly misunderstood in the public eye: innovation.

Innovation is the process by which a new idea or design is implemented and brought into the commercial or public domain, most commonly through markets – subtly but critically distinct from the processes of research and development, which serve to produce these ideas in the first instance. Its relevance to the ‘climate fight’ is clear and significant: in the production of new technologies that support carbon neutral lifestyles and renewable energy generation.

At this stage, it would be either ignorant or deceitful not to acknowledge that there is an argument that suggests state- or citizen-owned innovation is equally effective at introducing ‘green’ ideas to our world – and, as a process democratically governed in the interests of constituent populations, should replace private sector ownership of product and process innovation. As this question is relevant for subsequent points, this correspondent begs the reader’s temporary indulgence, as it will be addressed below.

The significance of this is in the ongoing necessity of energy consumption. While this correspondent would accept calls by activists for far-reaching, systemic change, it is undeniable that, even in the long-run, humanity will require energy consumption to maintain standards of living that are at minimum equal to today’s in the Global North – and, indeed, to raise those in the Global South to at least an equivalent standard. In order to meet these needs – ‘subsistence energy’, to borrow and twist a phrase from Henry Shue’s ‘Climate Justice: Vulnerability and Protection’ (2016; Oxford: Oxford University Press), which inspires this argument – we must somehow disconnect energy production from emissions production. The economic force of innovation allows us to do this: solar and wind energy are key examples of historical innovation, while carbon capture and storage technologies are foreseen in climate policy circles to be the next ‘big’ anti-climate change innovation.

To consider items outside of traditional product-based innovation processes, we might turn to the idea of distributed household-level electricity storage. American entrepreneur Elon Musk has championed his so-called ‘Powerwall’ product, a rechargeable battery that integrates with Musk’s solar roof product and electric vehicles to produce a ‘mini grid’. In this system, algorithms dictate whether energy produced by the solar roof is used by the home, or stored in the EV or ‘Powerwall’ batteries: energy is only drawn from the grid when production by the solar roof is insufficient to meet requirements. This concept can be expanded geographically to encompass, in theory, any size of energy network – lauded as many to be part of the solution to the intermittency of renewable technologies such as wind and solar, by allowing excess energy to be stored locally and used later at times of peak demand. Critically, this eliminates the need for substantial investment in energy transmission networks that would be otherwise needed to move renewable energy from areas with surplus to those in need.

This form of innovation exemplifies the power of private sector innovation (in this example, with research and development as an adjunct) as opposed to state- or community-owned processes. Investment of the scale needed to accommodate a 100% renewable energy grid would be a significant cost burden on any party, whether state of private: the development and innovation of household energy storage technologies that could be scaled up to operate on a local grid-level is therefore strongly incentivised in the private sector by individuals and firms looking to cut the cost of renewables, or facilitate products that depend on them (in the case of Musk), to improve profit margins.

The principle of cost cutting and the profit incentive applies on a much larger scale to the ‘climate fight’. The Guardian recently reported on a study that found 74% of US coal production is more expensive than renewables, with the industry expected to be entirely out-competed on cost by 2025 (Milman, 2019) – of particular note for Trump’s drive to reignite the US coal industry to spark jobs and encourage lower energy bills. If energy firms are able to produce electricity more cheaply with renewables, where’s the incentive to maintain fossil fuel production – particularly when the costs of installing renewable sources are likely to be mostly one-time for installation? If households are able to minimise their energy bills by buying renewably-generated electricity, or installing solar panels and a dynamic battery system – why not?

The spirit of these arguments, this correspondent would suggest, is reasonably strongly in favour of market-based innovation.

It is important, however, to note that this does not suggest that market-based innovation should exist as the sole strategy for stimulating ‘green change’ – far from it. As a process, that itself is only a way of describing collectively the actions of millions of individual decision-makers, market mechanisms can be fed in to by all manner of non-market activity. State investment in open access research and development might constitute a trigger for new innovation processes, while activist shareholders might offer investment only in companies with ‘green credentials’, or that invest in ‘green innovation’. Community projects, such as renewable energy co-operatives, function as part of a market mechanism by seeking the most cost-effective solution – another form of the profit incentive in action.

The long and short of this correspondent’s argument here is that the market – by extension, the study of economics – is not inherently irreconcilable with sustainable, anti-climate change practices. With the right education and communication in place, decision-making at all levels of the economic system can be subtly altered to implement ‘green change’: in effect, using economic practices traditionally viewed by activists as ‘the problem’ to bring about solutions. The communication aspect of this is particularly important in cases like that of Donald Trump: characterising renewable energy as an opportunity to reduce costs and improve economic efficiency is likely to be critical in securing further uptake of such technologies in Republican America.

Republican mayor Dale Ross of Georgetown, Texas, exemplifies this very strategy, as reported in Dart, 2017.

There are, of course, a plethora of other ways in which economics can contribute to climate action. As this correspondent mentioned in the previous piece in this series, carbon taxes or emissions permit trading systems are both ways of attempting to control greenhouse gas emissions with economic mechanisms, by applying a price to the damage that these emissions called – and so reducing their ’consumption’.

More widely, similar economic strategies have been employed to impact on plastic consumption. The UK’s 5p plastic bag charge, introduced in 2015, has led to plastic bag sales falling by 86% to July last year (GOV.UK, 2018). So-called ‘deposit return systems’ for drinks containers, in which consumers are given a small cash sum to return bottles and cans for recycling, are currently being considered by the Government: a similar scheme in Germany, introduced in 2003, is credited with achieving 99% recycling rates for plastic bottles, as opposed to just 43% in the UK (Carrington, 2018).

In conclusion?

To consider the question originally posed by this piece, on practically reconciling market ideologies with mitigating the climate emergency: this correspondent hopes to have demonstrated the ways in which this can be the case. While this correspondent would be the first to concede that rampant consumerism, profiteering, and disregard for environmental damages under the conventional capitalist system have largely been responsible for causing the climate emergency that we find ourselves in, this correspondent would suggest that improvements in antitrust regulation and enforcement, coupled with and enabling greater consumer engagement in holding corporations to account for their environmental records, would be a far more straightforward and effective method of combating this – instead of overthrowing the system entirely. The third and final piece in this series will consider the potential challenges of this approach and outline why an alliance between economic policy and activist thinking could be key to succeeding in preventing catastrophic climate change.

Header Image: Photo by Master Wen on Unsplash

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.