The Climate Demands Better Capitalism
by Lars Jaejer| November 22, 2021
Technological progress shapes our lives. Behind such transformation often reside profit opportunities. It is unsurprising, therefore, that the influence of science on everyday human life coincided with the widespread adoption of capitalism in the 19th century. The result was unimagined economic productivity and creativity. It was only with a grounding in capitalism that technological progress gained its incomparably strong social momentum, which continues to this day.
In any discussion about political, social, and even ethical questions regarding technological progress, we must inevitably consider our economic system. Today’s heated debates about the benefits and harms of capitalism are characterized by the same contradictions posed by technical progress. Massive gains in productivity due to rapid technological innovation boost average living standards, even as they reinforce inequality, human, and ecological exploitation, as well as ethical indifference — all in an immodest race to success and accumulation.
The ugly sides of capitalism are increasingly apparent, above all the disregard for ecological damage caused by so many industries. It is little wonder that even beyond tired left-wing romanticisms, skepticism about capitalism and even science is on the rise. There exists a remarkable correlation between the political-economic rejection of our Western economic model and a pronounced skepticism about new scientific knowledge and corresponding technologies. Even in the heartland of capitalism — the United States — feelings of anxiety, skepticism, and mistrust in elites, whether in business, journalism, politics, or academia, have grown in ways not seen in generations.
Notably, the critics of capitalism and science are found on both ends of the political spectrum. The right, which used to reliably defend free markets, enterprise, and innovation, has been overtaken by populist anger often directed at those same values.
Fear and frustration are palpable, yet they hinder diagnosis about what is driving unsatisfactory outcomes for so many. Emotions blind us to the powers of logic and reasoning.
What then are the root problems of capitalism?
To begin, notwithstanding all the creativity and prosperity which capitalism has bestowed on humankind, we must recognize that there is no “invisible hand” that assures optimal social or ecological outcomes. Individual pursuit of self-interest may be best for some individuals, but it does not always deliver mutual self-interest. The reason is that the assumptions of autonomous decision-making and independence of outcomes are too strong. That is not the way things are. In the face of what economics dubs ‘externalities (e.g., interdependencies) markets alone cannot be assumed to deliver mutual benefit.
The most important of such market failures regards ecological balance. Where costs of pollution, biodiversity loss or carbon emissions — above all on future generations — are not recognized and appropriately accounted for in economic decision-making, capitalism fails the planet and the unborn.
To wit, capitalism has disregarded the climate for far too long. It is not an exaggeration to say that for a century and a half, our capitalist system has largely ignored the environmental consequences of economic behavior. Unremarkably, yesterday’s top companies — in energy, transportation, and manufacturing — were responsible for staggering environmental destruction. Of course, their ‘stakeholders’, including customers and suppliers, were complicit.
Ecologically conscientious companies, on the other hand, have struggled to compete. Recognizing costs that others willfully ignore is rarely financially advantageous. Nor is thinking beyond the usual short-term horizons and narrow field of vision of most company managements. Quarterly or annual profit orientation, or even five-year plans, are incompatible with considering the consequences of today’s decisions on humankind over several generations. Returning, again, to the parlance of economics — the discount rate on future outcomes for the capitalist is much too high. In the vernacular, the future doesn’t count for much in capitalism.
Remarkably and thankfully, short-termism is beginning to change. One fascinating driver is a new political framework for the markets. A study published in June 2020 by Imperial College London and the International Energy Agency analyzed stock market data from the last five and ten years in Germany, France, the UK and the US. The result: Returns on renewable energy investments have been substantial over the past five years, far outstripping those on fossil fuels. In Germany and France, renewable returns have trumped those from traditional energy sources by some 178 percent. Dirty energy investments lost investors over a fifth of their value.
Investors are beginning to see the financial attractions of clean energy. The market capitalization of NextEra Energy, the largest US renewable energy (wind and solar) company, overtook that of oil giant Exxon last year, making NextEra the most valuable energy company in the US. As recently as 2013, Exxon had been the most valuable publicly traded company in the world. In less than seven years, it has lost two-thirds of its market value.
The situation is even more dramatic for the coal industry. The market capitalization of coal companies in the United States, reflected in the Dow Jones US Coal Index, has plunged by more than 99% (!) in 10 years, forcing its issuer (S&P Global) to quietly remove the index from its listings.
Or take another example — the price of CO2 emission permits in Europe. Following reforms in 2013 to the trading scheme and a five-year period for surplus allowances to be absorbed, prices have begun to rise sharply. From 2018 to 2020 the price traded on the Leipzig exchange for the right to emit one ton of CO2 into the atmosphere quintupled. More recently, it has again more than doubled.
The lesson is that markets and sustainability can be compatible. But for that to be the case, a different (political) framework is required. Interdependent markets, alone, cannot deliver the social or ecological optimum. Interdependence across space and time must be explicitly incorporated into prices and costs, and hence into economic decisions. An example is emissions caps and trading.
Change is occurring. Economic activity is beginning to de-couple from some of its harmful effects. In Germany, France, England and most other European industrialized countries, greenhouse gas emissions are falling even as economic activity expands. That is also the case in the US, albeit to a lesser extent.
Experience and logic demonstrate that what is required are changes in attitudes and approaches, reinforced by changes in public policy. In December 2019, the European Commission adopted the “European Green Deal” aiming to reduce net greenhouse gas emissions to zero by 2050 and by 55 percent by 2030. Months later, China followed suit. Under President Biden, the US is making similar commitments of its own.
In sum, successful capitalism, which boosts prosperity equitably and sustainably, is not self-assured. The invisible hand also must be accompanied by the watchful eye, that recognizes capitalisms internal failings. When that happens, social pressure manifests political change, which in turn, creates the mechanisms that improve the outcomes of raw capitalism. Progress, higher living standards and sustainability are mutually consistent objectives, but they require a new capitalist framework. Sustainable growth is not an oxymoron, but it is an aim that requires both markets and social awareness.