How capitalism can save the planet

Julian Jessop

February 10, 2020

I’ve arrived late to the arguments about climate change, having spent rather longer on Brexit than anyone normal would have liked. But there’s still plenty of work to be done to promote market-based solutions to environmental problems.

As a humble economist, I’m not going to challenge the scientific consensus that i) climate change is real and ii) that human activity is now the main cause. Nonetheless, this is a pretty low hurdle to clear. These statements tell us little about the magnitude of the risks, and next to nothing about how best to respond.

For a start, climate change is not new. In the last 650,000 years, there have been as many as seven cycles of glacial advance and retreat. These happened to be periods of natural fluctuations in temperature, mainly due to small variations in Earth’s orbit around the sun. Some scientists have identified multiple cycles of warming and cooling even in the past few thousand years.

What’s more, the current episode is not that unusual. Despite the huge growth in population and the unprecedented changes in agriculture, industry and travel, the average global temperature has only increased by a little more than one degree celsius since the late 1800s. And despite the attention rightly paid to local emergencies such as the wildfires in Australia, death rates from natural disasters and extreme temperatures are actually at multi-decade lows.

The apocalyptic warnings of a looming global catastrophe, therefore, have to rely on forecasts of substantial changes still to come. To be fair, scientific models have been reasonably good at explaining and predicting what has already happened. But longer-term projections are increasingly speculative, and there are serious questions about their reliability.

It is also important to recognise the progress that has already been made in tackling the key drivers of climate change. The UK’s greenhouse gas emissions have fallen by around 40 per cent since 1990, despite GDP growth of more than 70 per cent over this period. Even in China, where total emissions have jumped as the economy has boomed, the government has invested heavily to reduce the number of emissions per unit of output.

That said, I am convinced of the case for further action. This can be thought of as insurance to reduce the risk of a truly global catastrophe, even if that outcome may still be unlikely. And regardless of any impact on the climate, there are many other reasons to tackle related problems, such as poor air quality, plastics pollution, and the costs to animal welfare.

Unfortunately, the quality of debate is often mediocre. At one extreme, there are fanatics (what else to call them?) who believe it is worth paying any price to tackle climate change, even if this means a huge reduction in the quality of life. They have probably alienated far more people than they will ever win over.

At the other extreme, some continue to dismiss the scientific evidence out of hand, regarding the whole climate change narrative as part of some giant hoax. This attitude isn’t helpful either, not least because it makes it easier for fanatics to belittle anyone with a different view as a “climate change denier”.

Even worse, the middle ground is occupied by a lot of muddled thinking. Activists often make nonsensical arguments about how reducing inequality is essential to protect the environment, because “70 per cent of flights are taken by the richest 15 per cent of people”. In reality, a more even distribution of wealth and income may simply allow more people to be able to afford to fly – or to do other things that are potentially harmful to the planet.

Another example is the Malthusian calls for families in rich countries to have fewer children, even though almost all future population growth is expected to come from the developing world, particularly Africa. Europe’s problem is not having enough young people, rather than too many.

Malthus was wrong about the ability of the planet to feed a growing population because of the agricultural revolution. Similarly, modern-day extremists are underestimating the scope for human ingenuity to boost living standards without harming the environment. As Andrew McAfee has argued, technological change is allowing rich economies to grow while making “more from less”. I’d add that free-market capitalism and the profit motive have a key role to play here.

Indeed, the biggest red – or green – herring of all is the nonsense about how capitalism is to blame for climate change. This is debunked well here by Kristian Niemietz. It is true that without capitalism we would not have had the agrarian and industrial revolutions, and all the economic and social benefits that followed, as well as the environmental costs.

However, “evil corporations” are simply responding to consumer demand for goods and services that happen to be polluting. That is ultimately our fault, not theirs. With better information and the right market incentives, consumers can make better choices – without the need for coercion.

Of course, the environment does provide many examples of market imperfections, where some government intervention may be desirable. In the case of “public goods” such as flood protection, state provision is often the only viable option. And carbon emissions are a form of negative “externality” where markets may not give enough weight to the wider social costs.

But there are also market-based solutions to these problems. They include putting a monetary value on environmental assets (sometimes known as “natural capital”) and enforcing property rights around them. They also include tradeable pollution permits and the setting of carbon taxes at appropriate levels to correct for environmental externalities.

Carbon taxes are relatively controversial. Some oppose them because they can be regressive, but a greater burden on lower-income households can be offset elsewhere in the tax and benefit system (making the tax revenue-neutral). Using the price mechanism in this way is surely preferable to the clumsiest forms of state intervention, such as rationing particular goods and services.

I’m more concerned that carbon taxes should not just be crude levies used to subsidise whatever pet eco-projects are backed by the government of the day. Indeed, the track record of politicians seems just as bad in this field as any other. I recall that it wasn’t so long ago that the UK government was actually promoting a “dash for diesel”.

We may be seeing a re-run of that now. The government has brought forward a proposed ban on the sale of non-electric cars by five years to 2035. But today at least, electric cars actually produce more emissions over their lifetimes than petrol or diesel vehicles, after accounting for the emissions involved in making bigger batteries and generating the electricity to keep them charged.

These sorts of interventions still appeal to politicians who want to be seen to be doing something, even if the evidence base for the policy is weak. But this doesn’t always extend to less popular measures that may actually be more effective. For example, it may well make more sense to revisit the freeze on fuel duty and the lower rates of VAT on domestic energy bills.

Investor activism can also work both ways. Making it harder for companies in fossil fuel industries to raise capital could be counter-productive, because the world will still need fossil fuels for many years to come and because these businesses are often at the cutting edge of the new technologies that will replace them. Who else but car companies are going to make electric cars?

In summary, climate change is happening and is probably exacerbated by human activity. But that does not justify crashing the economy or becoming off-grid hermits, nor should questioning whether proposed responses are sensible mark you out as a “climate change denier”.

Above all, the environment is safest in the hands of capitalist economies where individuals are free to make their own choices. Market mechanisms work best in this field, just like any other, even if they may sometimes need a little nudge.


Written by Julian Jessop

Julian Jessop is an independent economist. Follow him on Twitter: @julianhjessop


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