Sorry, Kyoto Signatories, Emissions Traders, Carbon Taxers, Homo Oeconomicus Won’t Save the Climate – Part 2

By Michael Hoexter

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

4.  Existing Climate Policy Is Lacking a “Drive Axle” Between Ethical Impulse and Policy Implementation

The decision in the 1990’s to turn over climate policy to market mechanisms, in particular emissions trading, was framed by supposedly “objective” economic assumptions based as outlined above on the idea that people are essentially, Homo oeconomicus, i.e. act in practice as if they do not consider, among other things, the moral dimension of life, are “utility” maximizers and are essentially divorced from their community of context or the community of all human beings more generally.  The Kyoto Protocol and its various progeny including the European Union Emissions Trading Scheme (EU-ETS), the Northeastern US Regional Greenhouse Gas Initiative (RGGI) and California’s AB 32 cap-and-trade system, all “hand off” implementation of the intention to reduce climate change to a constructed carbon permit market, layered above the real markets for goods and services.

Explicitly in the rules of the carbon markets are injunctions to market actors to limit their focus to “cost-effective” solutions to climate change with also the provision within the policy framework of many ways to circumvent immediate or even longer term efforts to reduce or cut emissions-intensive activities of the firm or organization involved in the emissions trading system.  The purchase of offsets, widely criticized but integral to most emissions trading systems, places the stress in these systems on the potential of actors for maintaining or increasing their economic gains without an enforcement of duties that they may have to the greater community, let alone the future of humanity as a species. Furthermore a group or community perspective on changing the way of life or economy to use less carbon is left entirely out of the parameters of the policy instrument.  Portrayed by its advocates and assumed naively by others to be the world’s expression of climate virtue and needed social transformation, a cap-and-trade system had none of the policy focus and instruments to transform in a rapid and wholesale manner, society and its use of energy and land, as it does not recognize the critical element of the social and group nature of the structure of human communities, as well as the institutional expression of our social nature in the form of governments.

Defenders of cap-and-trade/emissions trading like to claim that regulators and government officials are given “certainty” over the quantities of emissions by the cap-and-trade instrument because they control the quantity of permits available, as against, in the competing carbon tax instrument, just setting a price on emissions and allowing market actors to work from there.  But cap-and-trade’s claimed control over quantities of emissions via the use of permits for quantities of pollution is illusory given the loose or faulty control that regulators have over carbon markets by design.  The notion that somehow, after allowing traders to supposedly cut emissions during the normal functioning of the policy, that suddenly, if polluters neither purchased permits, offsets nor cut emissions, regulators would shut down a particular plant or an industry segment, contradicts the entire modus operandi of emissions trading, at least as it has been sold to the market participants.  The control over quantities of emissions claimed by cap-and-trade advocates is simply a fondly repeated prayer given the actors who are empowered by the system, namely the incumbent polluters and carbon traders who determine the focus of the markets and have inordinate influence over the regulators themselves.  A chronic problem of the marquee EU-ETS cap and trade system has been the laughably low cost of its permits (around $3/tonne) due to oversupply, and therefore an almost non-existent push to cut carbon from the side of the policy.

As it turns out, the most famous regulatory experiment based on the assumptions of cap-and-trade failed spectacularly where government officials thought they could control quantities rather than price via a simple regulation of markets. The monetarist experiment of the 1980’s in which the Federal Reserve thought it could control the size of the money supply rather than the price of money, i.e the interest rate, was eventually abandoned after its miserable failure to actually control the money supply in a way that was not disruptive of the economy.   Some claim that the high levels of inflation of the 1970’s, despite the increase in the money supply, was reduced because of this policy, though, a deep and damaging recession caused by the policy, reduction in real wages of working people, and a decline in oil prices seem like more likely proximal causes.  If it were not yet clear that the theory of the policy (controlling quantities directly from a central regulatory point) was entirely wrong, since that time, the Fed no longer targets quantities of money and simply sets the price.

Working within the assumption that the economy exists independent of governmental institutions, the regulatory experience of the Federal Reserve Bank of the 1970’s and 80’s would be an argument for a carbon tax as the more effective way to control emissions by assigning a price to them without the need for a sudden enforcement of a cap after months or years of laissez-faire, the equivalent of the deep and damaging Fed-created recession of the early 1980’s. One nominal difference between emissions trading and carbon taxes is that in the carbon tax/fee framework, price becomes the only instrument to control emissions rather than in emissions trading, the emissions cap is additionally this rather fanciful and spectral “hammer” that might, but is exceedingly unlikely, to come down on carbon polluters.  However both emissions trading and carbon tax/fee systems, if implemented as the central or sole climate policy, share the problem of relying on unplanned atomized, self-interested action in markets alone to shape the future zero-carbon society.

Ultimately, even if a central focus on carbon pricing and market regulation were appropriate to the climate challenge, the driver for effectively instituting any of these policies, any climate policy, is allotting a central place to people’s and leaders’ ethical commitment and a desire by national and the international communities to preserve the world for this and future generations.  Underlying this orientation would be a self-understanding of our species as beings that live in communities with social institutions and physical infrastructure that are largely shared, the social “terrain” within which that ethical commitment would be made operational.  The notion that climate policy “strips away” the polity and the realm of potential moral action and only perceives in practical terms an amoral, individualized economy, breaks from the outset the “transmission belt”, the “drive axle” for a rigorous-enough and effective-enough policy.  What is at stake is the priceless survival of the human species and of future generations, to which “cost effectiveness” to individual households or firms and the opinions of market participants about the financial price of carbon for their own accounts can only be subordinate concerns to the real current resources and real abilities of our species to rescue itself.

Discussions of climate policy over the last decade have revolved around the choice whether one is for emissions trading or, on the other hand, some version of a carbon tax.  Both emissions trading and carbon taxes, if pursued as the sole or central policy to pursue climate policy involve a hand-off to Homo oeconomicus in markets of the implementation of climate policy.  This hand-off in turn, diminishes or obscures entirely a potential focus on the transformation of the shared social, energy, and transport infrastructure upon which society and markets are based.

An actually-effective climate policy would in its entirety not break the “drive axle” of climate policy but a component of that actually-effective climate policy discussed in a section below would be a carbon tax.  It appears, for instance, in British Columbia’s modest carbon tax and dividend program, the tax has added a mere 25 cents to the cost of a gallon of gas, but in combination with a moral and informational appeal to gas end-consumers has had significant effects on emissions.  As a tax or fee is tied to government and our individual obligations to the regional or national community, it is preferable as a component of climate policy as it integrates with our moral obligation to cut our carbon emissions better than emissions trading.  However, contrary to the views of carbon tax-only advocates, a tax is only one component of an effective carbon policy.

5. An Example: James Hansen and Carbon Pricing

The climate scientist and now activist James Hansen’s preferences in climate policy and the evolution of his views tell us something about how social science categories and disciplinary boundaries have misled policymakers and climate policy advisors, among which, in the latter group, we can count Hansen.  James Hansen has had a pioneering career in climate science as well as in educating the public and policymakers about the findings of climate scientists.  Furthermore, Hansen has had a primary role in alerting the public and the policy elite both in the United States and around the world to the dangers of climate change:  the famous Senate hearings in 1988 about global warming revolved around Hansen’s testimony.

Furthermore, Hansen is very much aware of the ethical issues that surround climate change and has written a book about the critical intergenerational ethical issue (“Storms of My Grandchildren”) surrounding climate change.  Additionally, after his retirement from NASA where he spent much of his scientific career, Hansen has devoted himself full-time to climate activism, including, though not limited to, getting arrested at protests against the building of the Keystone XL pipeline and other fossil fuel infrastructure projects.

Hansen has been sharply critical of cap-and-trade as the primary instrument to address climate change.  Hansen has instead shown a preference for carbon taxes or more specifically what he and others call “fee and dividend” which is another name for a carbon tax with a fixed individual refundable tax credit.  In some designs of fee and dividend it is revenue neutral, meaning that the government gives out as much in tax credits as is collected in tax in total across the entire system, leading to no net intake of taxes by government overall.  The individual refundable tax credit (“dividend”) would allow households that do not purchase so much in the way of emissions-intensive goods and services to earn money via carbon tax/fee program while those who lead a more emissions-intensive lifestyle would end up spending more money than their fixed refund via their energy-related expenditures, now more expensive via the tax/fee.  The refundable tax credit represents an effort to redress the regressivity of a simple carbon tax which would without the tax credit differentially affect the working class and poor, who spend a higher percentage of their income on energy-related goods and services than the wealthy.  That the tax credit is refundable means that those without tax liability would simply receive a stimulus check from the government tax authority every year in the amount of the tax credit minus their tax liability.

Hansen has chosen, in my opinion, the most likely of carbon pricing systems to make some progress both in terms of political feasibility and also effectiveness, if the per metric tonne carbon dioxide emissions equivalent is set high enough to curb emissions.  Hansen, like almost all carbon pricing advocates, has maintained that this is a politically “conservative” solution that allows the “market” to decide which energy sources will be implemented.  Hansen, a lifelong federal government employee until his retirement, has spoken as if this should appeal to both major American parties because it is market-based.  If Hansen were to advocate a central role for government in climate policy, as, for instance, I do, at least during his employ at NASA, he might appear to be self-serving as a government employee.  In appearance, this seems to be an appeal for his own independent-mindedness as a policy analyst, his recommendation of a market-based mechanism shows the appropriate skepticism of the capacity of government to do good or to be effective that meshes with current neoliberal dogma.

However, Hansen is also a major advocate and increasingly so, of nuclear energy as a climate solution, putting his faith into newer designs of nuclear plants that may be safer than existing plants.   Hansen does not believe that renewable energy and energy efficiency can meet energy demand and therefore effectively decarbonizes the economy.  Hansen has been scathingly critical of environmentalists and others who see in climate action an opportunity to as well, shut down nuclear power plants as an evil or threat in themselves.  He is particularly focused on China, which has a very large population in a relatively small area, is developing rapidly, has a high concentration of energy intensive industries, and has relative to its energy demand a lower density of sites with high quality renewable energy (diffuse sunlight in populated areas due to humidity and smog/not particularly windy).  Hansen’s latest policy recommendations have emphasized technology transfer and scientific cooperation between the US and other nations to attempt to encourage the Chinese to develop more nuclear energy more rapidly.

Hansen’s earlier exclusive reliance in his policy proposals on the market as an impartial arbiter of the correct climate solution were, of course, based on the fanciful notion from our current neoliberal political-economic echo chamber that Homo oeconomicus could decide which energy system would be built once a price on carbon was set.  But as Hansen’s justifiable desperation grows regarding inaction on climate, he is recognizing, correctly, that his favored technological solution will not simply be produced by the uncoordinated actions of market actors to a price on carbon.  Nuclear energy, more than any source of energy for peaceful use, is a creation of public policy and government subsidy.  This observation is not necessarily a condemnation of nuclear energy if it gives us a chance to preserve a habitable climate but simply an observation of fact.  Hansen seems to be edging towards a policy that would be something like a nation-by-nation or international energy plan rather than an open market competition between energy sources, which is fondly-held economic myth anyway about how energy and other long-lived, capital-intensive infrastructure gets built, especially in short order.

I do not share Hansen’s negative or dismissive view of renewable energy and energy efficiency as insufficient to the climate challenge, and I see his views in this area as reactive rather than well-considered.  However, for rapid-enough deployment of renewable energy and energy efficiency in a systematic way, government investment and regulatory change is required as well as it is for nuclear energy, so this is not a distinguishing characteristic, as some advocates of renewable energy like to claim.  I am though, like Hansen, critical of the categorical dismissal of nuclear energy, and particularly potential innovation in nuclear power, by environmentalists as well as others who magnify its shortcomings but overlook its past benefits and future potential benefits.  For instance, historically nuclear power has prevented a good deal of carbon and other pollutants from entering the atmosphere.

However, the trend in Hansen’s policy positions to go beyond pricing as the only determinant of climate action is, independent of the role of which zero-carbon solution he or another analyst favors, heading towards a more realistic climate policy stance. Such is the power of groupthink about the supposed independence of markets, Hansen might still today deny that he has now partially exited the “markets-only” view of how climate policy should proceed.  A sufficiently high carbon price will be an aid to the market acceptance and growth of all carbon-reduced products and services but he is right to realize that government policy will help shape many of the available alternatives, often guided by engineering and scientific analyses of the feasibility and climate effects of a given design of energy infrastructure.  Without this anticipation of the shape of the zero-carbon energy system that we must start building today, we will never achieve or approach achieving our climate goals.

6. Background for an Actually-Effective Climate Policy

Rather than rely solely on price signals for individual or corporate actors in what are erroneously assumed to be all-powerful and all-encompassing markets, actually-effective climate policy is a massive societal and institutional movement towards a more sustainable world with multiple policy components centered around an interlocked political economy not a “(markets-only) economy” detached in analysis and cognition from national and international political bodies and processes.  This observation accords with empirical observation as well as a simple reality check regarding the nature of the tasks ahead:  the climate crisis is upon us and because of its enormous scale, to address it requires “all hands on deck”.

Furthermore, actually-effective climate policy draws on human capacities beyond the ability of (some) individuals to use simple arithmetic and algebra to calculate monetary gain and loss.  Most of us, as human beings, have a moral sense, have highly developed intellects beyond our abilities to calculate, and also have the abilities to affiliate and cooperate with others.  A range of these abilities must be part of climate policy both for political leaders as well as for the citizenry at large.  In this, climate policy is not too different from an actually-effective industrialization or full-employment policy, which require of their designers and implementers more than simply an eye to maximize income and minimize monetary loss.  That recent efforts to create industrial development or full employment have failed have a lot to do with a dominant ideology that attempts, like Procrustes, to cut human beings down to a reduced form, Homo oeconomicus.

Empirically, climate action and, more generally, policies and market actions against dependence upon fossil fuels after the oil crises of the 1970’s reveal widely divergent responses by national governments and economies, often backed by cultural and economic trends within different countries.  The developed nations that have, since the 1970’s, taken the most successful steps in addressing fossil fuel dependence and lowering per capita and per unit GDP greenhouse gas emissions are mostly Western and Central European nations and Japan.   These nations have also been the most conscientious in adopting the flawed Kyoto Protocol and have attempted most vigorously, partially out of honest belief in the policy’s probity combined with social science-naivete, to implement the Kyoto protocol in some sectors of their economies.  However these nations’ successes in reducing their fossil fuel (most particularly oil) dependence have had little to do with their efforts to adopt emissions trading but more to do with national planning and determination to reduce oil dependence via both high energy taxes and policies to spur energy efficiency, renewable and nuclear energies over the last 4 decades.  By contrast, nations like the US, Canada and Australia have, to varying degrees lagged in these efforts, though the differences in their responses tell us something about the characteristics of actually-effective climate policy.  The US has in recent years, reduced its per unit GDP emissions by off-shoring its most energy and carbon-intensive industries to Mexico and China with a lesser version of this trend effecting the European Union’s emissions as well.  Also methane emissions in the US are undercounted leading to no progress in the emissions intensity of the US economy.

The countries that have to date most successfully decreased carbon emissions of their economies per- unit-GDP and per-capita over the 4 decade period have had many of the following characteristics:

1. Medium to high level of economic development
2. Political legitimacy of government (usually though not always via electoral democracy)
3. Acceptance of economic planning and dirigisme (leading role of government in economy) by the population
4. Political commitment to science and values of the Enlightenment
5. Broad social acceptance of internationalism/interdependence of nations
6. Relatively high levels of economic equality (though over the past decade generally following the current trend towards increasing inequality).
7. Strong social safety net (lowering the stakes for economic failures and setbacks on individual or familial level)
8. High energy taxes, especially for imported fossil energy
9. High per unit retail prices of fossil fuels or electricity generated using fossil fuels (often tax driven)
10. Existing low- or zero-carbon transportation system (electrified railway network and public transportation)
11. Medium- to high-density urban and suburban development (both by design or historical circumstance)
12. Political weakness of privately- or investor-owned fossil fuel industries relative to government leadership (i.e. non-petro-states).

An actually-effective climate policy will need to combine many of these characteristics as a package, requiring at times social and political change simultaneously or before the physical/technical changes that reduce emissions will occur.

While the above seems like a long menu of diverse political, economic and social characteristics and therefore policy components, the primary motive force for climate action is and will be individual and broadly social ethical commitment to the flourishing of future generations in combination with enlightened self-interest.  The above list of characteristics are either contributing factors to or the result of political leaderships over a period of years realizing an ethical commitment to the future of the nation as a whole.  National polities and political institutions have been the places historically where people’s ethical views and those of the broader community have been able to shape the course of human events and day-to-day living.  The renowned heterodox economist John Kenneth Galbraith and now the Modern Money (MMT) school of political-economic analysis, call this “the public purpose” which, however that purpose may be culturally and politically defined, government policies in their actual practical implementation serve.  A climate policy based solely on the expectation that people are narrowly self-interested “utility-maximizers”, i.e. Homo oeconomicus, within the context of markets will simply reinforce the self-focused attitudes and behaviors that have led us to the current dire situation where we are destroying the inhabitability of the planet for our own and co-evolved species.  Furthermore those policies that hinge on shaping the behavior of individual actors alone, overlook the critical project of recognizing, analyzing and then transforming shared, community infrastructure to radically reduce or eliminate net carbon emissions within the space of a few decades.

An actually-effective climate policy on a nation-by-nation level and internationally will be a major step in the evolution of humanity towards some new integration of self-interest and common-interest.  Such an evolutionary step is necessitated by the arrival of the Anthropocene epoch, the geological epoch where human beings can no longer eject the unintended byproducts of their intended activity into the non-human (as well as the human) environment without regard for the consequences.

The advantages accruing to our species for their dominance on the face of the earth come with disadvantages which are only now being reckoned with by large swaths of humanity.  One of those disadvantages is the ability of humans to wipe themselves out as an organized social species, i.e. a civilization or, somewhat less likely, our ability to wipe ourselves out as a species entirely.  There are those who would like to look away from those costs or disadvantages, in some cases denying their existence.  These tend to be believers in the ideology of “free” markets that are premised on an “agnosia” (not-knowing) of the crucial physical inputs and (intended and unintended) outputs into the success of economies and markets.  There are others who, as in the first wave of climate policy, want to consign climate policy and action to a familiar realm which does not challenge currently dominant categories of thought (i.e. the neoclassical “economy” that exists separately from the polity) or does not challenge dominant social groups (defining climate policy as transforming the right to pollute as a tradable commodity on markets to please the financial elite).

An effective climate policy is based then on both human acquisitive and self-preservative impulses, privileged by mainstream economic theory and related philosophical schools, as well as upon individuals’ sense of duty to others and to future generations.  Alternatively, if these “higher” impulses are not currently top of mind, an effective climate policy allows for these impulses to be developed and integrated into climate action in the future, i.e. there is room for them.  The achievements of civilization, where government and other institutions come to represent a portion of the moral strivings of the community as a whole, are key components of the large-scale climate solutions prescribed by the policy, not left out of them or taken as invisible “givens”.  A model of climate action without the instruments of national governments and international intergovernmental bodies integrated in its model of society, is ultimately a model without a chance at effectiveness.

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