Sorry, Kyoto Signatories, Emissions Traders, Carbon Taxers, Homo Oeconomicus Won’t Save the Climate – Part 1

By Michael Hoexter

[Part I] [Part II] [Part III] [Part IV]

1. Introduction: Context of Existing Climate Policy

Together, as a world economic system, we are currently on an emissions trajectory to achieve anywhere from 4 to 6 degrees Celsius (7 to 11 degrees Fahrenheit) warming by 2100.  Global average temperature increases within this range mean catastrophe for humankind, with sea level rises of at least 3 meters (10 feet) and a vastly more hostile environment for human life and co-evolved species.  Humanity may be, with these emissions levels either bringing about its own extinction as the effects of the resultant warming set in or, at least, so degrading the conditions of life that very few humans will be able to survive.  We will have to reduce the currently escalating rate of increase of emissions to zero and then over a period of two to three decades reduce net greenhouse gas emissions to zero in order to have a chance of stabilizing the climate and not significantly endanger the welfare of future generations.

These higher levels of warming are not inevitable but over 15 years of climate policy, the policy that would stabilize and decrease the concentration of warming gases, has not been effective or nearly effective enough depending on your viewpoint. Twenty-two years after the UN’s Rio summit, 17 years after the Kyoto Protocol was chosen as the central worldwide policy to curb emissions, and 9 years after Kyoto mechanisms were put into effect, the emissions trading policies of Kyoto have not had a substantial effect on the trajectory of emissions.  While much of the greenhouse gas emissions growth has occurred outside those countries that have instituted an emissions trading system internally, fluctuations in emissions accounted for throughout the world are bound more closely to broad economic and political factors other than the institution of an emissions trading scheme.  More influential than emissions trading have been:  rapid economic growth, relocation of emissions intensive industries like cement and steel, emissions that may escape current accounting regimes, and economic recessions.  China leads recent emissions growth with other rapidly developing countries because a confluence of two of these factors (relocation and growth of emissions-intensive industries and overall rapid economic growth), while decreases in Europe and the United States are largely attributable to recessions plus deindustrialization. Self-congratulation in the US regarding recent decreases in emissions are, in addition, enabled by an under-counting of the effects of fugitive methane from natural gas extraction and distribution networks.

Climate policymakers, if they take their job seriously, have an unenviable task:  the fate of civilization weighs on the success or failure alone of the policy they create and enact.  Climate policy must attempt to change the massive, complex socio-economic and technological systems and land-use trends which sustain high emissions and simultaneously enable the creation of a zero-net-emission society around the globe, within a span of two to three decades.  In addition land-use policy and/or perhaps new geoengineering technology will have to reduce as much as possible, existing concentrations of greenhouse gases in the atmosphere and oceans.

In their design, most existing climate policies selected to deal with climate change were versions of a policy, cap-and-trade, that had been originally designed to deal with a much more circumscribed problem with a fixed set of technical or coal-sourcing solutions: reducing acid rain by the reduction of sulfur dioxide emissions (actually a cooling influence on the climate) from coal-fired power plants.  The policy was initially designed to encourage coal plant owners to install emissions-scrubbing technology via a system of auctioning off tradable pollution permits that would become more limited in quantity and therefore more expensive over time, supposedly creating an effective, rising “price” for emissions.

While advocates for cap-and-trade attempted to attribute reductions in acid rain and sulfur dioxide emissions during the 1990’s and 2000’s to cap-and-trade, the most important contributing factor to reductions has been the practice of transporting low sulfur coal from the Western US which increased in the 1990’s due to freight railway deregulation and resulting cost reductions in transport and therefore the effective price of Western low-sulfur coal to power plant operators in the Eastern US.   With the presence of at least two “off-the shelf” technological or operational options at an affordable cost, the reduction of sulfur dioxide emissions was, in comparison to global warming, “falling-over easy”.  The US federal government has since then introduced direct regulation of power plants which has led to the collapse of sulfur dioxide emissions trading markets.  Despite this recent history, during the period in which the first wave of climate policy instruments were selected, the economists and policy advocates most invested in cap-and-trade continued to repeat the words “market-based” and “cost-effective” attached to “cap-and-trade” or “carbon pricing” enough times to foreclose a critical discussion of its merits and demerits.

2. Betting the World on Self-Interest and Individualism

The central actor in emissions trading (the generic term for cap-and-trade), the motive force for emissions-reduction decisions on a day-to-day basis in the economy, is Homo oeconomicusHomo oeconomicus or “economic man” is the model of the individual economic actor assumed by most economists, especially mainstream neoclassical economists, as well as many participants in the political process of varying backgrounds and ideologies.  Stripped down to essentials, Homo oeconomicus is an autonomous rational calculator of self-interested advantage to him or her, in the language of mainstream economics, a “utility maximizer”.  Homo oeconomicus is only superficially a social animal, contradicting empirical evidence and subjective experience that suggests that people are highly social.  Another way to describe Homo oeconomicus is that it simply an expression of neoclassical economics’ “methodological individualism” a founding assumption that suggests that neoclassical economics is, whether economists are conscious of it or not, an ideological operation more than a description of reality.  Thus theories and policies that assume Homo oeconomicus would tend to overlook social relationships, interactions and the role of institutions and groups.  Resulting from these assumptions, neoclassical economics is a description of a “particulate” economy

In the case of the original emissions trading instrument, the utility-maximizing economic actors (i.e. people and organizations) that were supposed to realize the policy goals, were the owners of power plants, usually power utilities.   The power companies owning coal fired power plants would make decisions to buy permits on auctions or install sulfur dioxide scrubbing technology depending on their own calculations of the relative economic advantages of each move.  The power companies would then have a maximum bid price which represented to them the point below which it was economical to avoid the installation of the new technology; if the price went over that number, that company or plant would then, it was assumed, be prepared to invest in the scrubber.  As it turned out, sulfur dioxide reduction occurred because of the availability of lower sulfur coal from the Western U.S. at a cheaper price rather than the permit auctions incentivizing the installation of emissions scrubbers. Additionally, the new low sulfur coal increases net global warming over dirtier coal as sulfur dioxide emissions, produced by coal impurities, are in fact a “negative climate forcing” (i.e. cooling), so “cleaner” coal fuel leads to slightly greater climate warming overall though less acid rain.

Even if the decision to source coal from the Western U.S. had occurred due to costs imposed on power plant operators by the cap-and-trade instrument, the analogue between reducing sulfur dioxide emissions and reducing greenhouse gas emissions is strained.  Decarbonizing the electricity sector or the economy as a whole will involve multiple changes and investments that are dependent upon each other by widely dispersed economic actors both public and private.  Simple fuel-switching with existing equipment will not suffice.   For instance, to eliminate global warming pollution in electrical generation, it will require a series of interdependent investments in new transmission that links existing grid coverage areas, new generators, as well as mothballing old generators or alternatively the emergence of new types of supply such as distributed generation which would compete with the utilities participating in the permit auctions.   Less certain would be the development of a new generation of safer nuclear power plants at some point in the future, though this too is inconceivable without government support independent of carbon pricing policy. To eliminate global warming pollution in transportation will involve still more intermediate investments, involving electrical supply to or near the vehicles that will move people and goods.  The possibility that public sector investments would be required in this process, largely unaffected by permit auctions or prices, makes the cap-and-trade policy more of a show than a direct route to a zero-emissions infrastructure.  Furthermore, the requirement now is for us to start building a zero-net emissions infrastructure as this process will take decades.  Contrary to this goal, the incrementalism of cap-and-trade is a recipe for investment in incrementally lower emissions solutions or delay of the building start for zero-net carbon emissions infrastructure.

Emissions trading specifically (as opposed to the carbon tax/fee version of carbon pricing that also depends on the assumption of Homo oeconomicus) rests on a type of self-interested behavior that is typical of our current economic era but is wholly inappropriate to the task of rebuilding the physical infrastructure of society.  With a design inspired by the credulous wonder of neoliberal/neoclassical economists, as they gazed upon financial traders and the supposed efficiencies of financial markets, emissions trading contains within it multiple invitations for take-over by financial traders that have only very short term gains in mind.  The focus on short-term gain of financial traders, a product both of their increasingly parasitic role and lack of engagement with the fundamental businesses from which the financial products they trade derive, contradicts the need for economic actors to focus on large-scale multi-year investments in real assets and long-term benefits of those investments to cut carbon.

While academic economics institutionalizes Homo oeconomicus as “normal” within the precincts of economic theory, to assume people are only self-interested also is one of the more common rules of thumb for assessing the behavior of others that one encounters in business and political settings, beyond the jargon of academic economics or utilitarianism.  This attitude with or without academic justification however, is, in the end, a support for cynicism and widespread sociopathic behaviors in any institutional or business setting, so is ultimately unsustainable as a consistent and universal social philosophy.

Homo oeconomicus, while it seems like a hard-headed “realistic” model or assumption about human behavior, turns out to have shaky theoretical and empirical foundations. Actual cost-benefit maximization as posited by neoclassical theory, i.e. computing all possibilities and picking the most advantageous, as Reinhard Sippel showed via a simple experiment, is an impossibility.   One line of psychological research has shown that people are as likely to be “satisficers” as attempt to be “maximizers” that the tendency to “maximize” is a trait present in varying degrees (i.e. one can have “more or less” of it) not an invariant condition of humanity.  This means that many people will attempt to gain “enough” advantage to themselves but not necessarily try (always vainly) to maximize it.   Furthermore people are not only set on gaining personal advantage but also on cultivating relationships with others, that we are in fact Homo socialis more than asocial hoarders of advantage.  Additionally, people act often, out of concern for others and sometimes even selflessly, though this is not always the case.

These empirical observations have not caused mainstream economists to rethink their models of human behavior that assume utility maximization and methodological individualism.  Perhaps this is because they believe that these models are good-enough approximations of behavior on the level of the individual that nevertheless, in aggregate suffice to make their models of larger scale institutions and phenomena valid.  However, recent history has shown that mainstream economics’ larger-scale modeling is next to useless, especially in dealing with crises.  Only a few economists predicted the Great Financial Crisis of 2007-2008, of which economists should have been well aware if they had not been beholden to dogma and the financial interests profiting off the debt-fueled housing/asset bubble.  In some sense, the assumption that everybody is a “maximizer” naturalizes and excuses the greed and excess that led to the recent financial crisis, thereby making the run-up to the crisis invisible to most economists as it was happening.

While not supported by empirical observation as a universal rule of thumb to describe human behavior, the construct of Homo oeconomicus fairly accurately describes an ideal type and role within monetary capitalism that could be called the “microeconomic accounting” role.  The microeconomic accounting role is that range of mental orientations and observable activities by actors in the private sector, both businesses and households that target as a goal to have a greater monetary income than monetary costs to them over a period of time.  Those who seek to increase the amount of their income over their costs are to a lesser or greater extent pursuing or conforming to the ideal type of the utility maximizer, though there is a wide range of degrees of effort into which individuals and organizations put into this accounting activity, therefore “maximization” is an inaccurate empirical description.  Though within larger businesses there are people who specialize in microeconomic accounting, i.e. accountants, it can be argued that in a successful business many in the organization’s leadership internalize to a lesser or greater extent the microeconomic accounting role.  If the only role or capacity of individuals is believed to be microeconomic accounting, then “greed” is as good a description as any for that individual and organizational motivational system.

The current neoliberal political-economic orthodoxy attempts to deny that there is any other type of accounting, or really any political-economic decision-evaluation process, beyond microeconomic accounting.  The advocacy and practice of fiscal austerity, the current and most aggressive version of neoliberalism, denies that what might be termed macroeconomic accounting, the budgeting and political-economic decision-making process of monetary sovereigns, exists.  Macroeconomic accounting, a political-economic process that occurs in legislatures and among government executives, must at some point in the business cycle take into account or react to among other things the limiting case of the paradox of thrift.  Allowing for the paradox of thrift, in which the simultaneous impulse to save by private actors leads to a shortfall of demand, households and businesses alone striving to follow the microeconomic accounting ideal, i.e. maximizing income and minimizing costs to themselves, cannot effectively govern the economy as a whole or create prosperity.

While advocates of austerity and neoliberalism promote the belief that there is nothing but microeconomic accounting and demand that governments use the accounting rules of businesses and households, they inevitably, if they seek to run a sound economy, must break with their ideology in practice, if not in theory.  As governments around the world discovered in the Great Depression and only temporarily after the Great Financial Crisis, a monetarily sovereign government cannot afford to follow the rules of microeconomic accounting.  After an initial period of “Keynesian” emergency measures after the Great Financial Crisis, the dogma of fiscal austerity was deployed in the US in 2010 to prevent a thorough re-learning of the lessons of the Great Depression, i.e. that governments must manage capitalist economies actively via fiscal and monetary policy or the result will lead to collective ruin.  The austerity drive has so far been relatively successful in preventing this re-learning while simultaneously imposing needless suffering and protecting the ruling financial industry elite from accountability.

The deficiencies of mainstream neoclassical economics are numerous and not all can be easily traced to the unrealistic assumption of Homo oeconomicus, or the denial by many influenced by neoclassical economics of the necessity for a macroeconomic accounting by governments, distinct from the financial operations of businesses or households.   But it is safe to say that there is enormous institutional inertia in economics as attachments to assumptions and models have led it become an otherworldly affair.  Most mainstream economists operate with assumptions that divorce them from the realities of the economy, leading to the profession’s aforementioned disastrous performance in predicting economic crises as well as leaving the profession almost completely unprepared to face the upcoming climate catastrophe.  However this has not yet diminished the influence of mainstream neoclassical economics in one or another of its versions, including neoclassical environmental or climate economics, upon government policy.  Economics, unrealistic and unsuccessful as it as a descriptive or predictive science, remains the master discipline of how government policy is structured, for a variety of reasons too involved to go into here.

An outgrowth of the assumption of the human being as Homo oeconomicus is the accompanying assumption by economists and economic policymakers that markets are the “natural state” of the economy.  In the past 40 years, the idea that markets represent the core of the human condition itself has been promoted by the neoliberal political-economic philosophy, which is a worldview that is based in part on assuming human beings are essentially or in practical terms Homo oeconomicus.  In neoliberalism, markets are viewed to be infallible while government is considered to be the nexus of fallibility.  In following the neoliberal philosophy, various policymakers, nominally from different parts of the political spectrum, have slowly and/or rapidly undermined the integrity of government institutions and sought to replace them with “market” institutions or “public-private partnerships”.  The central neoliberal policy idea is that goods and services are of necessity better delivered by the private sector rather than the public sector.  Originating from the right-wing in the 1970’s and 80’s, neoliberalism is now the dominant government philosophy in most political parties from the Right to parties that used to be of the Left.

Despite its political dominance, neoliberal leaders have a wretched record of management of the economies of the developed world, leading currently to mass unemployment and income inequality not seen in 80 years or more.  The net effect of neoliberalism has in these economies been the hegemony of private finance and the banking sector over the economy at large.  Neoliberalism has proven to be largely blind to the needs of the “real” economy, meaning manufacturing and delivery of services with the exception of encouraging the development of bespoke and high-end services that target those with high incomes, an outgrowth of rising income and wealth inequality.  Neoliberalism only cemented its political dominance and therefore complete dominance over economic policy in the 1990’s when parties of the nominal left, including the U.S. Democratic Party and the British Labor Party, became controlled by factions committed to neoliberal ideology.  These “socially liberal” neoliberals sought in one way or the other to emulate the right-wing founders of neoliberalism in their economic policies.  Electorates thus since then have had little or no choice between political parties in terms of their fundamental economic orientation, as fanciful and ineffective as that orientation has turned out to be in terms of improving overall social welfare.  By creating “two flavors” of neoliberalism, public sphere debate on fundamental economic issues largely disappeared and neoliberal policy could be implemented unchallenged and leaders held unaccountable for its actual success or failure.

It is then a particularly unfortunate confluence of events for humanity that during the time when climate policy was first formulated and implemented that neoliberalism with its accompanying reliance on neoclassical economics and its “Austrian” sibling-tendency, were and are the dominant political-economic ideology among policymakers.  To act on climate change means instituting large qualitative and quantitative changes in the physical infrastructure of society, the domain of the “real” economy.  Neoliberalism has prove itself particularly inept in developing manufacturing and infrastructure as the critical elements in these areas are usually functions of government industrial policy or public spending on infrastructure.  These are areas which neoliberals claim are better served by private actors in supposedly “free” markets, an economically erroneous idea that serves as cover for reinforcing the relative power of speculative financial elites over government and over society at large.  Additionally, “free trade” ideology interferes, in the Anglo-American world at least, with attempts of governments to build up or preserve manufacturing assets.

3. Government and the Moral Force of the Human Community

In banishing government from its model of the ideal society or economy, neoliberalism lames the ability of a nation, or humanity more generally, to act according to its own accepted moral precepts, community norms, and best practices.  The effort to separate markets from government oversight during the neoliberal period has led to a weakening of the ability of the broader community to enforce laws, leading to regulatory failures in a number of economic sectors, most noticeably in the financial sector.  Neoliberalism assumes the formal distinction between “economics” and the original term for the discipline, “political economy”, in which a combined economy plus the polity/government were the objects of study of the process by which human beings transformed materials from the earth for their own benefit.  While the notion of “economics” as a separate or successor discipline to “political economy” has been inscribed in the current terminology used in academia and the public sphere more generally, this decision and social practice are now resonating in ways that have unforeseen consequences for humanity.

If we assume, more realistically, that there is as a fundamental social construct, a “political economy” and a related academic discipline, the role of politics and the ethical ideals that may motivate political actors and political movements are much more likely to be included in a description of the functioning of the economy.  If instead, as we are in current discourse, dealing with “economics” and an economy that is intellectually isolable from politics and the ethical strivings of people, then the ethical element of human community life and the economy is isolated from how we think about economics and design economic or climate policy.  Critically important, real-world economic decisions are made in political institutions that have profound effects; many of these decisions are based on interpretations of ethical principles filtered through the degree to which that government is corrupted by the influence of monetary gain for officeholders, this level of corruption itself an expression of the ethical priorities of a society in practice.  While the concept of political economy may mislead some into thinking that the economic aspect of the political economy is precisely malleable to political will and purely the practical expression of ethical ideals, which it isn’t, the specific points of integration and articulation between the polity and economy should have a home in the social sciences and in public discourse.

But the moral challenges of regulating a fair and equitable economy pale in comparison, though are by no means replaced by, the ethical challenge of climate change where the current and immediate past generations in the developed world have endangered the viability of the world for future generations and, more immediately, for many of those in the current generation in parts of the developing world.  As has been the practice of policymakers and pundits, deploying interpretive frameworks from neoclassical “economics” isolated from an understanding of the role of political institutions and the ethical bases of the community which then becomes the actual practice of climate policy is itself an ethical lapse or violation as well as an exercise in futility.  The ethical violation of mistaking climate change for a (narrowly neoclassical) economic problem is one that is perhaps difficult to notice as we have been told that “economics” is a social science and therefore an accurate description of reality.  However what is taken to be scientific or semi-scientific “economics” is for a number of reasons explored here and elsewhere not as reliable a depiction of reality as is assumed, even without our taking into account the immediate crisis and danger posed by our disruption of the earth’s climate.

(You can access a complete PDF of this multipart series here.)

25 responses to “Sorry, Kyoto Signatories, Emissions Traders, Carbon Taxers, Homo Oeconomicus Won’t Save the Climate – Part 1