Capitalism vs. the climate 🌍💸

Capitalism got us into the climate crisis, and it can get us out too

Nov 10, 2021

Epistemic status: I’m confident about my knowledge of economics and climate science, but the COP26 stuff is a relatively new topic for me so it’s out of my depth.

In case you haven’t figured it out already, I’m a capitalist. Capitalism has been an overwhelmingly positive force for the world: by enabling people to raise money for innovative commercial projects and new technologies and bring them to market, industrial capitalism has created economic growth and raised standards of living for billions of people around the world – especially, in recent decades, the world’s poorest.

You’ve probably seen a version of this chart, which shows that the share of people in extreme poverty has declined tremendously since 1820, even as the world population has grown:

Source: Our World in Data, “Global Extreme Poverty” (CC-BY 4.0)

At the same time, industrial capitalism has contributed to climate change by driving up society’s consumption of fossil fuels. Our higher standards of living have come at the cost of higher energy use, and most of this energy since the Industrial Revolution has come from fossil fuels. So fossil fuel consumption has gone up astronomically since the turn of the 19th century:

Source: Our World in Data, “Fossil Fuels” (CC-BY 4.0)

And the negative effects of climate change have fallen disproportionately on people of color, indigenous people, and the global poor – who have contributed the least to climate change. According to the UN Development Programme, climate change could put 100 million people around the world back in extreme poverty and displace over 200 million people “due to more frequent and severe climatic disasters.” Since warming from greenhouse gas emissions is cumulative, the effects of climate change will get worse over time, so future generations will suffer even more from climate change than people in the present.

Despite the severity of the impending climate disaster, I don’t believe that the climate impact of industrialization and growth outweighs the good they have created for modern society. Rather, I think that capitalist institutions, together with government-led industrial policy and international coordination, are instrumental in getting us out of the climate crisis.

Defining “capitalism”

Capitalism is notoriously hard to define, and it hasn’t helped that decades of propaganda (at least in the United States) have caused the public to associate the term “capitalism” with market fundamentalism and the term “socialism” with any and all government intervention. Pretty much all countries today have some kind of mixed economy, combining capitalist institutions such as banks, stock markets, and corporations with government interventions such as regulation and redistribution. And capitalism includes a spectrum of economic system subtypes, like the social market economy pioneered in postwar West Germany, the Nordic model, and the East Asian model used by Japan, South Korea, and Taiwan after World War II.

Socialism is when the government does stuff and the more stuff the government does the socialister it is -Karl Marx, 1823 — Source: Know Your Meme

However, when people criticize capitalism, they’re usually talking about a few features that are common to capitalist economies. These include:

Markets: the economy is organized around markets of buyers and sellers, which are shaped to varying degrees by government policies such as taxes, subsidies, and regulations.
Investment: people with capital (such as banks, millionaires, pension funds, and governments) can lend it to companies so they can build out their businesses, and expect a return on investment. The result is a financial system composed of markets for different types of investments. (By contrast, socialist economies are characterized by workers or the state owning and getting all the profit from companies.)
Profit motive: firms are usually, though not always, motivated to maximize profits. Thus, they will respond to financial incentives from their suppliers and customers as well as the government, including taxes and subsidies.

Climate change is a negative externality

In mainstream economics, climate change is conceptualized as a negative externality, which means that consumers and firms won’t bear the full social cost of their pollution unless it’s priced in. So without the proper incentives to align their behavior, economic actors will collectively produce more than the “socially optimal” amount of pollution. This is why fossil fuel companies make a lot of money from contributing to climate change, lobby for government subsidies and against climate action, and have spread disinformation about climate science. It’s also why the car, road, and aviation industries have lobbied against high-speed rail in America. Simply put, the status quo allows them to sell more oil, planes, and cars.

To be sure, government policies have exacerbated global fossil fuel consumption, including subsidizing fossil fuels, subsidizing driving at the expense of more sustainable modes of transportation, and strangling the nuclear industry. But we wouldn’t be emitting nearly as much greenhouse gas as we do today – about 50 billion tons of carbon dioxide equivalent every year – without the last 200 years of economic growth and the fossil fuel consumption driving it.

Climate change being an externality is also why governments acting on their own won’t be enough to address climate change, and why global coordination is both necessary and difficult. As companies are beholden to their shareholders, so are national governments beholden to their citizens, and the citizens of any given country don’t internalize the full cost of their contributions to global climate change. So I don’t believe that simply switching to a different economic system at a national level will be enough to address the climate crisis.

Capitalism can solve the climate crisis

Instead, I believe that capitalism already provides many tools we can use to confront the climate challenge. Let’s not underestimate the size of this problem: we have to bring the world’s annual greenhouse gas emissions from 50 gigatons of CO2 equivalent all the way to zero, and preferably negative. Decarbonizing the global economy requires, at least in part, developing emission-free technologies for every industry that currently emits greenhouse gases, like food, electricity, transportation, and steelmaking. These technologies need to be cheap enough for low- and middle-income countries to take advantage of them, so they can decarbonize as well.

Some critics of capitalism believe that economic growth is inherently unsustainable because it necessarily involves an ever-growing natural resource footprint, and with it, ever-growing environmental pollution. But in principle, it’s possible to power the world with 100% clean energy. Every hour, 173 petawatt-hours’ (PWh) worth of sunlight reaches Earth. In 2019, the year before the COVID-19 pandemic, humanity consumed 170 PWh of energy. So we get enough sunlight to power the world more than 8,000 times over. Thus, I am certain we can keep growing the economy and eradicate poverty while meeting our energy needs sustainably.

One of the most important ways we can promote clean innovation is through green finance. Innovation is a positive externality because technical knowledge doesn’t become more scarce when others use it, so it cancels out the negative externality of climate change. But many cleantech research and development projects require lots of money upfront before they can become commercially viable, and even more capital so they can scale. So we need to mobilize governments and private investors to deploy massive amounts of funding for clean R&D. Governments can do this by taxing carbon emissions, subsidizing clean technologies to drive adoption, and providing grants and low-interest loans to research labs and startups.

At the 2015 UN climate conference in Paris (COP21), President Obama announced the launch of Mission Innovation, an initiative by 22 countries plus the European Union to finance clean energy R&D. The organization currently focuses on seven innovation areas, including emission-free shipping, clean hydrogen, and heavy industry. At the same time, Bill Gates announced Breakthrough Energy, a private investment vehicle for clean energy. This year, at COP26, countries and financial institutions announced plans to invest even more in decarbonization and climate adaptation, including a renewed pledge to deploy $100 billion in green finance to developing countries by 2023. Fingers crossed 🤞🏼🌍

Sunyshore

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