Market-Oriented Economic Belief System Incompatible With Climate Change Mitigation

Climate scientists are loudly sounding the alarm bells. Even if global greenhouse gas (GHG) emissions are drastically reduced, a series of self-reinforcing bio-geophysical feedback loops could still lock the planet into a cycle of continued warming and a pathway to final destination: “Hothouse Earth.” To avoid these risks and keep warming below 1.5° Celsius, humanity will have to reduce GHG emissions to net zero by 2050. Scientists show that limiting the global mean temperature increase to 1.5° Celsius is neither a geophysical impossibility, nor a technical fantasy. The engineering solutions to bring about deep de-carbonization—including quick fixes and negative-emissions technologies—are available and are beginning to work.

Rather remarkably, the distinctly alarmist tone of the climate scientists stands in contrast to more upbeat economic reports that there has been a delinking between economic growth and carbon emissions in recent times, at least in the world’s richest countries. The view that decoupling is already happening in real time is a popular position in global and national policy discourses. In a widely read 2017 article in “Science”, former President Barack Obama argued that the U.S. economy could continue growing without increasing GHG emissions, thanks to the rollout of renewable energy technologies.

Is the “Yes, We Can” optimism warranted? The economists’ equivalent of Obama’s optimism is the “Carbon Kuznets Hypothesis”, the idea that industrialization raises GHG emissions initially, but as the economy becomes technologically more sophisticated and energy efficient, and as people become richer and demand stricter environmental regulations, GHG emissions fall. In other words, growing the economy and saving the planet go hand in hand.

In our recent working paper published by the Institute for New Economic Thinking, we systematically evaluate the “Yes, We Can” optimism by carefully looking at the historical data on GHG emissions and growth for a sample of 61 countries. What we observe is that the data do not support this harmonious view of economic growth. The generally used production-based GHG emissions data ignore the highly fragmented nature of global production chains and are unable to reveal the ultimate driver of increasing CO2 emissions: consumption growth. It is true that some rich countries have managed to reduce GHG emissions while increasing their consumption levels, but these are exceptions, there is no general trend. In today’s global economy, higher consumption leads to higher GHG emissions. So far, there is no systematic decoupling of material standards of living and GHH emissions.

To prevent potentially catastrophic warming, the link between consumption and GHG needs to be severed, but halfhearted tinkering will not do the job. Deep de-carbonization cannot be brought about by slightly modifying business-as-usual policies, which rely on price signals, technological fixes on the supply side and voluntary or “nudged” behavior change on the demand side. Current policies are bound to extend current unsustainable production, consumption and emission patterns into the future and put us all on the one-way path to Hothouse Earth. Climate stabilization requires a fundamental disruption of hydrocarbon energy, production and transportation infrastructures, a massive upsetting of vested interests in fossil-fuel energy and industry, and large-scale public investment — and all this should be done sooner than later. What is required is a massive mobilization in the face of an existential threat. The problem for most economists is that it suggests directional thrust by state actors, smacks of planning, coordination, and public interventionism, and goes against the market-oriented belief system. “Economists like to set corrective prices and then be done with it,” writes Jeffrey Sachs, adding that “this hands-off approach will not work in the case of a major overhaul of energy technology.”

The real problem therefore is not a technical one. The real problem is that available solutions go against the economic logic and the corresponding belief system that have dominated the world economy for last few decades — a logic aimed at scaling back (environmental) regulations, pampering the oligopolies of big fossil-fuel corporations, kowtowing to the automotive industry, giving free rein to financial markets and prioritizing short-run shareholder returns. The biggest barrier to averting going down the path to “Hothouse Earth” is the present market-oriented belief system. We will only be able to phase out greenhouse gas emissions before mid-century if we shift our societies and economies to a “wartime footing.”

Dr. Enno Schröder and Dr. Servaas Storm are economists at Delft University of Technology, the Netherlands.