By Roxane Martinon
Is Carbon Pricing the best tool for enabling a net-zero carbon transition?
Across the world, economies are threatened by the climate crisis because they rely heavily on the consumption of carbon, the very element accountable for global warming. From electricity and heat to transportation, every sector of the economy has been powered by carbon since the Industrial Revolution. Overall, 80% of global energies stem from oil, gas, or coal. In this blog, we will see how mainstream economic principles on environmental economics have failed to comprehensively approach the current climate crisis and how some issues challenge them.
How does traditional economic theory fail to consider carbon lock-ins and path dependency into consideration? Orthodox economics suggests implementing carbon pricing while other perspectives argue for tighter governmental control and direction through policy and regulation.
Until now, environmental economics has been focused on a market response and carbon pricing. Carbon markets rely on the concept of cap and trade. By fixing the amount of carbon emissions each year, each proportion can be issued as allowances to be distributed and traded between companies (EDF). The European Union has for example issued the project of a European Carbon Market to increase the pace of emissions cuts, the overall number of emission allowances will decline at an annual rate of 2.2% from 2021 onwards, compared to 1.74% currently. Other related mechanisms such as the clean development mechanism and the joint implementation also allows countries to gain credit by investing in green development abroad. The benefits of cap and trade is its efficiency. Indeed, when considering net zero as the ultimate goal, setting a price on carbon would enable a quick transition. However it does not take other development criteria such as economic and social sustainability into account.
These neoclassical theories have proven to fall short of reality. Indeed, the concept of carbon lock-ins, for example, can be used to explain the difficulty to reduce carbon emissions for countries, even when they have notable investment in green technology research and development. Carbon lock-ins occur as a result of the lack of opportunities for new technologies to emerge in an interlinked competitive market. In this sense, an electric car is only going to integrate the economy if the appropriate infrastructure can make it to cities, such as charging booths for example. Another example is the implementation of public transport or bike lanes in a city built with important roads which cannot be modified at this stage. As such, a government led-response would help regulate the market and would ensure the smooth adaptation of new green technologies in the economy.
Zhengalis argues in favour of a policy-led decarbonization that overcomes carbon lock-in for example by taking into account distributional consequences and structural change. Preventing carbon lock-ins in developing countries is crucial in tackling climate change. Indeed, developing countries have the benefit of being adaptable to the challenges of our century. Implementing renewable energy sources in developing countries would limit the effect of carbon lock-ins and prevent from dealing with the consequences later.
Another approach from classical economics to understand and provide answers to the climate crisis has heavily relied on models. Modelling the cost of installing renewable energies have for example curbed their development. However, these models are not representative of the total cost of the transition to green energy. In this sense a “snowball effect” stemming from evolving mindsets and better technologies will help reduce prices and incentivize more investments. For example, the economies of scale stemming from production and distribution will reduce the buying prices of renewable energy. The enabler of this cycle should be the governments and provide a clear mindset of where the economy is heading. Providing policies as a response has proven to be inefficient and should be replaced by preventive policies.
Another limitation to carbon markets is the neocolonialist nature of its regulations. Indeed, if an international carbon market were to be put into place, the first ones affected by high carbon prices would be developing countries from the global south. These are the very countries that did not benefit from a fast and cheap development provided by carbon consumption unlike countries from the global north. Capitalization of carbon would encounter the same challenges as neoliberalism making the rich richer and the poor poorer. In this sense, carbon pricing frameworks fail to consider social factors when trying to achieve the net-zero.
This is why, Tienhaara argues for a green capitalism that is guided by heavy financing and where governments should tighten capital controls as well as prevent capital flight to tax heavens to ensure the financialization of a green economy can happen smoothly. Green energy can and should also be viewed as a business opportunity. In this sense, a mission-oriented policy targeting green energy could create millions of jobs, which could help transform the economy and reintegrate actors of the society whose jobs are compromised by a green transition.
A debate also arises between partisans of the “green growth” versus the ones of “degrowth”. Naomi Klein underlines the limitations of green growth by arguing in favour of a degrowth, per se, reducing the amount we produce and consume and eradicate overconsummerism. She therefore argues for a shift of economic paradigm aimed towards embracing green development in parts of the world that live in poverty while embracing degrowth elsewhere. This would enable them to develop sectors of the economy that have non-profit goals such as education, research in some cases as well as caregiving.
In essence, tackling the Climate Crisis requires multiple processes that go beyond carbon markets and traditional theories that consider zero-carbon energy sources, that focuses on resource efficiency and the end of over-consumption. Classical theory has been too focused on attaining the “net zero” for carbon emissions, and have therefore focused less on the need for a green transition. Indeed, blindly attaining a “net-zero” does not rhyme with progress and is only productive in certain situations. Today, the crisis in Ukraine displays the need to switch to renewable energy and the urgency to do so and pleads for the government to lead the market towards that change.
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