Why Market-based Solutions Won’t Solve the Climate Crisis

‘Capital is seeking a path to maintain rather than to change.’

For those of us who are deeply concerned about the rapidly escalating climate disaster (like yours truly), it was certainly great to hear prominent voices in finance – such as hedge fund manager Larry Fink of Blackrock – start to express the need for urgent action in recent years. The days of climate denial and massive lobbying of the fossil industry are finally over, so it seems. However, according to Adrienne Buller, researcher at think tank Common Wealth, we have only moved on to a new illusion called ‘green capitalism’. Her book ‘The Value of a Whale’ is an antidote against the wishful notion that ‘the market’ is going to solve all problems.

It is easy to understand the appeal of green capitalism to politicians and investors alike. Through measures like ‘carbon offsets’, green capitalism aims to solve climate and biodiversity problems with minimal disruption to the current economic system. Carbon offsets make it possible for businesses to pay somebody to plant forest, so they can keep on polluting.

Ironically, in recent bootleg fires in Oregon and California, thousands of square kilometers of forest went up in smoke that was designated for the carbon offsets of companies including BP and Microsoft. Our response to ecological disaster is still determined by old economic thinking. Our institutions are still very much in the grip of this old mindset and this is the reason we are not making any real progress in addressing the escalating climate emergency.

Putting a Price Tag on Everything
The book is called ‘The Value of a Whale’ because in our current political climate every discussion about the ecological crises we are facing is framed in terms of markets and profits. In the neoliberal frame of mind, a transition directed by governments is considered undesirable and without chance. Reducing emissions will create untenable burdens for citizens and enormous debts for future generations. The only solution is that markets must solve the problem. To do this, the externalities of ecological damage must be adequately priced.

The IMF (International Monetary Fund) actually calculated the value of a whale. A specimen of the great whale is valued at two million dollars. This is based on its carbon capture capabilities and tourism income. The author says it may be weird to put an animal in a spreadsheet, but when discussing green capitalism the question is very relevant. After all, the global trade in carbon molecules is about to begin.

So why does Buller believe that putting a price on carbon won’t solve the climate crisis? The first problem is a practical one. Our current global economy is completely dependent on the earth’s ecosystems. These highly complex interdependencies are impossible to capture in prices, models and financial products. A second problem is that carbon pricing is employed because many economists find it the most efficient solution. But do we need efficiency? To radically reduce emissions, we need effectiveness more than anything. We also need solutions which are ethical and just, and carbon pricing doesn’t address these considerations at all. If a billionaire wants to be launched into space for fun? Fine, as long as he pays. Pricing is no equalizer for all parties.

ESG in Financial Markets Falls Short
During the Covid19 pandemic, the financial world saw a major boom in ESG (Environmental, Social and Governance). ESG-labels are given to funds that invest ethically and environmentally conscious. More awareness is a good thing, right? Yet, argues Buller, we are falling way short to what we could do. Let alone what we should be doing to prevent global warming to pass 1,5 degrees which is the upper limit to remain safe on the planet (which is already out of reach, says Bill Gates).

The problem with ESG-ratings, Buller writes, is that they are mostly concerned with reporting, and not so much with realizing actual impact in reducing carbon emissions. Again, they are not effective, except in greenwashing the activities of the financial sector. What we need to accomplish in a very short timeframe, is the recreation of the infrastructures of the global economy (energy, transport, agriculture, fertilizer, etc). Is carbon pricing the best means to do this? Why let markets decide rather than just designing an effective reduction plan? Because the latter solution would be far more disruptive to companies and capital. Carbon pricing gives politicians an excuse to not enforce much stricter regulations sooner. States and political operatives can use carbon pricing to visibly respond to democratic demands for action while minimizing individual accountability and, crucially, avoiding direct confrontation with fossil capital or with the underlying economic dynamics in which the ecological crises originates, namely the accumulative, expansionary and externalizing drives of capitalism.

In the EU, reducing emissions is therefore left to the free markets in the forms of tradable permits. Smart financial engineers have already developed derivatives around these permits that can be traded and swapped. Some large polluters have profited from these financial instruments to make money from polluting rather than paying for it. Little studies have been done into the effectiveness of carbon pricing, but the ones that have been done in the EU conclude that 0% or 1,5% lower emissions were accomplished. And this is considered the crown jewel of progressive EU climate policy! The fact that big companies are embracing carbon pricing, should be a clear marker that they see this as relatively painless measures. They can continue to do business as usual, add some more ESG-reporting to please regulators and capital providers, and as a bonus get a nice branding story to tell their customers. All this, once again, distracts from creating serious regulation with the much needed impact.

Another problem, even if big polluters want to change radically, is that they need their shareholders to go along. Shareholders are insulated from responsibility from the ecological and social havoc their investments cause. As we have seen in the 2008 financial crisis, society bears the risk. Asset management giants Blackrock and Vanguard own 20 percent of most S&P 500 companies. with the threat of huge selloffs, they can sway every management to first and foremost protect their investments. For the hugely influential asset management industry only one thing counts: the aggregate growth of the total asset pool.

ESG-investing might give us the impression that investors are moving their money from dirty to clean companies. In reality, it is mostly money changing hands between stock investors. There is hardly any link between these investments and the actions taken by a company. ESG is good at creating the impression of material progress while very little is really accomplished. Investing, Buller writes, is very different from making an investment. Investing might be entirely speculative with no material impact in the real world. A lot of money is made from failures.

Conclusion
The current ‘green capitalist’ movement is designed for – the name says it – capitalists, whose primary aim was and always will be accumulation. Because of the nature of climate risk with radical uncertainty due to cascading and self-reinforcing impacts, complex feedback loops and potential tipping points, we must adhere to a ‘precautionary principle’ – taking all the steps we are capable of in recognition of the fact that even a small chance of a catastrophic outcome is not one worth taking. Capitalism cannot and will not do this.

Yes, we are still trapped in old economic thinking. Even the lauded EU Green Deal is not based on rapidly curbing emissions, addressing inequality, reducing materials and so on. Rather, the inherent bias of world leadership and our international institutions is toward an imagined market-led efficiency of capital allocation that will not be realized, and which has no likelihood of being effective at delivering on the immensely complex challenge of overhauling our economy’s relationship with the natural systems that support it. Priority is on the creation and guarantee of new profitable areas for investors.

There is no easy solution going forward, but as Buller argues, market-based thinking isn’t it. We have to open our minds to how we want to live and what is ecologically possible, and organize our societies accordingly. Then we need strong political leaders to make this happen and accept that a price will have to be paid by everybody.

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